BREXIT: WITH COVID-19 A PROLONGATION OF THE TRANSITION PERIOD IS A MUST

Before the outbreak of the Covid-19 pandemic we were working on the hypothesis that the transition period, mostly for UK political reasons, would only last till the end of the current year.

Covid-19 dramatically changes the landscape. Negotiations between the EU and the UK, already under a tight time schedule, were interrupted. Their resumption date is a question mark, as we haven’t as yet reached the peak of the pandemic.

Taking the European Parliament new meeting schedule as an example, face to face meetings are not expected to resume before September. It would therefore be impossible to conclude the negotiations on the future relationship, and in particular on the modalities of the Free Trade Agreement, in time.

In addition to that, the pandemic gives the UK Government a strong political argument to justify accepting a prolongation of the transition period, say of one more year till the end of 2021.

Those would be logical, rationale, decisions, and on top of that good news. And we all need good news in these times of distress.

That would mean “business as usual” for the EU/UK agri-food relationship for an extra year. The UK would stay in the single market till the end of 2021, which would give more time to negotiate the best possible future relationship.

I am also moderately optimistic that after the pandemic is over, the focus on the economic pain suffered and how to turn the economy around will make both sides concentrate on their core interests, and on the least possible disruptive arrangements.

TWO SUCCESSIVE BLOWS TO WTO – WHERE DOES THE US-CHINA DEAL AND THE APPELATE BODY PARALYSIS LEAVE THE EU?

The WTO suffered two successive blows: the Appellate Body is paralyzed and the US-China trade deal is a major departure from trade multilateral rules.

The impact might not be immediately felt, but it is potentially huge.

The Appellate Body is a WTO Supreme Court of the sorts that has the final word on adjudicating trade disputes. Without its rulings a party cannot request and eventually apply trade sanctions. The paralysis as from December,10 of the Appellate Body comes after a determined blockage by the US to the renewal of its Members.

What does that mean? A country can commit a violation of trade rules without facing the rule of international law. Blocking some imports, applying illegal subsidies, and other trade restrictive measures, can go on unchecked. The rule of law in international trade is no longer upheld by the highest trade court.

As the EU is the largest trading block in the world, it stands out to be the most potentially affected.

The Commission has taken the matter seriously. Other than attempting to unblock the US opposition, unfortunately to no avail so far, it has worked to create alternative mechanisms, like binding arbitration to settle disputes. But that needs the consent of both parties in a dispute.

The Commission is also proposing to get the power to sanction countries that are found by a trade panel in violation of WTO rules, plugging the whole created by the paralysis of the Appellate Body. That is a welcome move that strengthens the EU. However it will not be effective against the US, China or other emerging large economies, who will hardly accept unilateral trade sanctions from the EU without retaliating.

The other big blow to the WTO comes from the US-China trade deal. This deal foresees that China increases imports from the US in 2020 and 2021, against the reduction and suspension of some of the tariffs raised in the trade war.

On agriculture it foresees that China will increase imports in 2020 by 12.5 bn $ and by 19.5 bn $ in 2021, bringing total US agriculture imports to 40 to 50 bn $ in 2021. To put it in context, in 2017, the last year before the trade war started, the US exported 24 bn $ to China. So the deal foresees almost doubling that amount! Moreover it will have dollar amount allocations to specific groups of products. If China does not comply, the US might snap-back the additional tariffs, according to a specific dispute settlement arrangement.

The US-China deal also reduces SPS barriers to US exports, including accepting hormone treated beef. It streamlines the approval of GMOs in China to a maximum 2 year period. On GIs it allows the US to export products considered generic, and the US to oppose registration of GIs in China.

There are two serious implications from this deal: first, this is managed trade, not free trade under multilateral WTO rules; and second, this displaces other countries from the large Chinese market.

Some question the deal will ever be implemented, or that it will fall short on its promises. The deal might fall apart as a result of renewed US-China tensions, but the fact is that it is structured and equipped to stand. It goes well beyond a political declaration, it has targets and a dispute settlement mechanism that can be quickly activated. So we are well advised to take it seriously.

Although both the US and China claim that the deal respects WTO rules, it can only work through directed Chinese State trade purchases, which will displace normal free trade flows. Both the US have the capacity to double its agricultural exports to China, and China to accommodate those imports. What it takes is for China through its State controlled economy to direct more imports from the US to the detriment of the others – e.g. the EU, Brazil, Argentina.

When such large and powerful countries like the US and China flout multilateral trade rules and engage on managed trade, the WTO is seriously at risk.

For the EU, other than this systemic risk, comes the hard fact that its agri-food exports will to a large extent be displaced from the Chinese market to give way to US products. In 2018 we exported 10 bn euros worth of agri-food products to China, and trade was bound to be increased with the pork crisis. Now EU exports will come second after the US.

 

 

 

TRADE WARS AND SUPPORT TO FARMERS – TWO DIFFERENT TALES ACCROS THE ATLANTIC

We have written before on the issue, underlining the difference of treatment between farmers in the US and the EU. In the US farmers were twice compensated for the losses that accrue from the trade war with China. In the EU farmers are left on their own after the US retaliation on the Airbus subsidies case, where whereas they were not part and parcel of the dispute, they were still the main target of the sanctions.

Now it is becoming clear the impact of the US compensation packages are having on US farmers. According to a host of economic analysis the US Administration has overcompensated farmers by about the double of the losses incurred. The Administration does not actually dispute that fact, they explain instead that they have made their calculations on gross rather than net trade losses, which miss the fact that the US found to a certain extent alternatives to the losses in the Chinese market.

The result of these compensation packages on farmers’ incomes is big. Across the US, farm income is expected to rise more than 10% this year, and 40% of that income will come from Government subsidies (both from the Farm Bill and the trade compensation packages). It is true that Presidential elections are coming in the US, but the fact is that farmers are looked after when they face collateral damage from trade disputes.

Meanwhile in the EU farmers are facing an expected drop in the CAP subsidies, and total inaction from the Commission to prop up the resilience of the sector.

The US trade sanctions following the Airbus case are already heavily impacting dairy and wine exports to the US. Unfortunately as late as last week the US opened up an internal consultation on whether to increase the additional tariffs to 100% from 25%, and on whether to enlarge the scope of the sanctions including to other agriculture products. Are in particular targeted cheeses (those not yet impacted), bulk olive oil and bulk wine, sparkling wines and whiskies, hams and pasta.

This potentially new round of sanctions is within the US WTO rights, as the first round was well under the maximum amount of additional duties authorized (7.5 bn $), and might be a warning shot against the determination of the EU to apply its own round of sanctions following an expected WTO determination against Boeing subsidies. If both sides do not find an agreement on the aviation subsidies the future is bleak for our exports to the US. Dairy, wine, olive oil will likely be completely blocked, along with other products.

I haven’t even mentioned here the threats to France from the GAFA taxation issue, nor the automotive dispute Damocles sword still hanging over EU-US trade.

Will the Commission go on looking the other way whilst trade sanctions pour on the agriculture sector? Will the gap on the way farmers are treated across the Atlantic go on getting larger?

THE US RETALIATION LIST ON THE AIRBUS SUBSIDIES CASE

THE HEAVILY IMPACTED AGRICULTURE SECTOR SHOULD GET MUCH NEEDED HELP

The US retaliation list has been published, and as unfortunately I had anticipated it is loaded against EU agriculture exports to the US.

Although the dispute is on aircraft subsidies, agriculture leads the list of the products targeted, with roughly the double of the trade impact than all the others products added together, including aircraft.

The retaliation list is also heavier on additional tariffs for the agriculture products than for aircraft – 25% as compared to 10%.

The US has been careful to minimize the impact on its economy by exempting some items that are imported bulk and bottled in the US. It has also left room for expansion and/or deepening of the sanctions, either by expanding the product coverage, or by increasing the amount of the additional tariffs. That might be a tactical move to prevent or anticipate any EU retaliation prior to the expected decision on the “sister” case against Boeing, and to increase its negotiation leverage then after.

Dairy is heavily impacted, as are wine and whiskey, olive oil and olives, pork, hams, biscuits, jams and some fruits.

The EU dairy sector, including many cheese GIs, bears most of the blunt. The impact of a 25% additional tariff on EU exports is not easy to anticipate. It will be a mix of lower exports as products become more expensive in the US, and a reduction of margins for EU exporters, eager to minimize loss of volumes and markets even if that means giving up on profits.

In the end there is little doubt that the negative impact will be passed on to the producers, negatively impacting their incomes.

What also strikes me as well is the lack of support to cushion the sector from this blow. Whereas in the US the negative effects of the US-China trade war on US farmers were compensated twice by sizeable subsidies, in the EU there is no such talk, no initiative on sight from the European Commission. Could the fact that the current Commissioner for Agriculture will be the next Trade Commissioner help in proposing a package of support to those affected, in particular to the farmers? Let us not forget that they had no part on the subsidies found illegal by the WTO, but they are the ones who will lose the most.

The European Commission should calculate the actual loss of agriculture exports targeted by the retaliation list to the US, in the months to come, and devise a support package that would compensate the farmers affected. It should not just monitor the EU domestic markets and intervene only when drastic price drops are on the record, as that will miss the actual losses of those affected by the trade retaliation.

By Joao Pacheco

BREXIT – A LAST CHANCE FOR AN EXIT DEAL?

We are now barely 3 weeks before the (latest) deadline for Brexit, which should concentrate minds, in particular of those with political responsibilities, on how best to unlock a reasonable solution.

The new element is the latest UK proposal, which departs from the previous signed but never approved withdrawal agreement.

The new proposal accepts an all-Irish alignment with the EU norms and standards, in particular on animal and plant health, but extricates the whole of the UK territory from the Customs Union. That entails the need for customs controls between the Republic and Northern Ireland, but according to the new proposal that could be met to a large extent by electronic means and controls outside the border, in order to prevent the unacceptable (to all parties) re-imposition of a hard border.

In my view the right way to approach this new UK proposal is to access its own merits, and then compare it with the appropriate benchmark. This is an important point, as the choice of the appropriate benchmark can go a long way towards accepting the new proposal as a basis for negotiation, or on the contrary to clearly refuse it.

If the benchmark is the signed withdrawal agreement that was not adopted by the British Parliament, this new proposal falls short in terms of guarantees it brings to the EU agriculture sector, as it acknowledges a number of holes in the customs controls, and puts the faith of the whole agreement on the hands of the Northern Ireland’s Assembly.

Before moving further let me be clear: the preferred solution would be … no Brexit. But now with the finishing line at sight, I believe we need less wishful thinking and more realistic and pragmatic solutions.

But if the benchmark is a no-deal Brexit, as the UK Government says, the new proposal should be weighed in its own merits against the effects of a no-deal.

I am aware that the political process in the UK is quite messy, and that political events might change the scenario, namely by the provoking the fall of the current UK Government. But rather than engaging in political speculation, I prefer to keep my comments on what is on the table right now.

On the merits of the new UK proposal, or better on its main flaws, what comes first is the design for customs controls between the EU 27 and the UK in Ireland.

The UK proposes that small firms be exempted, or to put it differently proposes that low-scale smuggling be de facto accepted. As regards more significant trade flows the new proposal bets on a mix of electronic, trusted operators and outside the border controls.

It would become a test for a radically different customs control system. It might control the most significant flows, but it hasn’t been tested.

In the new proposal the obligatory customs declaration would stay, but the means to enforce it would be by electronic tagging of transport and a number of physical controls outside the border. Thus the new system would be less tight.

However I would put that into perspective. Currently our customs controls are done by an obligatory declaration of the goods, and payment of customs duties and VAT as appropriate, but only a small fraction is actually physically controlled.

The other major flaw of the new proposal is that it gives the Assembly of Northern Ireland the right to refuse the agreement, when it would have been agreed by the states – the EU 27 and the UK. That is a highly political issue, but I believe that would have to go if the proposal is to be accepted.

On the positive side, the new proposal gives guarantees on the respect of the norms and standards of our single market, and paves the way to negotiating a Free Trade deal between the EU 27 and the UK.

Now, coming back to the new proposal and the benchmark of a no-deal, what is at stake in my view is accepting a less tight customs controls, and therefore facing to a certain extent duty evasion (on both directions) or bracing for the shock of a no-deal Brexit and a high tariff wall across the Channel. The duty evasion problem, which is real, would however be rendered irrelevant by a large Free Trade deal that would eliminate all tariffs.

I will not come back to the disaster for the EU 27 agriculture sector of a no-deal – Farm Europe has dwelt extensively on that.

To conclude I would hope that the time has come for a last ditch negotiating effort from both sides, eliminating as far as possible the flaws in the latest UK proposal. Rather than betting that a political U-turn in the UK means an end to Brexit, or brings back the previous withdrawal agreement back.

 

THE BEGINNING OF A US-EU TRADE WAR?

The “hot autumn” for trade that we predicted in a previous post gets dangerously close, as it would seem the US got the WTO final green light to apply sanctions to EU exports, on the Airbus subsidies case.

The EU might also get the opportunity to impose its own sanctions when a final decision is reached in the WTO in the next few months on the Boeing subsidies case.

It would seem logical that the US and the EU find a compromise rather than sanctioning each other, but that hasn’t happened so far.

According to preliminary information the US might impose sanctions in between 5 to 10 bn euros. The list of targeted products is already known, and many agri-food products are on the spot. Wine, dairy (in particular cheeses), olive oil and olives, are the most significant.

With that high level of authorised sanctions the US can effectively block all EU exports of those products. The latest figures available show that for cheeses, wine and olive oil, the EU has exported yearly roughly 5.8 bn euros. It should be noted that the sanctions are accounted for in tariff value, not in trade value. The US can apply different tariffs to different products, and the calculated value of the tariffs can be as high as the authorized amount of sanctions, and thus the value of the trade actually sanctioned can be much higher.

The EU sanctions to come on the Boeing case are of little help to the sector. Although they concern a wide range of US agri-food exports, including wine and cheeses, the fact is that the EU exports more of these products to the US than what she imports.

The sector should push the European Commission to find a compromise with the US, but the fact is that you need two to tango and the Trump Administration seems to prefer confrontation first.

The autumn starts soon, and the streak of bad news could include a no-deal Brexit. Time to re-think the CAP reform and beef-up the resilience of the sector with a real crisis fund?

ON THE TRADE FRONT UNCERTAINTY IS THE NEW NORM

What can we expect with regard to the impact of trade issues on the EU agri-food sector till the end of the year?

Difficult to say. Let us examine the main building blocks step by step.

  1. Trade Disputes

The tensions with the US are lingering on, with currently a lull of the sorts between past threats and future milestones.

There are two major potential conflicts that are hanging over transatlantic trade, a key component of our agri-food exports.

First, the threats by the US Administration to tax imports of cars from the EU under the pretext of unfair treatment to US exports and threats to national security.

The US domestic legal cover to act comes through a report from the Department of Commerce that, as expected, finds that car and auto parts imports are a threat to US national security.

Trump has signed a proclamation setting a six-month deadline for the US to reach a deal with the EU (and Japan) to “address the threatened impairment of the national security with respect to imported automobiles and certain automobile parts.” So we will know more by the autumn.

In the meantime the EU has agreed on a negotiation mandate to establish a free trade deal on industrial goods with the US, excluding agriculture.

The US has for the same negotiation a mandate that includes agriculture. The two mandates do not match.

How will this end? By a “trade war”, by an agreement, or by prolonging the current lull?

Partly the outcome seems to depend upon what will happen in the US-China dispute. The US has privileged addressing the Chinese problems first, avoiding to get in trade disputes with the two larger trading blocs at the same time.

Will the US and China eventually find an agreement? If so, when? Difficult to predict. The US has an interest in reaching a deal that would restore agri-food and other exports to China in an election year, on top of intellectual property rights issues and subsidies to state owned companies. But as the dispute with China currently enjoys a strong bipartisan backing, the deal must be substantive. Otherwise for Trump it might be better to keep a strong stance, rather than being portrayed as weak and accommodative.

To this adds the relative economic and related political strength of both countries right now, where the US seems to be on a more favourable position and under less pressure to compromise.

In the event the US and China settle their disputes, will the US turn the screws on the EU? Not as easy as with China, as there is less political support for moving against the EU, and the inevitable cross-retaliations would come right before the 2020 elections. But it is nevertheless a distinct possibility, as the US agri-food sector would have regained access to China and could better weather EU retaliations, minimizing the negative political impact on farm States.

Worth adding that the US is pushing hard to conclude a deal with Japan after the Japanese July elections, which would limit the cars dispute to the EU.

And what about the EU? In my mind there is little doubt that our agri-food exports would be impacted in the event of an escalation of the dispute on cars. Perhaps not in the first round of retaliation, as logically the increased US tariffs would target the EU car and auto-parts exports. But after the US slaps tariffs on our car exports, the EU is obliged to retaliate, and in the likely event that it would pick-up other sectors than US car exports (as the US exports less cars than the EU), the US would counter-retaliate as it did with China. Our agri-food exports would then be a target, starting with GIs in the dairy, wine and meat sectors.

Second, the Boeing-Airbus dispute, where both sides are awaiting a determination from the WTO that should fall before the year’s end on whether and to what extent trade sanctions could be applied.

In the event the US are authorized to apply sanctions, and they could be substantive, our agri-food exports would come high in the list of products to be targeted, as the US complains heavily on being blocked by tariffs and non-tariff barriers from exporting to the EU (hormones, GMOs, GI protection).

Those two lingering trade disputes have thus the potential to disrupt our exports of high added value agri-food products to our by far and large main market.

Their outcome is however uncertain at this juncture, and we’ll have to wait till the autumn to find out how they unfold.

  1. Brexit

The Brexit saga is far from over. The fact that there is less talk about it does not mean that an outcome is on sight, on the contrary.

Brexit has laminated the two major British political parties in the European Parliament elections. The Prime-Minister has fallen. The choice of a new Prime-Minister will be made by the end of July, and the odds are that this time it will be a Brexiteer.

That does not mean that it will make a solution easier, far from it, but it increases the odds of a no-deal Brexit by the end of October.

Thus the worst possible scenario for our sector has become to a certain degree more likely. Worth reminding that that would have the potential to choke-off our exports to an extent not seen in the past, and inevitably disrupt our domestic markets for key products (meat, dairy, sugar seat on top of the list).

It is also possible that the UK is forced into early elections, and that the EU agrees to extend the deadline for the UK to exit beyond end-October, thus keeping the status quo. We will know more by the autumn.

Conclusion

The sector faces a number of uncertain outcomes, from trade disputes and from Brexit, that have the potential to severely impact our exports and in the case of Brexit also disrupt our main domestic markets.

To these uncertain outcomes adds the continuing Free Trade negotiations with Mercosur, Australia and New Zealand. In all there is a common trait – our imports of agri-food products will raise more than our exports.

In the particular case of New Zealand the potential advantages are difficult to realize as the average New Zealand tariffs are negligible, and negligible will be our benefits. Pragmatism, looking for additional export opportunities in a balanced way, seems to have given ground to free trade ideology.

The current CAP is not equipped to deal with major market shocks, and the proposal by the Commission does not alter that. Only the EP Comagri has put forward amendment proposals that would increase the resilience of the sector.

The Commission is changing in the autumn, when all these threats and uncertainties will be in full display. That could be either an additional challenge, as new teams would have to quickly come to speed and forcefully react; or an opportunity to change course, and concentrate the strength of the CAP on tackling the real problems, increase the resilience of the sector and help him face the future.

Trade in 2019: high stakes amid high uncertainty

January 2019

One thing is certain about what trade brings to the EU agri-food sector in 2019 – high-stake issues and a high level of uncertainty on how they will unfold.

The two major trade issues that could have a large impact on the sector in 2019 are the EU-US trade relations and Brexit (Mercosur will likely linger on following the election of Bolsonaro in Brazil).

We have dwelt with Brexit at large in our previous analysis and in our Global Food Forum. The impact of a no-deal Brexit would be catastrophic to many, and anything else than the UK staying in the customs union would negatively impact EU exports and raise concerns on increased imports from third countries. Stakes are high and uncertainty even higher. The moment of truth is fast approaching with the Brexit date set for 29th March, and we will no doubt come back to it shortly.

The other major trade issue concerns the EU/US trade relations, and this will be the main focus of our comments today.

The trade relations deteriorated sharply with the unilateral application by the US of tariffs on steel and aluminum imports from the EU (and others). That was followed by threats from the US to target with additional tariffs imports of cars and auto-parts from the EU. The aim of the US is to rebalance the log on trade in goods with the EU, and it is applying pressure through threatening to resort to trade protectionist measures or stretching its ability to do so under WTO rules.

The negative turn in the trade relations came to a thaw mid last year, with a commitment to negotiate freer trade and tackle non-trade barriers, and an additional commitment by the EU to import more soybeans and natural gas. The scope of the agreement has been contested from the beginning, with the EU adamantly refusing to include agriculture in the free trade talks, and the US asking for the opposite. The European Commission has still to present its draft negotiation mandate, and the US its negotiation objectives, but the odds are that the scope will differ, which does not bode well for the future of the talks.

Why has the truce been agreed and why has it hold so far? The answer should be found in the state of another big trade dispute, even more acute, between the US and China. The US has applied additional tariffs on a large part of Chinese imports, and China retaliated in kind. The US has a number of claims against China’s practices that are largely shared in the US and around the world, including in the EU, and the current Administration seems determined to obtain significant changes from China.

What the US tactically cannot afford is to fight at the same time two big trade battles – one against China and the other against the EU. The US seems determined to address its main concern (China) first, which led to the truce currently holding with the EU.

Recently however there are signs that the US and China are making some progress in finding an agreement. Talks are on-going, and the Chinese have given signs of goodwill by re-opening imports of US soybeans and approving a number of GMO varieties for US exports. The fact that the Chinese economy is not in good shape, is more dependent on trade than the US economy, and the one-party regime stability hangs on the economic welfare of the country is certainly a factor pushing Beijing towards accommodation. The self-imposed deadline is the 1st March. The outcome is uncertain, and either an agreement is found or the US has threatened to ramp-up the duties against Chinese imports.

Meanwhile the US Department of Commerce is set to present the result of its investigation on cars and auto-parts imports by mid-February. The investigation will be assorted by proposals and it is expected that additional tariffs will be included.

Where do we stand in this high stake, high uncertainty, trade dispute?
If the US and China find an agreement, the US will be in good shape and have freer hands to engage with the EU. Although ramping-up pressure on the EU does not enjoy the wide level of support in the US as pressing China, it would most likely come in with a choice for the EU between negotiating a trade deal potentially favorable to the US or face additional tariffs on some imports (no doubt cars).

In this scenario the pressure on the EU to negotiate a TTIP-light, including agriculture but excluding a number of other contentious issues like investment and public procurement, would be very strong. And the pressure of Germany, the main loser if cars are targeted, on France and others to agree on those terms would be as strong.

If the EU does not blink and keeps its current position of rejecting the inclusion of agriculture in the negotiations, amongst other disagreements on the scope of the talks, the probability of tariffs being unilaterally imposed by the US on EU cars and auto-parts increases, and with it the likelihood of EU retaliatory measures. A trade war who no-one knows where it would stop would follow, and a second round of trade retaliation could target EU exports of agri-food products, like wine, cheese and other products.

If the US and China fail to find an agreement, the EU might enjoy the current truce further. The European Commission is adroitly joining the US and Japan in pressing China at WTO, which might help in avoiding more conflict and trying to bring back trade disputes to the multilateral WTO, rather than letting the bilateral power struggles decide.

The indirect impact of the US-China trade wars would still be felt in the EU, partly as an opportunity to increase exports to China, but partly negatively as the Chinese and world economies would suffer to a certain extent. But for the agri-food sector that is a relatively minor risk compared with a US-EU generalized trade conflict, or a TTIP-light heavy on agricultural concessions. Worth recalling that the US is the EU’s top destination representing 16% of the EU28 agri-food exports, 22bn euros in 2017 with an EU positive trade balance of 11bn euros.

Uncertain times. And high stakes.

A NEW US FARM BILL IN SHARP CONTRAST WITH THE NEW CAP PROPOSALS

The US Congress adopted a new 5-year Farm Bill that enhances the commodity programs and crop insurance tools previously available to US farmers, in a sharp contrast to the European Commission CAP proposals that drastically cut the budget and support to EU farmers.

The new US Farm Bill increases support across the board. It increases most loan rates for commodities like cereals (wheat, maize, rice, etc), oilseeds (soybeans), cotton, sugar and others like peas and lentils.  It opens up the possibility to increase the reference prices for the insurance program Price Loss Coverage and improves the Agriculture Risk Coverage calculated yields.

Last but not least it boosts the dairy revenue insurance by sharply reducing the premiums for the smallest producers – below on average 240 cows, yes 240 this is not an error, this reflects the size of dairy holdings in the US- and increasing the level of protection for all farmers amongst other improvements.

The new Farm Bill also increases resources for environmental protection, and for export promotion programs.

Thus, the number one competitor of EU farmers gets a significant boost from the State budget the moment when EU farmers face the opposite – a reduction of 12% in real terms of the CAP budget proposed by the Commission.

Two sides of the Atlantic, two different tales. The US Farm Bill is built around tools that do not fit the EU model and needs, but it is striking that the US increases support when the European Commission proposes sharp cuts even when the sector faces stagnant incomes and dire prospects for the future.

The US farmers will have an even more robust set of tools to improve their resilience to market shocks and climatic events, whilst the EU farmers who have little of it would in the future have even less according to Commission’s proposals.

The EU model has done away with countercyclical payments that compensate farmers when prices drop, which led in the past to waste and alienated the sector from market signals and export markets, which concentrates public support in most productive areas and farms, and it should not emulate the US model in that respect.

But the CAP has not provided sufficient resilience tools to absorb climatic and market shocks. We need more climatic and income insurance and mutual funds, we need a real and well-funded crisis management fund – but that will not happen without CAP support.

We also need to do more to protect at the same time the environment and to improve the economy of the sector, which suffers from lower to negative productivity, compromising the future of farmers incomes and the sustainability of the sector. That will not come either without well targeted CAP support on double performance investments.

Will this new US Farm Bill make the European Commission re-adjust its CAP proposals and funding? If not the current Commission, the next? Will it ring alarm bells in capitals all too willing to let farm support go down? Will it energize the European Parliament to raise in defense of the EU agriculture sector?

We can only hope so. Otherwise our future seems more compromised.

 

 

 

BREXIT: ONLY GOOD NEWS?

The good news is that an agreement was found on the Brexit transition period, lasting through end 2020. Till then the UK will be part of the EU Customs Union and Single Market, so there will be no disruptions to trade on agri-food products between the EU27 and the UK. Definitely that is good news, in the context of the inevitably of Brexit. It raises the prospects of a softer rather than a hard Brexit.

However the UK also obtained the right to negotiate and sign trade deals with third countries during the transition period. This means that as from 1.1.2021 the UK might open up its market to third countries under previously negotiated Free Trade Agreements. And most likely it will.

Even in the best scenario where there would be a Free Trade Agreement in place between the EU27 and the UK, the EU27 exports to the UK would face renewed competition, which can be determinant in such important sectors as beef, pork, poultry, dairy, sugar, wine, to mention a few. Inevitably EU27 exports would suffer.

A word of caution though: this relatively speaking best scenario is not guaranteed as formidable obstacles remain to an overall agreement – the Irish border issue being one that looks close to impossible to crack.

For the UK the possibility to negotiate and sign new trade deals whilst still in the EU Customs Union also adds leverage to its negotiating position, and gives comfort to those in the UK that are not prepared to accept post-Brexit terms that would keep the UK closely aligned with EU rules and decisions. They can argue that the UK can find alternatives to the EU27 market, and therefore should not yield too much on the post-Brexit terms of its relation with the EU.

The EU agri-food sector needs to be prepared to the upcoming events. The rosiest scenario means more competition and less exports to the UK, and the hard Brexit scenario means disaster.

Unfortunately that is not good news.