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The political shock of Brexit has yet to be translated in actual economic and commercial terms. The uncertainty as to which will be future model of the trade relationships between the EU and the UK is still paramount. Will we see a hard or a soft Brexit? To which degree will the UK retain access to the single market?
Beyond these uncertainties it is however possible to shed light on a number of factors that will shape that relationship in the agri-food sector. There are a number of hard facts and reasonable assumptions that point towards a substantial different scenario for the EU trade with the UK.
This paper examines the consequences of Brexit for the EU-27 agri-food sector. It also explores the expected outcomes of EU trade openings for a number of sensitive sectors, and how both might have a cumulative impact.
Brexit and enhanced trade openings are a double challenge for a sector that is already showing a number of strains, that is investing less than what it should, that has experienced lower productivity and seen revenues stagnate.
I) Brexit: Building a new EU-UK agri-food relationship
The agriculture and food sector is by far and large the field in which the EU-UK relationship is the most integrated in political, economic and budgetary terms.
For more than 40 years (since UK’s accession to the EU in 1973), the Common Agricultural Policy and the EU norms and standards have been the reference point for the British agri-food sector and the British input in the building process of both the CAP and the EU standards has been far from negligible, not to say decisive.
As a result, beyond speculations on the new relationship between London and Brussels, it is already clear that when Brexit will materialise, it will lead to a serious reshuffling of the agri-food landscape both within the UK and all across the EU, both politically and economically.
Politically, the CAP and the future EU standards will be negotiated without the British perspective in the negotiation room.
Economically, the EU agri-food sector will continue to have a major outlet in the UK. Nevertheless, much more competition on the UK’s internal market is to be expected from global competitors, with cascade effects on the internal market irrespective of what will happen in terms of the future EU-UK trade deal.
Finally, the Brexit will be a serious hit for the overall EU budget, although the EU financial ministers will have to keep in mind June’s 1984 agreement (Fontainebleau) on the British rebate, stemming directly from the low rate of return for London when it comes to the Common Agriculture Policy. The particular issue of the CAP budget is discussed in more detail in another paper to the Forum.
This paper provides an overview of the current relationship between the EU and the UK.
It does not attempt to offer advice to the Brexit negotiations. Nor does it speculate on what will be the model of the future relationship – Norwegian, Swiss, Turkish or a new type of compromise. The paper has however to make a few assumptions, deemed to be reasonable. The first assumption is that there will be a Brexit. The second assumption is that the UK will keep a liberal approach in terms of seeking trading opportunities.
This paper attempts at examining the likely consequences of Brexit to the EU’s agri-food sector, and advise how the EU should cope with the new challenges.
- “First, Free Trade” (UK’s Prime Minister)
“First, free trade (…) As the UK leaves the EU, I have set out our ambition to become the global leader in free trade. The leaders from India, Mexico, South Korea and Singapore said that they would welcome talks on removing the barriers to trade between our countries. And the Australian trade minister will visit the UK to take part in exploratory discussions on the shape of a UK-Australia trade deal”.
Theresa May, G20 Summit, 5 September 2016
To secure the fullest possible access to the EU internal market will be a top priority for the UK authorities in the negotiations to come with the EU, the financial passport being the Grail to obtain for the City.
Agriculture and food have never been a prominent topic across the Channel. A complete U-turn would be surprising, which means that agriculture and the agri-food sector will from the UK side be open to full-fledged free trade arrangements, with the EU or with other trading partners across the world.
The consequences of the UK position is that irrespective of the model of the future UK-EU relationship the UK market will be a new market for EU products as they will face much more competition from other suppliers.
The UK market is today protected by the EU common external tariff, and by a host of EU sanitary and other regulations. While the EU market is already open to some FTA partners, and other FTAs are under negotiation, it is likely that the UK will in the future be open to other countries than those negotiating with the EU and will agree to freer terms of trade in agriculture with the countries with which the EU is negotiating. This is a relevant point, as the EU has protected sensitive sectors in agriculture (cf. meats, sugar) in previous deals and is expected to do so in the future with the likes of the US and Mercosur.
Whatever the result of the EU/UK negotiations, both the internal policy shift in the UK and diverging trade strategies between the EU and UK will lead to medium and long terms changes for the EU agri-food sector. This should not be underestimated, even more following the clear commitment of the new British leaders to create the biggest open economy in the world. This strategy will make it difficult a full-free trade agreement between the EU and the UK without any safeguards, as some of the following sectoral examples will highlight. Otherwise, London’s trade strategy would de facto become the EU’s strategy, like it or not.
- General overview
60% of the agriculture and food products consumed in the UK are imported. And nearly 75% of these are coming from the EU.
The UK is a major outlet for traditional agri-food export countries such as the Netherlands (€6.9 billion), Ireland (€5.2 billion), France (€5 billion) and Germany (€4.5 billion).
The agri-food sector in Spain (€3.2 billion), Belgium (€2.6 billion), Poland (€1.5 billion) and Denmark (€1.4 billion) are also exposed to Brexit with certain sectors facing serious risks.
A cautionary word is appropriate as the figures for The Netherlands and Belgium might reflect to a large extent the relevance of their ports, rather than domestic production. But that does not diminish the finding that many EU countries have substantial trade interests in the UK market.
|Import from the UK
|Export to the UK
Table : Overview of EU/UK agri-food trade in 2015 (in EUR) (Source: HMRC, UK Gov)
- Sectorial overview of the EU-UK post- Brexit trade challenges
Meat products: a further chill for the EU beef community
Nearly €1 billion of EU beef meat products are routed to the UK every year, mostly from Ireland (more than €700 billion). This is an additional sword of Damocles for the whole EU beef sector, which is already under pressure from the EU trade agenda while facing a structural crisis at the same time.
It is clear that the real game for the future of this trade flow is not tied with the EU/UK negotiations but rather more with the UK/rest of the world Free Trade Agreements to come. It is indeed hard to believe that UK FTAs with countries such as Australia, Argentina, Brazil or the US would not pave the way for a significant share of imported beef meat from these countries in the 65 million people British market. EU exporters will in the future have to compete with the most competitive meat producers in the world. It is therefore illusory to think they will keep their UK market share, on the contrary they should expect it to shrink significantly. In addition, these FTAs could have an indirect effect, by pushing Irish beef producers to find new outlets in the world market but also on the EU internal market.
Danish, German, Dutch and to a lesser extend Spanish and French pig producers will also likely be affected, the UK being a €670 million market for EU exporters. Additional bad news coming from the UK would come on the top of difficult conditions with Russia leading to an enhanced dependence on exports to China.
In turn, the UK is expected to pay a special attention to the €350 million trade flow of sheep meat exported or re-exported, in particular in the context of its future new bilateral relations with the New Zealand. A very significant share of this trade flow is channelled to the French market (€190 million). New Zealand producers benefit from a 280.000 tons tariff free quota to the EU. They see the Brexit as an “opportunity in time of change”.
For the meat products, the cascade effect of trade agreements will have to be carefully assessed. Serious safeguards on future UK exports will be needed to avoid that a UK open to the global meat market does not lead to a de facto opening of the EU internal market to the world market.
Wine and spirits: New World wines and Scotch whisky
For more than 20 years EU wine producers have been working hard to stop the drain of their market share on the British market. Their efforts to repel the New World onslaught could be short lived.
The market seems to have stabilised for traditional EU wine makers at €1.8 billion, with France leading the way (880 million), followed by Italy (€540 million) and Spain (€228 million).
The UK will also be willing to secure a preferential access to the internal market for Scotch whiskies, which is indeed particularly sensitive from an economic point of view – not mentioning the Scottish push for a new independence referendum. This tariff line (more than €1.2 billion) represents 10% of the UK’s agri-food exports, with France, Spain and Germany being the main outlets.
The willingness of the UK to open its market to New World countries for the wine sector will seriously reduce the attractiveness of the British market for the EU wine sector, and likely further erode its market share.
Sugar and sugar products: will EU-UK producers dig up the hatchet?
Having the UK open to the world market will change drastically the EU sugar landscape, and the difficult balance reached between sugar beet and cane refiners. The long-standing tensions between the continental sugar beet cooperatives (German, French and Dutch) and the US owned cane sugar refining company (American Sugar Refining – Tate&Lyle, which owns, in London, 25% of the total refining capacity in the EU)are about to rebound.
The fact that David Davis, UK State Secretary for exiting the EU, is a former Senior Executive of Tate&Lyle might not help for peaceful talks on this file.
On one hand, the EU sugar producers are enjoying an important outlet in the British market (€880 million in 2015). On the other hand, Tate&Lyle is poised to regain some competitiveness from UK FTAs with sugar cane producing countries. In this case, assuming that the beet sugar producing company maintains its production, the British market would most probably be in a position to switch from a deficit to a surplus position.
Taking into account that raw sugar refining into white sugar is not considered as a substantial transformation allowing operators to rebrand it as “local products”, restrictions via current EU strict rules of origins for the sugar sector will need to be also implemented to the UK to avoid a damaging triangular trade in a post-Brexit context.
Milk and milk products: more competition on a big market
On paper, the challenge of the Brexit for the milk sector is more than significant (€2.5 billion EU exports). Once again, Ireland (€718 million) but also France (€546 million), Germany (€345 million), the Netherlands (€186 million) and Italy (€167 million) have serious interests in the British market.
Even if the trade balance is not in its favour, the UK also has a significant market position in Ireland (in particular via Northern Ireland) and France. In total, nearly €1 billion of milk products are exported or re-exported from the UK to the EU internal market.
An UK FTA with New Zealand and with the US would inevitably bring added competition in the UK market for EU exporters, which could face an erosion of their market share. The losses in the UK market could lead to increased pressure on the EU-27 internal market, which is the last thing the sector needs after the current (and yet unfinished) dairy crisis.
Fruits and vegetables: is carbon foot print sufficient argument for EU origin?
With about €4.5 billion of fruits and vegetables exported from the EU to the UK, it’s clear that EU producers are exposed to the Brexit consequences. Spain (€1.6 billion) and The Netherlands (€ 1 billion) are by far the most exposed.
Many other countries are also concerned, such as Italy, Belgium, Ireland, Poland, France, Germany, Greece or Cyprus, which is traditionally exporting potatoes to the UK (€6 million).
The challenge for EU exporters could come from freer access to the UK market from exporters in North Africa.
Nevertheless, the proximity to the market should allow EU producers to keep strong positions, even under enhanced competition with the rest of the world.
II) Trade: the challenges ahead
Trade deals have become a topic of heated debate and increased public scepticism on what would be the benefits for the common citizen.
The difficulties that even the less broader and controversial trade deal with Canada (CETA) has faced pale as compared to the reactions to TTIP, leading to at least further delays in concluding the negotiations, and even questioning its viability in the current form. The fact that the UK will in the future no longer be a member of the EU also diminishes the size of the EU market, and in some cases alters the EU trade priorities. Brexit thus inevitably leads to a re-evaluation of the balance of current negotiations.
The future of the trade negotiations lies squarely on the evolution of the political scenario in both sides of the Atlantic. A lot will depend on who wins the next US presidential elections, on the priorities of the new US Administration. But the political scenario in the EU is also becoming more complex and less trade-friendly.
Other than making hazardous forecasts on whether the political appetite for trade deals will falter or not, this paper looks at the on-going and proposed trade negotiations and examines what would be their expected impact in the agri-food sector. The sector will exercise some influence on the viability of the trade talks, but it will likely not be a determinant one..
This chapter examines the challenges the EU agri-food sector faces from current and prospective trade negotiations, on top of Brexit.
- Concerning concluded FTAs and tariff rate quotas
Existing FTAs have been negotiated for a market that included the UK, and tariff rate quotas (TRQs) for sensitive products have been calculated accordingly. Concerning sugar this is especially significant: the quarter of the raw sugar imported in the EU is now entering via the UK.
The EU without the UK will significantly change that picture. Logically the UK share in current FTA and TRQ’s should be extracted, otherwise the existing quotas would no longer reflect the balance of the negotiations and would overburden the EU-27 market.
In addition to that, WTO has implemented rules when a new member is acceding to a custom union (Article XXIV of the GATT). The EU enlargement (including the enlargement with the UK in 1973) has therefore led to concessions to compensate for tariff increases: for sugar, this resulted in CXL quotas. By the same token it would be logical to extract the UK share from these quotas.
However the consequences of a member leaving a custom union in existing FTAs or Art. XXIV concessions is not foreseen by WTO rules. WTO rules are designed to open up markets, and its provisions are geared towards that goal. Freer trade terms are set in stone and reversals are not part of the rules (or are subject to dispute settlement).
In the context of the Brexit negotiations the Commission should seek to divide the WTO import quotas with the UK to reflect the new reality, and jointly present the new arrangements to the other WTO members which have negotiating rights
- Concerning current and prospective trade negotiations
It is worth reminding that even if the EU has many other trade interests beyond agriculture, the sector at large represents a significant share of the EU’s GDP and employment. The future of the sector is vital for the EU as a whole. It should be recalled in this context that the EU has a Common Agriculture Policy that should help frame that future. The CAP is a unique feature in the EU policy landscape, and it should be designed in a way that helps the sector coping with the many challenges it faces.
Without pretending to present a full economic analysis of the aggregate consequences of the trade deals being negotiated or considered by the EU (a Commission evaluation paper is expected soon), this paper looks at the two biggest trade deals in terms of impact in the sector (TTIP and Mercosur) and draws some useful conclusions as to what would be the main challenges and how the EU should address those.
Farm Europe has already examined TTIP and Mercosur and made appropriate sectoral recommendations. Now the time has come to go further and extract broader policy proposals that would help better shape the EU sector, make it more resilient and competitive.
Other than TTIP and Mercosur, and assuming CETA will be applied soon as it looks likely, the EU has a number of ongoing trade negotiations from which those with India, Japan and if agreed by the EU Institutions, Australia and New Zealand, will add to the impact of the former two.
That impact is far from identical, each negotiation has its specificities. Within each trade deal the sectoral impact might be diverse. But that diversity should not prevent us from drawing some conclusions.
The trade deals bring challenges and opportunities, depending on the sectors and the countries. There are sectors where broadly speaking the EU is poised to benefit – wine and spirits, olive oil, processed products. Other sectors offer a much more complex picture, either because they face countries at different stages of competitiveness (the case of dairy products or sugar) or because the EU is on average on par with those countries.
There is however a sector where with one notable exception (Japan) the EU will face strong competition from more market openings – the meat sector. While it is undeniable that Japan could be an important outlet for EU pork exports in particular, the global outlook from the combined FTAs is the opposite for beef and poultry, and even the overall balance for pork might be negative. US, Canada, Brazil, Argentina, Australia, are all competitive producers of beef, and for some pork and poultry as well. Judging from the terms of the agreement with Canada the sector should expect in case TTIP and Mercosur are concluded, not to mention the FTAs with Australia and New Zealand, a very significant surge in imports and a further deterioration of the trade balance.
Where the picture is less clear, on dairy or sugar for instance, the devil is in the details. On dairy the benefits expected from a Mercosur or Japan deals could be questioned by the Australia and New Zealand deals to a certain extent. Not to mention that the US sector has a known potential to develop, adapt and compete.
On sugar the potential benefits in the Japan FTA seem limited, as Japan’s sugar market is highly controlled. Where there is little doubt is on the terms of trade with Mercosur (Brazil) or Australia that can be dramatic to the survival of the EU sector. Brexit could also become a key factor in the future of the EU sugar market, adding to the negative impact of the FTAs.
In all the other sectors, even in those where the EU is poised to gain like the wine sector, more competition will be brought in. New World wine producers have made significant inroads in world market share, and they will also benefit from freer trade in the EU.
To summarize, further trade openings will bring a surge in imports in the meat sector, a big shock in the making to the sector which has structural problems of its own. The losses in the UK market as a result of Brexit will compound the negative effects of FTAs under negotiation or to come.
The sugar sector will face further competition from imports and a loss of the UK market, to an extent that will depend on the specific conditions agreed for the FTAs and for the future trade relations with the UK. On the other sectors the results will very much depend on the terms agreed, but the underlying force will be more competition in the EU market.
The EU should not just wait and see what the consequences might be. The CAP is a great policy if properly designed. Rather than pursuing a line of “business as usual” the decision-makers would be well advised to anticipate the challenges from further trade openings that they are promoting.
3) Relaunching the EU trade policy on a new governance
Brexit may be the occasion to evaluate the opportunity to review the way that mandates for negotiations are given to the European Commission.
Up to now, mandates are approved without review clauses, even if given a long time ago and in a significantly different context (e.g. Mercosur).
Worth reminding that agreements can only be adopted (by the European Parliament and Member States parliaments, if needed) as a whole – or not. In case of failure to adopt, the reliability of the EU Trade policy can be brought into question by partner countries, weakening the European attractiveness already undermined by the loss of the UK.
In this way, and paradoxically, Brexit may be the opportunity to relaunch the EU trade policy on a new governance, more transparent and thus more acceptable to the civil society.
The common line to the challenges Brexit and freer trade is enhanced competition for the EU-27 agri-food sector across the board, and a very daunting challenge to the beef and sugar sectors.
The opportunities that freer trade will offer should be recognized, but they do not invalidate the challenges ahead.
As already said above, the EU agri-food sector has an asset that should be fully used to reinforce the sector, make it more resilient and competitive: the CAP.
The question is whether the current CAP is designed to meet those challenges. The question is whether a CAP designed around a policy of decoupled direct payments offers the sector what it needs.
The best answer to more competition from other countries is to improve your own position. In order to improve its position the EU agri-food sector should seek to improve its competitiveness, increase its market share at the global level and become more resilient to external shocks.
To improve competitiveness, and indeed also to protect the environment, the sector needs more and better targeted investment.
To improve its resilience to external shocks it needs policies that protect incomes against climatic and economic events.
That is the subject of discussion in other panels in the Forum. But both Brexit and trade add to the need of policy reform in the EU.