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BREXIT SUMMARY from The Policy Group

BREXIT SUMMARY from The Policy Group

Date Published: 18/09/2018

The Brexit implications can be divided into three:

  1. Those factors where leaving the EU allows the UK to create new policies. There is no absolute reason why policy has to change and change is not a necessary Brexit consequence. For agriculture the impact of these changes is potentially as big as anything else.
    • Subsidy. This is potentially significant in terms of average profitability. The current expectation is that it will be both reduced and diverted to fund public goods, such as environmental protection. While there is a lot of scope for manoeuvre, the WTO principle is that payment must be based on income foregone. Reduction in subsidy should improve market focus and return on entrepreneurial ability but adjustment will be hard.
    • Immigration policy. New rules have been announced allowing entry of seasonal agricultural workers although there will still be issues for dairying and year round food industry businesses.
    • Reduction in UK boarder tariffs (see below) and regulation. Whether regulation changes are perceived as good or bad is likely to depend as much on personal perception as anything else. International standards already apply to trade albeit EU rules can 'frustrate' and cause delays. Agricultural policy in the UK is devolved to the individual countries and thus Wales and Scotland GMO policy differs from that in England!
  2. Those factors we will have little direct control of such as tariffs imposed on us.
  3. Consequences such as exchange rate and slowing of investment.

Tariff options

The UK is largely a net food importer while the EU is largely a net exporter. As a net exporter, on a like for like basis, the EU food price is no longer (since export subsidies are no longer permitted and quotas have been removed) consistently high compared with other producers because the price of disposal on to the global market has to be competitive.

This is despite often very high import tariffs. In practice, most primary product trade is below the headline MFN tariff and is on the basis of TRQs while processed goods are more likely to be subject to the full MFN tariff.

The EU is uniquely often a major importer and exporter of apparently the same goods. However, when probed there are differences in quality between the two trades. For example, we largely import sheep legs and rump steak and largely export offal and the lower quality cuts. TRQs tariffs are not necessarily zero and are on a limited volume which might not be sufficient for all imports. Thus in the case of beef, TRQ tariffs mean that the price of premium beef (as we define) is above world prices but lower quality beef (as we define) is at ‘world’ price (and cheaper than the import price).

Taken as a whole the taxation transfer to producers does result in a higher price than apparent in the payment made for the good.

When we leave there are three major tariff scenarios:

  1. We agree a new Free Trade Agreement so tariffs between the UK and the EU remain as at present. This is the UK objective. However, cost of trade would still rise because the bureaucracy would increase through documentation and customs checks. This is already a feature of trade with others but current UK/EU trade is probably more complex and involves commodities less frequently traded (e.g. milk tankers move across the Irish boarder several times a day). The other issue is the Rules of Origin that are specific to each FTA. In our case we export a lot of flour and bakery goods from N Ireland to the Republic of Ireland containing Canadian wheat - perhaps 20% could no longer be exported. The politics are immense. The four EU pillars of free movement of goods, capital, labour and services apply to all the other European countries trading with the EU (e.g. Norway (EEA) and Switzerland) and an exception for the UK is difficult to achieve.
  2. We crash out of the EU. This would mean the UK adopted the same tariffs as currently applied by the EU under WTO. This would clearly be disruptive to trade but because the UK tends to be an importer of most agricultural goods the tariffs would have more bite than now and raise most UK prices. For those goods we export prices would fall. Even a crash out on WTO terms is not straight forward because the TRQs have to be shared. A mechanism has been agreed (based on share of trade over three years) but this is not acceptable to many of those exporting because flexibility, and market, is lost.
  3. We crash out but lower UK tariffs unilaterally. This avoids higher prices but weakens our negotiating position with others. It also has a political element because EU manipulation has excluded some issues thought to be controversial such as hormone treated beef and chlorinated chicken which would no longer be possible (although reasonable to argue in favour of consumer choice). The EU would still impose tariffs on or exports to them. It may well kill off some sectors (but not many) such as sugar.

In my positive moments I think it is quite possible that the UK would join the CPTPP (Comprehensive and Progressive Trans Pacific Partnership) (whether we would have to relocate geographically is another question). There has been a number of positive statements from current CPTPP members on UK membership although negotiation could take two or more years. While not as convenient as the EU, there are also advantages. There is also a view that post Trump the US would re-join and I do not think it is beyond possibility that the EU would also eventually join in some form.