Agri-food Trade after Brexit: Policy Options and Role of Regulation in Future Trade Flows

Jorge Soguero Escuer, PhD Candidate, University of Birmingham

Abstract: Food trade is a sensitive matter for UK’s post-Brexit food security and EU food exporters. Despite the relatively high tariffs on agricultural products compared to other sectors, the Political Declaration on the future relationship suggests the intentions of UK and EU trade negotiators to eliminate them. However, the text is more ambiguous about rules and standards. Farmers and consumers have expressed theirs concerns about the additional costs of conforming with new rules and standards as well as checks and inspections in foods crossing the EU-UK border. This article briefly describes what would be the compliance costs associated with each trade policy option subject to political debate by observing how third countries trade food with the EU based on those agreements.

 

 

 

Introduction

Substantial negotiations on the future trade relationship will only initiate after 29th March 2019, once the United Kingdom (UK) officially leaves the European Union (EU).The Withdrawal Agreement (WA) announced on 14th November was received with strong criticism by the British political spectrum. One of the most controversial arrangements of the draft deal is the future trade relationship between the EU and the UK (Piper, 2018). This trade discussion is of a special kind. Countries negotiate Free Trade Agreements (FTAs) to open markets and facilitate trade. However, EU and UK negotiators will seat at the table with the objective of minimizing the impact of a deal that will irremediably leave the parties worse off. The consequences in trade of Brexit, whether a soft or a hard one have been stressed by trade experts:2

“Being outside the Customs Union and the Single Market will inevitably lead to frictions in trade. Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU Single Market as well as of the UK market. This unfortunately will have negative economic consequences, in particular in the United Kingdom” (European Council, 2018).

Farmers, food manufacturers and consumers are concerned because of potential disruptions on food trade after Brexit. Experts have warned that one of the major negative consequences of a hard border would originate from trade facilitation costs (Van Berkum et al., 2016; Tim Lang et al., 2018).This article, then, explores the non-tariff measures (NTMs), agribusinesses trading across the Channel might face. The objective of this article is, thus, threefold: explaining the importance of trade in the UK and EU food sectors; understanding how NTMs affect trade in foods; and revising the trade frictions, food exporters could face in each of the recurrent trade policy scenarios presented in studies and public debates.4

The role of EU-UK trade on food supplies and income

We know little about what the future trade relationship between the EU and the UK would be yet. The British Government faces the dilemma of keeping high alignment with EU rules and standards in goods and enabling enough regulatory flexibility to leverage in negotiating new trade deals. British consumers are particularly worried about food price hikes and food availability. Around 21% of British households suffer any kind (whether marginal, low or very low) of food insecurity (FSA, 2017). According to Department for Environment, Food & Rural Affairs, the UK imported 30% of its domestic food consumption from EU countries in 2016, and another 11% from third countries that have a trade agreement in place with the EU. Around 70% of British food and non-alcoholic drinks exports end in European markets. The figures are significant to appraise that any trade disruption would have direct effects on British food supplies and income of food producers. Leaving the Single Market will mean for food exporters additional paperwork, technical inspections and country of origin custom checks that imply costs and delays. Waiting time at the border, whether minutes or hours, is very sensitive in a sector that trades products of such perishable nature and are concern of the potential disruptions. Custom authorities and food agencies have warned about the unavoidable impact of Brexit on the availability of fresh food and food losses due to delays caused by NTMs, as well as the high costs of warehouse stockpiling needed to avoid food shortages (The Guardian, 2018a; 2018b). For example, the Institute for Government (2017) reports that, in the case of beef and lamb coming into the EU from third countries, between 20% and 50% of the shipments undergo phytosanitary checks at the border.

NTMs impact on food trade

Assessing the overall impact of Brexit in agriculture and food trade is complex. Apart from the above-mentioned NTMs, tariffs, exchange rate, access to migrant labour and post EU’s Common Agricultural Policy subsidies for farmers must be factored in (Hubbard et al., 2018). Trade economists have estimated the effects on UK domestic prices and bilateral trade in goods. However, compliance costs with potential new rules and standards are difficult to estimate and they are assumed fixed or approximated through back-of-the-envelope calculations.The UK currently trades with the rest of the EU under a harmonized regulatory framework, which might not be binding when the UK leaves the Single Market.Future divergence on technical regulations, such as sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT), would imply significant compliance costs. Cadot and Gourdon, (2016) estimated SPS, TBT and other relevant compliance costs for 65 countries, including 27 EU countries, and concluded that they are considerably high for food compared to other goods (see Table 1). NTMs are widely used by developed countries, with a particularly wide product coverage in the food sector, and tend to be more restrictive than tariffs (Anderson and van Wincoop, 2004). In the case of Brexit, NTMs will gradually increase in the long run, once UK and EU food rules and standards diverge and agribusinesses adjust to them (Bellora et al., 2017).

Table 1Average ad-valorem equivalent estimates in 65 countries for SPS, TBT and other NTMs

Source: Cadot and Gourdon (2016)

 

Trade frictions under different trade policy scenarios

The Political declaration sets out a non-binding agreement on zero tariff and quota-free exchange for all goods. It also acknowledges that custom checks and procedures will be necessary. The draft suggests that “UK will consider aligning with EU rules [to what extent is yet to be determined] in relevant areas” and draws lines for consensus in other trade facilitating measures like mutual recognition, institutional cooperation, and common principles on TBT and SPS. The text also calls to avoid a hard border in Ireland/Northern Ireland “on a permanent footing”, which might result in a double trade regime if the future agreement is not so deep for the rest of the UK. To understand better the compliance costs that food exporters could face depending on the trade regime agreed, we analyse how other countries subject to those trade arrangements with the EU currently trade in food.

European Economic Area (EEA)

Also known as the Norway-style option, the EEA allows for a high level of harmonization as Norway follows EU food law. It would be synonym, for food producers, of minimum adjustments in their production and marketing requirements. EEA permits UK to pursue its own trade agreements, but the rigidity of the regulatory ties might limit the negotiating power with important trade partners that might look for looser food rules and standards.The downside of not being in the Customs Union (CU) are country of origin checks at the border, as they still originate significant trade costs and delays.

Customs Union

The EU has currently three CUs in place with Turkey, Andorra and San Marino. A CU would ease trade frictions as it implies not only zero tariff but also strong regulatory alignment. However, Turkey, the largest CU partner, does not have an agreement on agriculture. Turkish standards differ from the EU’s and burdensome customs checks are carried out. To avoid such trade frictions, the parties might seek a more ambitious agreement, like San Marino. The country fully obeys EU food law and enjoys an equivalent position to Member States in food trade. However, it is not fully exempt from custom checks for some specific products. A CU only allows the UK to negotiate trade agreements with third countries in areas not covered by the agreement. In other words, a CU including the agriculture sector would impede the UK to independently sign new agreements that include trade in food.

EU-UK FTA

Some pro-Brexit Members of Parliament in UK support a more ambitious version of the EU-Canada Comprehensive Economic and Trade Agreement (CETA). The proposal suggests a more comprehensive agreement on tariff and tariff rate quotas elimination than current CETA, but there are no guidelines on how deep it would go on regulation and standards. Canada and the EU agreed on higher cooperation on food standards, but trade facilitation costs are high. Certain products such as beef and crops have larger duty-free quotas under CETA, but exports still obey restrictive regulation. This type of agreement, although within certain parameters, would allow UK to set their own food regulation. How this agreement would fit in the ambitious “Global Britain” trade policy strategy while respecting the integrity of EU food markets and law is yet unclear (Swinbank, 2018).

No-deal/WTO rules

Both UK and EU contingency plans warn of the large trade disruptions in case of no deal. They would consider each other as a third country and would establish customs procedures, as they do with imports entering EU markets from countries with no preferential trade arrangements. Border checks and controls, as well as most-favoured nation tariffs, would apply at full blast.8 A no-deal scenario allows for unilateral trade policy decisions. For instance, the UK could eliminate tariffs and minimize checks at the border so as to avoid high food prices in its domestic markets (Raab, 2018). This measure might be yet at the expense of putting local producers’ income at risk due to the increasing competitiveness.

Conclusion

Whatever option the parties finally agree on, food traders across the Channel will no longer enjoy the favourable frictionless conditions they had before the UK’s departure. Based on the commitments reached in the WA, one might also expect foodstuffs crossing the Irish border to suffer less trade disruptions than in other parts of the UK. While the UK’s strategy is to find new trade partners, it might come at the expense of regulatory divergence and increasing compliance costs in trade with the EU. The role played by the EU for the British food producers and consumers would be difficult to replace, and securing a high regulatory alignment is of great importance for the sector.

References:

Anderson, J. E. and van Wincoop, E. (2004). ‘Trade Costs’, Journal of Economic Literature, 42(3), pp. 691–751. doi: 10.1257/0022051042177649.

Bellora, C. et al.(2017). Research for AGRI Committee – EU – UK agricultural trade: state of play and possible impacts of Brexit. Brussels.

Van Berkum, S. et al.(2016). Implications of a UK exit from the EU for British agriculture; Study for the National Farmers’ Union (NFU). doi: 10.18174/377860.

Cadot, O. and Gourdon, J. (2016). ‘Non-tariff measures, preferential trade agreements, and prices: new evidence’, Review of World Economics, 152(2), pp. 227–249. doi: 10.1007/s10290-015-0242-9.

Dhingra, S. et al.(2017). ‘The costs and benefits of leaving the EU: Trade effects’, Economic Policy. Centre for Economic Performance, London School of Economics and Political Science, 32(92), pp. 651–705. doi: 10.1093/epolic/eix015.

The Economist (2018). ‘How a soft Brexit differs from a hard one’, The Economist Group Limited, London, 25 July. Available at: https://www.economist.com/the-economist-explains/2018/06/25/how-a-soft-brexit-differs-from-a-hard-one

European Council (2018). European Council (Art. 50) – Guidelines, EUCO XT 20001/18, 23 March.Brussels.

Food Standards Agency (FSA) (2017). The Food and You Survey Wave 4 Combined Report for England, Wales and Northern Ireland.

Le Gallic, B., Mardle, S. and Metz, S. (2018). ‘Brexit and Fisheries: A Question of Conflicting Expectations’, EuroChoices. Wiley/Blackwell (10.1111), 30(2), pp. 30–37. doi: 10.1111/1746-692X.12200.

The Guardian (2018a). ‘UK running out of food warehouse space as no-deal Brexit fears rise’, 18 November, UK. Available at: https://www.theguardian.com/politics/2018/nov/18/uk-running-out-of-food-warehouse-space-as-no-deal-brexit-fears-rise

The Guardian (2018b). ‘Post-Brexit port checks could disrupt fresh food supplies, say freight bosses’, 3 May, UK. Available at: https://www.theguardian.com/politics/2018/may/03/post-brexit-port-checks-could-disrupt-fresh-food-supplies-say-freight-bosses

Hubbard, C. et al.(2018). ‘Brexit: How Will UK Agriculture Fare?’, EuroChoices. Wiley/Blackwell (10.1111), 17(2), pp. 19–26. doi: 10.1111/1746-692X.12199.

Institute for Government (2017). Implementing Brexit: Customs.IFG Analysis, London.

Kee, H. L. and Nicita, A. (2017). ‘Short-term impact of Brexit on the United Kingdom’s export of goods’, pp. 1–12.

Office of the United States Trade Representative (USTR) (2018). 2018 National Trade Estimate Report on Foreign Trade Barriers. Washington.

Parliament. House of Lords (2018). 14th Report of Session 2017-19. Brexit: food prices and availability. London.

Piper, Elizabeth (2018). ‘May wraps ‘suicide vest’ around UK over Brexit, says Johnson’, Reuters, London, 9 September. Available at:https://uk.reuters.com/article/uk-britain-eu-johnson/may-wraps-suicide-vest-around-uk-over-brexit-says-johnson-idUKKCN1LP06W

Raab, Dominic (2018). Secretary of State Dominic Raab’s speech on no deal planning, Department fo Exiting the European Union, London, 23 August. Available at: https://www.gov.uk/government/news/secretary-of-state-dominic-raabs-speech-on-no-deal-planning

Steinberg, J. B. (2017). ‘Brexit and the Macroeconomic Impact of Trade Policy Uncertainty’, Society for Economic Dynamics. Society for Economic Dynamics, 2017 Meeti(216).

Swinbank, A. (2018). ‘Food, Farm and Rural Policies after Brexit? Some Knowns, and Known Unknowns’, EuroChoices. Wiley/Blackwell (10.1111), 17(2), pp. 4–11. doi: 10.1111/1746-692X.12197.

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Endnotes

[1] The Withdrawal Agreement will be subject to a “meaningful vote” at the House of Commons. If the draft text does not go through, the chances are open for multiple scenarios, including an extension of the Brexit date and subsequent deferral of trade negotiations. The draft text stablishes a transition period 21 months starting from the UK’s departure day. The EU and UK agreed on applying zero tariffs and frictionless trade during this period. The Withdrawal Agreement and the Political Declaration are available at: https://ec.europa.eu/commission/brexit-negotiations/negotiating-documents-article-50-negotiations-united-kingdom_en

[2] See Dhingra et al.(2017) for an economy-wide analysis of the effects of Brexit in the medium-long term.

[3] See The Economist (2018) for a concise explanation of the difference between a soft and a hard border.

[4] Given the special nature of the negotiations on important supply-side aspects such as vessels access to waters and quota shares, the fisheries sector requires special analysis. For an overview of issues in the fishing sector see Le Gallic, Mardle and Metz, (2018). Note also that fisheries and aquaculture are excluded from the agreed EU-UK Customs Union arrangement in case of no deal.

[5] Some studies use previous NTM estimates on trade between the USA and the EU. Then, assuming in all cases deeper integration than the USA, apply 25% (soft Brexit) or 75% (hard Brexit) of these trade costs in the different scenarios (see for example Dhingra et al., 2017 and Steinberg, 2017). Kee and Nicita (2017) assume no additional compliance costs after Brexit in their analysis of short-term trade effect in goods.

[6] In simple terms, the Single Market means that British sheep meat can access a market in Brussels in a similar way that enters into a market in Birmingham.

[7] In the consultative process on a trade agreement this year, the US required UK “assurances” that some of the current EU food standards are either eliminated, set on a voluntary basis or mutually recognized (USTR, 2018).

[8] A recent report estimates that, if both sides apply current EU’s Tariff Schedule at WTO, food exporters would face an average tariff around 22%, with significant variation across products. Note that, while suggesting an increase in import prices, it does not mean an increase a surge of such magnitude (Parliament. House of Lords, 2018).