Friday, 22 April 2016

Questions facing farmers if the UK vote to Leave EU

UK farming and the 'great unknowns'

Would there be access to the European market, and under what conditions?
  • What would a future British agricultural policy look like, particularly for direct support?
  • If the UK will continue to have access to the EU’s single market, but take a different approach on support to farmers, how will fair competition for our farmers be ensured?
  • Would Britain be more or less open to imports?
  • What immigration policy would the government pursue and how would it affect our access to labour?

A recent NFU report prepared for the Yorkshire Agricultural Society called ‘The Implications of ‘Brexit’ for UK Agriculture’ provides a detailed analysis on the likely implications for the Farming community. The report covers farm support, budgetary issues, the environment, animal health and welfare, migrant labour, plant protection, genetically modified organisms and World Trade Organisation Rules. 

The report deals with what can only be called the great unknowns! 

To ensure its distribution I have below repeated the Report’s contents relating to the range of scenarios after exit. 

There are five broad scenarios after Exit and each of these has different implications for farmers. These scenarios can be placed on a continuum ranging from the most integrated to the least integrated:

1. Customs union. The UK withdraws from the EU, but remains within the customs union. Goods from within the customs union can move freely, including British farm exports, as can those from outside once a Common External Tariff (CET) has been paid. However, it does not differ much from EU membership and might be unacceptable to opponents of membership.

2. The ‘Norwegian’ solution in which the UK rejoined the European Free Trade Area (EFTA) and remained in the European Economic Area (EEA). The CAP regime as such is not included in the EEA, so there would be scope for a domestic policy. However, more generally, it involves accepting EU regulations while having a limited influence in them.

3. Switzerland is in EFTA but not the EEA. It has a series of bilateral treaties with the EU negotiated on a case-by-case basis. The difficulty as with the Norwegian solution is that a considerable body of EU law has to be accepted without the ability to shape it.

4. A simple free trade agreement (FTA) with the EU is probably the UK’s preferred option, but may be difficult to achieve.

 5. The default option is for the UK and EU to trade with each other within the WTO system if an agreement cannot be reached on a FTA. This would be damaging to UK farmers in terms of tariff barriers in Europe and free access of imports.

New EU-UK Relationship and the The range of scenarios after Exit

A number of possible relationships are available, although not all of them may be acceptable to the EU. In any event a protracted negotiation would be necessary following a referendum decision to leave the EU. All sectors of the economy will be impacted by the post-withdrawal trade regime, and consequently it is very unlikely that agri-food interests would be a decisive factor in determining its form.

However, because of the rather high tariffs that the EU currently imposes on many agricultural and food products —as compared to the lower tariffs that more usually apply to both manufactured products and raw materials— the post-withdrawal tariff regime is of particular interest to UK agriculture.

For example, the EU’s most-favoured-nation (MFN) tariff —i.e. the import tax it imposes in the absence of WTO-sanctioned preferential trade agreements— on a car is 10 per cent of the value of the car, whereas that on fresh lamb carcasses is 12.8 per cent plus €1,713 per tonne. The latter would be a hefty charge on UK lamb exports to France if a preferential trade regime did not apply. Similarly, the UK would charge an import tax on products coming from its former EU partners: €1,896 per tonne on Irish and Danish butter for example, if the UK continued with the MFN tariffs it currently applies.

Whilst high tariffs on agri-food imports from the EU might appear to offer welcome protection to UK farmers they would be highly disruptive for the food industries, and would act to push up consumer prices. Listed MFN tariffs are very high in comparison to the current support prices under the CAP. Indeed for sugar the MFN tariff exceeds the nominal support price!

As the UK obtains a large share of its sugar from outside the EU, but currently imported at zero or low tariffs because of preferential trade agreements, it would be highly disruptive if these import arrangements could not be continued after the UK’s withdrawal from the EU. 

Consequently the determination of the eventual trade regime is of considerable importance.
From a UK perspective the key objective would be to seek to have continued access to the single market, which is the principal economic benefit of membership, while eliminating or reducing the impact of those EU regulations that are seen as harmful to UK interests.

As a House of Commons research paper notes, ‘Whatever the arrangement there is likely to be a trade-off between the level of access to the single market, and freedom from EU product regulations, social and employment legislation, and budgetary contributions’ (Thompson and Harai, 2013: 10). 34

The implications of ‘BREXIT’ for UK agriculture
It is possible to place five options on a continuum, ranging from the most integrated to the least integrated:

1. Customs union. The members of a customs union (CU) fix a Common External Tariff (CET), and once this tariff has been paid imports from third countries are in free circulation and – as with products originating within the union – can move freely from one member state to another. From a trade perspective possibly the least disruptive option would be for the UK to withdraw from the EU, but retain the CU. Existing tariff arrangements, both with EU member states and with third countries, would be maintained and there would be no need to renegotiate tariffs and concessions within the WTO. (This would not stop the members of a CU from restricting the import of agricultural products on legitimate health/environmental grounds.)

 If agriculture was included as part of this deal it would be relatively easy to negotiate and a good outcome for British farm exports. Such a deal would also be more acceptable to other members of the WTO. On the other hand, it does not differ that much from EU membership and might therefore be unacceptable to those opposed to membership. However, if agriculture was excluded from the EU-UK CU, then this would be problematic.

If agricultural trade was not included in the CU, or in any of the trade scenarios envisaged in options 2-4 below, existing MFN barriers would apply on trade between the UK and the EU (including the Irish border), as would be the case in scenario 5. UK lamb would face high tariffs entering France (38 per cent of all lamb produced in the UK is exported to Europe: NFU, 2015: 4), as would Irish beef entering the UK.

 2. The ‘Norwegian solution’, in which the UK rejoined the European Free Trade Area (EFTA) and remained in the European Economic Area (EEA). This would mean a continuation of the free movement of persons, capital, goods and services. The free movement of persons would be of particular concern to Eurosceptics as lack of control over migration has been one of their principal objections to British membership of the EU. The 1994 EEA agreement means that EU laws in areas such as employment, environmental policy and competition policy continue to apply, including those regarded as most burdensome by business.

Iceland and Liechtenstein are also in the EEA. The CAP regime as such is not included in the EEA. Norway has its own domestic farm policy instruments and provides a higher level of support for producers than within the CAP. The Norwegian model is the solution that the EU would be likely to try to achieve, but it is unlikely to be acceptable to those concerned about regulation from Brussels. It involves accepting EU regulations whilst having limited influence on them.

3. Switzerland is in EFTA but not the EEA. EFTA is a free trade area rather than a CU like the EU. The UK was one of the original members. Switzerland has a series of bilateral treaties or contracts with the EU negotiated on a case-by-case basis. There are 20 important agreements and 100 that are less so. Bilaterals I signed in 1999 included an agreement on agriculture and Bilaterals II signed in 2004 included an agreement on processed agricultural products. It should be noted that Switzerland provides a higher level of domestic agricultural support than the EU. As in the case of Norway, this reflects the particular challenges that agriculture faces in terms of terrain and climate.

Norway and Switzerland have the highest levels of producer support as a percentage of gross farm income in the OECD at well over twice the EU levels. These are static agreements, so protocols have to be added from time to time to update them. It is essentially a model of considerable integration without membership. It does not mean, however, that Switzerland is not bound by horizontal policies that cover more than one sector or policy area such as environment and competition. For example, its Agreement on the Free Movement of Persons means that it must introduce equivalent employment legislation to that in operation in the EU, including the Working Time Directive.

 ‘Switzerland is more integrated than Norway into the EU because of geography, but lags behind Norway in terms of legal arrangements and the scope of its access to the single market’ (Buchan, 2012: 5). However, ‘Some say that the Swiss government is adopting more EU standards than many of the EU members’ (Linder, 2010: 89). Moreover, the relationship between the EU and Switzerland has been under some strain and ‘is not a template the EU wants to offer others … if the UK tried to withdraw on a Swiss-style arrangement, the EU would insist on wholesale UK adoption of future single market legislation and on UK acceptance of surveillance and enforcement mechanisms’ (Buchan, 2012: 9).

It is worth noting that in its 2012 report the House of Commons Foreign Affairs Committee stated (cited in House of Commons Library, 2013: 17),

‘We agree with the Government that the current arrangements for relations with the EU which are maintained by Norway, as a member of the European Economic Area, or Switzerland, would not be appropriate for the UK if it were to leave the EU. In both cases the non-EU country is obliged to adopt some or all of the body of EU Single Market law with no effective power to shape it’.

 4. A simple free trade area (FTA) agreement with the EU is probably the UK’s preferred option, but unlikely to appeal to aggrieved EU member states or to those member states worried about their own Eurosceptic parties. A member state such as France would be concerned about exports to its territory from the UK which was not constrained by the same set of rules. Such an arrangement would likely relate to tariff barriers, quotas and the like, on products originating within the UK and EU, without attempting to harmonise UK law on EU provisions (although some convergence on food safety, animal health and phytosanitary arrangements might be acceptable). 

Recent FTAs negotiated by the EU have not been as simple as this, e.g., that concluded with Columbia and Peru in 2012. Moreover, an agreement could take years to negotiate, and ratify as required in national parliaments. Proponents of a FTA argue that the EU has such arrangements with other parts of the world, but these are generally with developing and emerging countries and there is no precedent for such an agreement with a developed country that is a former member.

The experience of the EU-Canada free trade agreement may, nonetheless, be relevant. Negotiations for the EU-Canada Comprehensive Economic and Trade Agreement were completed in August 2014 (following a political break-through in October 2013) and the ‘CETA’ is understood, in particular, to remove 99 per cent of customs duties: see Its objectives, however, are broader, including such matters as the promotion and protection of investment.

For our purposes, what is probably most significant is that CETA does cover many agricultural duties (something which has so often proved difficult elsewhere). Thus, according to the above EU website, ‘[a] far reaching elimination of customs duties will apply also to the farming and food sector’ (with great benefit envisaged for EU high-value, processed agricultural products); and ‘[n]early 92% of EU agriculture and food products will be exported to Canada duty-free’ - although the same website at the same time envisages that all industrial duties are to be eliminated within 7 years.

5. If the CU option is rejected, and agreement cannot be reached on a FTA, then the default option is that the EU and the UK trade with each other as MFN trade partners within the WTO system. The EU then would have little alternative than to impose its CET tariffs against UK products (on lamb to France for example). Equally the UK would have to impose its MFN tariffs on imports from the EU (Danish butter for example). A unilateral MFN tariff reduction scenario by the UK could be even more damaging for UK farmers. UK farm exports would still face tariff barriers entering the EU, but there would now be freer access for all suppliers to the UK market, which would inevitably drive down prices.