Wolf in sheep’s clothing: Britain wakes up to Brexit farming conundrum

From farm subsidies to New Zealand lamb imports to livestock trade at the Irish border: the process of untangling Britain’s agriculture sector from the EU’s trade policy regime will start early in the Brexit process and face daunting challenges, writes Iana Dreyer.

Trade policy cognoscenti  were aware farming issues would be among the most challenging topics in the UK’s process of leaving the EU. But the general public and the many rural area Leave voters in the June 2016 referendum hadn’t probably quite realised how much agriculture would be a can of worms in the Brexit process. Now this fact is sinking in.

“Huge” issue

“The issue is huge in the EU. And it will be huge in the UK”, reckons Peter Ungphakorn, an expert in World Trade Organization agricultural trade matters, and a former official in the organisation. It took the British farming sector and food industry several months to come to grips with the various implications the UK’s exit from the EU for their business. But before Christmas farm and food groups have started airing their anxieties and demands more loudly.

“The issues at the heart of the UK’s future relationship with the EU are beginning to crystallise and so it is imperative that the strategic importance of food and drink to our nation’s economic and physical wellbeing is recognised and its future secured”, reads an open letter to the government orchestrated by the Foods and Drink Federation and co-signed by more than 30 food and farm associations from across Britain released last month.

The EU is indeed the UK’s largest market for exports of food and non-alcoholic drink. It is also a major source of imports, with 70 of inputs source by agro-food members of the Food and Drinks Federation sourced in the EU.

Andrea Leadsom, the UK’s Secretary of State for Environment, Food and Rural Affairs and an ardent Brexit campaigner, has largely remained silent on the government’s policy plans for the UK’s exit to the EU. DEFRA, Leadsom’s ministry, has promised farmers the status quo on subsidies until 2020 and sent reassuring messages about fears of labour shortages in the strawberry fields and food processing plants of Britain.

Yet the broader trade policy picture for farming trade post Brexit remains blurred.

Uncertain roadmap

Where Britain is headed on Brexit is very hard to predict. The current route taken by Theresa May’s government – which aims to trigger Article 50 of the Lisbon Treaty in March this year at any cost – entails the risk of what is commonly called a ‘hard Brexit’ in 2019. The alternative would be that the UK and the EU agree to a transitional arrangement in 2019 in which trade relationships remain largely the same for several years until the UK finds its final destination in a carefully renegotiated relationship with the EU.

It does not appear very likely that the UK would remain in the EU’s customs union, at least in the longer run, given the widely shared desire in the Leave camp to see Britain develop its own independent trade policy. A customs union with the EU would not allow that. But this will mean paperwork at the border and potentially other trade barriers across the Channel.

Whichever the scenario the first port of call for farming and trade will be shores of the Lac Léman in Geneva.

At some point Britain will leave the Common Agricultural Policy (this is independently of whether Britain remains in the customs union). This means UK’s farming subsidy levels will have to be redefined as part of its membership of the WTO’s Agreement on Agriculture of 1994.

Gladly, the EU has plenty of room for manoeuver in its current WTO subsidy commitments. The EU may hand out up to €72.4 bn (£54.3 bn) worth of WTO-inconsistent ‘amber box’ subsidies, yet in practice it currently only hands out €5.8 bn (£4.35 bn).

Whereas a bilateral London-Brussels negotiation on dividing up that allotted right might not be as difficult as some fear, other WTO members could intervene in the process. This would certainly be the case should the UK decide it wants a large so-called ‘amber box’ allotment, so as to be able to buy off farmers should it decide to reduce tariffs and enlarge quotas to please WTO third parties.

Codeword TRQ

Another issue are tariffs and quotas. The UK and the EU have already started working on a much needed clarification of the EU’s tariff schedule in the WTO. This is just to be able to state what is the status quo and comes before negotiating anything new amongst themselves, let alone with third countries. The UK has vowed to keep it as simple as possible, and, to begin with, replicate the EU’s tariff schedule once it is out of the EU and/or its customs union.

Yet replication alone might be tricky. The difficulty lies mainly in the so-called tariff rate quotas – quotas under the threshold of which import duties are lower than at their (usually very high) normal duty rate. At stake are 87 agriculture quotas.

EU quotas certified in the WTO date back to 1994, when the EU only included 15 member states. Before talking to Britain about separating out quota shares, the exact extent of the quotas still needs to be certified by other WTO members in a process called ‘rectification’.

Key sectors at stake include beef, lamb, pork, barley, dairy/butter, and sugar. “In 2015 we exported £ 1,188 m [€1.4 m] of dairy products, £403m of beef and sheepmeat worth £302 m [€377 m]. 38 percent of our total lamb production finds is exported to the EU, especially France, while 26 pork of pork production is also exported – over 80 percent of this to the European markets”, the Britain’s National Farmers’ Union explains. Three quarters of the UK’s growing barley exports go to the EU.

Beef fetches a 12.8 percent ad valorem tariff and between €176 (£132) and €304 (£228) per 100 kilos of imported meat. For lamb the rates are comparable. Butter fetches €231 (£173) per 100 kg at the EU border. Barley €93 (£70) per tonne. Should Britain and the EU separate without a deal, these very high tariffs would start applying to British exporters. That would hurt.

“TRQs are a very difficult area the UK will have to deal with”, said Peter Ungphakorn. Any future negotiation over the inheritance of a quota would need to split the EU’s share with the EU. But it’s not only that. Those quotas are allocated to only a subset of WTO members with whom the quota is negotiated individually. Hence there are potentially 87 TRQ negotiations ahead with different WTO members, if these start raising heckles. And that some WTO members will do is very likely.

The EU’s lamb quota is striking in this regard. The 283.8 thousand tonnes registered in the WTO  are only for 15 EU member states. Amendments and enlargements made to the quota by the EU unilaterally after new member states joined were never certified by the WTO. The EU’s WTO quota applies to countries like Argentina, Australia, Chile, New Zealand, Uruguay . New Zealand takes by far the biggest share in this quota, with 226.7 thousand tons. A quota for “other” countries of 200 tons is foreseen.

“New Zealand’s TRQ for lamb might be thought to be one that the EU27, New Zealand, and the UK would be happy to see transferred to the UK”, writes Alan Swinbank, in a piece for Sussex University’s UK Trade Policy Observatory.

“But the commercial interests involved might not be quite that simple. The UK currently produces about as much lamb as it consumes, with its imports from New Zealand offset by exports of UK-sourced lamb to France and other EU countries. But if the UK’s exports of lamb now faced the EU’s full MFN tariff, would the UK be quite so keen to accept onto its market New Zealand produce?”

Probably not.

“A potential unilateral lowering of British tariffs would be damaging, especially but not exclusively for our livestock sectors”, the NFU said. “Many UK farm businesses would be unable to survive if current tariff barriers were removed or slashed”, the farm group fears.

The fate of future UK lamb exports to the EU is also unclear. Would Britain only get a small share of the EU’s 200 ton quota?

UK-Ireland border

Another immediate concern will be the UK-Ireland border should the UK leave the customs union.

“Ireland is a major exporter of livestock products to the UK”, the UKTPRO’s Swinbank explains. “Highly integrated supply chains link manufacturing activities north and south of the border”. Certainly “modern computer and tracking systems could minimise the need for border checks on manufactured goods”, so Swinbank. “But would that suffice for livestock, agricultural commodities, and food?” That is not clear.

“Smuggling of livestock in particular was a feature of this border during the Troubles in the past.”, Swinbank reminds us.