“If you're not confused, you're not paying attention.” Tom Peters
Following Brexit, the UK will establish a new set of trade relationships. Agreements about the conduct of agricultural trade will form an important part of this new system. The devolved territories – Scotland, Wales and Northern Ireland – will have a keen interest in the structure of this new system, which will have a major influence on the development of their agriculture and food sectors. This blog tries to indicate complexity of the negotiations required before a new system for UK agricultural trade can be put in place which also satisfies the objectives of the devolved territories. This will be no easy task: the obstacles may be insurmountable.
In all international trade agreements, agriculture receives more attention than its economic importance implies. This largely reflects the political strength of the agriculture lobby. In the UK, the conflict between the interests of owners of land and other parts of society has a long history. The Corn Laws were introduced in 1815 to protect domestic wheat producers. Landowners were protected by high tariffs from international competition, but this caused the price of bread to rise and adversely affected the health of British workers. Their repeal in 1846 aided the UK’s development as an industrial nation. Since then, the UK has largely been an advocate of lower trade barriers.
Consistent with this history, the UK been a prime advocate within the EU of reduced financial support for agriculture. It has consistently argued for reductions in the size of the Common Agricultural Policy (CAP) budget. But, following Brexit, the CAP will no longer apply to the UK: instead, the terms of trade for agricultural products will depend on the UK’s trade arrangements that follow Brexit.
The Scottish Parliament and the Welsh and Northern Irish Assemblies also have extensive powers over agriculture. These include powers to influence the design and delivery of CAP payments to local farmers. The Scottish Government describes its agricultural policy as relating to:
“spatial, economic and environmental impacts of CAP payments; efficiency and sustainability of farm businesses; improving economic performance while reducing greenhouse gas emissions from agriculture; modelling of land use; the structure of Scottish Agriculture; farmer behaviour; innovation; and aspects of rural development.”
Scottish Government agricultural policy is inextricably linked with EU support structures for agriculture. Some changes to these responsibilities will inevitably follow Brexit. The devolved authorities are particularly exercised by the possibility of losing some of their existing powers. This would be taken as emblematic of Westminster’s lack of respect for these bodies. There will be particular sensitivity to changes in agricultural powers due to the greater contribution that agriculture and food production makes to the economies of Scotland, Wales and Northern Ireland relative to England.
Changes in powers will be determined by the trade agreements that the UK forms post Brexit. Agriculture will play a role in these agreements, but it will not be dominant. Other sectors, notably manufacturing and financial services, play a much larger role in the UK economy and therefore will be more influential in the design of these agreements.
There is therefore a risk that agriculture throughout the UK will be forced to accept new trading arrangements that it regards as unsatisfactory.
The case against agricultural subsidies has been made by Deiter Helm. He argues that agriculture does not meet the full costs of the pollution and reduction in biodiversity that it causes. Echoing the old Corn Laws debates, he argues that it increases the costs of food for British consumers. In relation to the CAP, he argues that its use of area-based support payments simply increases land prices, allowing the owners of land to realise an unearned capital gain and deterring new entrants to farming. These arguments are likely to command significant support and will be seized on by those willing to sacrifice agriculture so that the interests of other industries gain advantage in trade negotiations. However, the politics do not look promising: there will likely be united opposition in Scotland, Wales and Northern Ireland to the loss of powers over agricultural policy. These may trump the economic arguments for ending agricultural subsidies.
So what might be the likely course of Brexit negotiations involving agriculture, prior to the formation of new trade agreements? One possible route, associated with a “hard Brexit”, is that the UK falls back on WTO rules. This has some support within the UK Government and would be the outcome if neither an agreement nor a transitional arrangement is reached after the end of the two-year Brexit period.
Although the UK is already a member of the WTO, it currently applies EU “schedules” - commitments in relation to tariffs and industry supports. Once it has left the EU, the UK must develop its own “schedules”. Initially, to minimise short run trade disruption, it will continue to apply existing EU schedules. However, the UK and EU must settle several issues before new UK schedules can be put to other WTO members for their approval. Agriculture has a prominent role in existing WTO agreements and therefore will be influential in negotiations between the UK and WTO.
Attempts to reduce trade barriers often fail due to opposition from the agricultural lobby. The WTO has played a key role in attempts to reduce agricultural tariffs and support mechanisms, though not wholly successfully. The last major advance in reducing agricultural trade barriers was the “Agreement on Agriculture” (AoA) which formed part of the 1994 Uruguay Round of trade negotiations. The CAP has been compliant with this agreement since it was passed. This involved agreeing to a programme of reform to the agriculture sector that involved market access, domestic support and export subsidies. Thus, for example, the AoA required that all forms of border protection be converted into customs duties and be reduced by 36% between 1995 and 2000.
The remainder of this blog attempts to explain the issues that must be resolved between the UK, EU and WTO in relation to agriculture and how these may affect the devolved territories. The less determined reader may wish to give up at this point and accept the conclusion that “it’s complicated”.
WTO schedules comprise four parts, two of which involve agriculture. Part 1 sets maximum tariffs on trade in agricultural products between member states. It also sets conditions for tariff rate quotas (TRQs) on agricultural products. TRQs are two-tier tariffs, where a fixed volume (the quota) is imported at a low (possibly zero) tariff. Once the quota is exhausted further Imports are subject to a higher tariff rate. Thus, for example, the current agreement allows New Zealand to export 227,000 tonnes of sheep and goat meat to the EU tariff free. Exports above this quota must pay a tariff of 12.8% plus an additional weight-based charge. But it is not only New Zealand that has a tariff free quota. Table 1 below shows how a total of 284,000 tonnes of tariff-free sheep and goat meat exports to the EU is allocated annually to different countries.
Following Brexit these arrangements will change in complex and unpredictable ways. For example:
- The UK and EU must decide how existing quota allocations are to be allocated. Currently, the UK takes half of New Zealand’s EU quota. Should it continue to take the same amount? This is likely to be unpopular with British producers because 90% of UK lamb exports go to the EU and if they do not have continued tariff-free access to EU markets, they will be exposed to much greater domestic competition.
- It is not clear that the WTO will necessarily accept the outcomes of bilateral negotiations between the UK and EU to divide existing TRQs. Some members may seek to increase their TRQs both for the EU and UK. Countries that already have access may ask for an increase; countries with no access at present may ask for some quota.
- On the other hand, EU members may argue for lower TRQs to safeguard their position in domestic markets.
- The UK and EU must agree a set of TRQs for bilateral agricultural trade: they will have the option of setting these very high so that existing patterns of trade are protected, but it is not guaranteed that other WTO members will find this acceptable. They may object when the UK seeks to certify its new “schedules”.
Resolving these issues quickly will be a Herculean task. Even designing the process for forming an agreement will be complex (See, for example: Downes, C. (2016). The Post-Brexit Management of EU Agricultural Tariff Rate Quotas.) The Scottish Parliament and Welsh and Northern Irish Assemblies will also wish to influence the U.K.’s bargaining position in relation to tariffs and TRQs. They will have a greater interest in the outcome of these negotiations than the UK as a whole since agriculture as an industry is more important to the economies of Scotland, Wales and Northern Ireland than it is to England.
But this is not the only issue relating to agriculture where they will see their vital interests at stake: Part IV of the WTO schedules is solely devoted to agriculture. It specifies limits on financial support for this industry. These are agreed for each WTO member and specified in its Aggregate Measurement of Support (AMS). For the EU as a whole this is currently set at €72.4 billion. How much of this will be allocated to the UK following Brexit? The EU will retain the bulk of the AMS and clearly will wish its share to be as large as possible to give it the maximum latitude to adjust agricultural support. Even with goodwill on either side, the calculation of a fair share will be complex, involving the specific additions to the EU AMS that were negotiated as new member states joined the EU. It will also involve agreeing shares for the UK and residual EU for the 55 separate agricultural products identified by the WTO which are combined to give the aggregate EU AMS. Further agreement will be required on the appropriate sterling/euro exchange rate to be applied. These issues are explained in greater detail here, where it is argued that a likely outcome for the UK is an AMS of around €6.4 billion.
Current EU support for agriculture, as measured by the WTO, is substantially less than €72.4 billion. In 2012-13, the EU only used 7.4% (€5.9 billion) of its AMS allocation. Given that the CAP is regarded as a major support mechanism for the agriculture industry, how is the allocation so low? The WTO AoA classifies support for agriculture as being either in the “amber box”, “blue box” or “green box”. The amber box, which determines the size of a member’s AMS, includes measures used to directly support prices and/or production. The blue box covers aid based on areas and yields of specific products, while the green box covers general support for agriculture e.g. research, training and marketing, and, importantly, direct payments to producers which are fully decoupled from production.
Most CAP funding is no longer linked to production. Instead it takes the form of annual payments that are based on the area and type of land owned by the farmer. This form of support does not give farmers the incentive to increase production. However, to the extent that it supports farms that would be withdrawn from production in the absence of the support payments, it does increase supply. However, because there is no direct support for production, the vast majority of CAP payments went into the green box. And thus in 2012-13, only 7.4% of EU CAP support was inside the amber box and therefore classified as AMS.
The restrictions that the WTO applies to support payments would limit the freedom of Scotland, Wales and Northern Ireland to design their own policies even if the UK Government increased their powers in relation to agriculture. As far is the WTO is concerned, the UK government will be the relevant negotiating authority in relation to agricultural support. If other WTO members objected to, say, levels of agricultural support in Scotland, they would take out a complaint against the UK under the WTO international dispute settlement mechanism. To avoid exposure to such risk, the UK government would wish to ensure that total AMS is less than that allocated to the UK, when aggregated across the four nations. Following from previous arguments, the UK will also wish to ensure that the devolved authorities do not undermine TRQs agreed with the WTO.
This blog is intended to illustrate the complexity of a WTO-based agricultural trade agreement following Brexit. Not only are negotiations likely to involve three parties – the UK, EU and WTO - but also third countries that wish to influence allocations within UK TRQs. Additional demands from Scotland, Wales and Northern Ireland to determine agricultural policy within their jurisdictions may be impossible to accommodate alongside the need to form these international agreements. Whether, as I have previously suggested, financial compensation (in the form of increased block grants or new tax powers) will be enough to compensate the devolved authorities for changes to their powers to set agricultural policy remains to be seen.