Policymakers and key stakeholders should consider scenario planning of possible outcomes and reactions due to the significance of Brexit to the agrifood sector – in both the EU and the UK, writes Luke’s senior scientist Ellen Huan-Niemi.
Prime Minister Boris Johnson’s pledge to leave the EU by October 31 with or without a deal was blocked by the British Parliament, which required him to seek a Brexit delay. Eventually, the EU has granted the UK a three-month Brexit extension until January 31, 2020.
The UK is pursuing as free economic relationship with the EU as possible along with regulatory alignment to maintain frictionless trade with the EU after Brexit. However, frictionless trade is not possible because of UK’s four red lines: no free movement of labour, independent trade policy, no EU budget contribution, and independence from the European Court of Justice. Meanwhile, the EU negotiating mandate argues the indivisibility of the “four freedoms” of the EU – free movement of goods, services, capital and labour. These fundamental conflicting interests make Brexit a complex negotiation exercise.
Relevant stakeholders should stay informed of the EU-UK negotiations and possible trade deal scenarios. Anticipating future developments will be very important because Brexit is a process with many moving parts. The only way to assess the effect is to stay informed of events, progress and particularly of political positions coming from Brussels and London. Policymakers and key stakeholders should consider scenario planning of possible outcomes and reactions due to the significance of Brexit to the agrifood sector – in both the EU and the UK.
One of the options for a deal (soft Brexit) would be for the UK to remain in the European Economic Area (EEA), similar to Norway, in addition to preserving free trade in agriculture. This is called EEA+, where the + indicates that unlike in the EEA, there will be no tariffs on agricultural products. This would minimize trade frictions after Brexit. An alternative soft Brexit option is a free trade agreement (FTA) between the UK and the EU, but without regulatory alignment. If neither of these options is achieved and without a deal (hard Brexit), the UK and EU would face the Most-Favored-Nation (MFN) tariff rates of each other, just like any member countries of the World Trade Organization (WTO) without a preferential agreement.
Unless the EU and UK agree on a deal that allows continued tariff-free trade, tariffs will be imposed on the trade of agrifood products. Tariffs on agricultural and food products tend to be among the highest in international trade. The exporters of dairy, meat and sugar products will confront the largest increase in tariffs because tariffs are among the highest for these products, which are currently traded with no tariffs within the EU custom union. The UK exports of agrifood products to the EU that are worth billions will struggle with the prohibitive EU’s MFN tariffs.
In the event of a no-deal Brexit, there would be a far greater loss for EU producers than from the Russian import ban.
One striking feature of a no-deal Brexit is the asymmetry in the MFN tariffs structure between the UK and neighbouring EU countries. The majority of UK’s MFN tariffs will be reduced compared to the current EU’s MFN tariffs. The published temporary UK’s MFN tariffs proposal will lower tariffs on many products imported from countries currently trading on WTO terms. For example, the UK will apply MFN tariffs on various pigmeat products at only 13% of EU’s MFN tariffs. The lowered tariffs are to safeguard UK’s consumers from facing a dramatic increase in food prices in the event of a no-deal Brexit. Major agrifood producers and exporters such as the US, Brazil, Argentina, and Thailand will have access to the UK agrifood market without the high level of tariff protection. In contrast, EU exporters will face the burden of UK’s MFN tariffs, whereby they are currently trading with no tariffs. EU exporters will encounter intense competition with increased costs and the possibility of losing the UK agrifood market.
One of the biggest shocks to the European agrifood sector in recent years was the ban on EU food imports imposed by Russia in 2014. The ban, imposed in response to the EU’s economic sanctions on Russia for its role in the political crisis in Ukraine, cut off access to a huge export market for EU agrifood producers. In the event of a no-deal Brexit, there would be a far greater loss for EU producers than from the Russian import ban because the EU agrifood exports to the UK is many times larger than the exports to Russia. It would be very difficult to replace a high volume and high price market like the UK even if new markets are secured internationally after Brexit.