Agricultural implications of British EU withdrawal for rest of the EU

This Sunday, the Greek general election may decide if Greece will leave the Eurozone, sometimes referred to as Grexit. None of the likely winners of the election, including Syriza, want this, but if there is an unwillingness to address the restructuring of Greek debt, particularly given Syriza’s promises to dramatically increase public spending, this could be the outcome. Whether Greece would then remain a member of the EU if this were to happen is uncertain, with The Economist arguing this week that, in all likelihood, Greece would have to leave the EU as well.

Later this year, on 7 May, the British general election takes place. The outcome of this election will influence the likelihood of Brexit, namely, British withdrawal, not from the Eurozone, but from the EU. David Cameron, the UK Prime Minister, has promised to hold a referendum on UK membership of the EU in 2017 if the Conservatives are returned to power. At the moment, Labour and the Conservatives appear to be running neck and neck. The latest odds from Paddy Power, a prominent bookmaker, give 9/2 on either a Conservative or Labour majority government, 4/1 and 11/2 on a Labour or Conservative minority government respectively, 4/1 on a Conservative/Liberal Democrat government (as at present) and 6/1 on a Labour/Liberal Democrat government. The Labour and Liberal Democratic parties would hold a referendum only if a further transfer of sovereignty from the UK to the EU is proposed as a result of major treaty change, as already provided for in the UK European Union Act 2011.

If re-elected, Cameron wants to try to renegotiate some of the terms of the UK’s EU membership and his preferred outcome is to secure a sufficiently satisfactory outcome, a ‘new settlement’, which may or may not include treaty changes, which would allow him to recommend that the UK stays in the EU. Cameron’s much-delayed Europe speech on 23 Jan 2013 made a powerful case for staying in Europe, if the UK’s terms could be met. Exactly what these terms might be remains rather fuzzy, and change according to the issue of the day. Currently, the focus is on restricting welfare benefits for migrants, with some Conservative MPs also looking for restrictions on the number of migrants from other EU countries.

However, it is not clear that the other EU members are in the mood to concede to Cameron’s demands. At the weekend in Paris, Commission President Juncker apparently gave the clearest hint yet that he would be prepared to see the UK leave the EU, comparing the UK’s 42-year membership of the bloc to a romance gone wrong. Furthermore, even if Cameron did recommend staying in following agreement on a substantial package of reforms with other EU leaders, there is no guarantee that the British public would support him. Opinion poll evidence suggests that British public opinion is evenly divided on whether to leave or stay in, although much would depend on the terms of a renegotiated deal, if any.

Even if the decision to leave the EU were taken in a referendum before the end of 2017, there would be a further period during which the UK and the EU would try to formalise their new relationships. The procedures for leaving the EU were first set out in the Treaty on European Union, whose Article 50 provides, inter alia:

The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

So the UK first has to notify the EU of its intention to withdraw and it then has two years in which to negotiate a withdrawal agreement, although this period could be extended by the unanimous agreement of the European Council. Because the withdrawal agreement would cover areas that are both exclusive EU and mixed EU and member state competence, the agreement would then have to be ratified by the national parliaments of all other 27 member states. Even if neither the UK nor the EU will want to prolong the period of uncertainty, an optimistic scenario would be that a UK withdrawal, in the event of a UK referendum outcome in favour, could take place not before 2020. As there would be advantages in synchronising the timing with the end of the EU’s budget year, this points to a withdrawal date of 31 December 2020. However, there is no precedent for such a negotiation on a member state leaving, so how easy it will be to reach an agreement within this time period remains to be seen.

Thus, there remains a lot of uncertainty over whether a referendum will be held, the UK membership terms on offer in that referendum, whether a referendum would be approved or not, and how long it might take before an exit took effect if a referendum on withdrawal were passed.

Nonetheless, for those of us interested in EU agricultural policy, it is worth examining what implications a British exit (Brexit) from the EU might have for EU farmers, agricultural policy and the food sector. Our focus here is not on the implications of a British withdrawal for UK agriculture, but rather the implications for the rest of the EU. While there have been some attempts to explore the consequences for UK agriculture of Brexit (see the comments of the Country Landowners Association and the Scottish Government), the consequences for the rest of the EU do not appear to have yet been assessed. Update 25 January 2015. Alan Swinbank’s article If the British left: agricultural policy outside the EU published in Eurochoices last year is an excellent introduction to the UK perspective but unfortunately behind a paywall.

EU-UK agricultural links

This lack of interest in the consequences of Brexit for EU agriculture may be because the consequences of Brexit will be much more significant for the UK and UK farmers than for the EU. On the trade side, the EU accounts for 62% of UK exports and 70% of UK imports of agri-food products (2013 figures). On the other hand, the UK takes just 8% of the agri-food exports of other EU member states while it supplies just over 3% of their imports. Thus, while the UK can be seen as an important market for the EU agri-food sector, overall it is clear that the UK agri-food sector is much more dependent on EU markets than the EU is on the UK.

However, for some EU countries and some products, trade links with the UK are much more important. This is particularly the case for Ireland, which imports 61% of its intra-EU imports from the UK (accounting for 53% of its total agri-food imports), while the UK takes 59% of its agri-food exports to the EU (44% of its total agri-food exports). Thus, Brexit would imply considerable disruption to Irish agri-food trade. Further complications could arise if border controls again become necessary on trade with the UK because Ireland is the only country with a land border with the UK which is extremely difficult to police.

Trade flows are not the only area affected by a potential Brexit. The UK also plays an important role in EU agricultural decision-making. It contributes 12% of the EU’s budget; more significantly, it is a major net contributor to the budget. In 2013, its contribution to the EU’s own resources was €17.1 billion while EU expenditure in the UK amounted to just €6.3 billion, leaving a net contribution of €10.8 billion. Filling this gap in the EU budget would require either expenditure reductions or larger contributions by the remaining member states following Brexit. In the Council of Ministers, under the double majority qualified voting system since November 2014, it has 12.3% of the votes based on population, so a Brexit would imply different voting majorities in the Council.

The consequences of Brexit for EU farmers and food sector will very much depend on the policies that the UK might pursue after Brexit, particularly in the areas of trade, agriculture and regulation. The unknowns about what trade, agricultural and regulatory policies the UK might pursue outside the EU make it hard to draw any definitive conclusions about the likely effects for EU farmers and the food sector at this stage.

Possible UK trade policy after Brexit

There are various trade relationships that the UK could try to negotiate with the EU as part of its withdrawal, depending on the level of integration it wanted with the EU Single Market (see this House of Commons Research Paper for further discussion). Ordered by the degree of integration, the options are:

(a) European Economic Area (EEA) agreement with the EU (as for European Free Trade Area (EFTA) members Norway, Iceland and Lichtenstein)
(b) EFTA membership with EU free trade agreement as with Switzerland plus bilateral treaties on individual Single Market issues
(c) Customs union with the EU as with Turkey
(d) Free trade agreement as with Canada or under negotiation with the US
(e) No free trade agreement, WTO MFN tariffs apply to exports from both partners

The ranking of options shows that for the UK there is a trade-off between the level of access to the Single Market (i.e. freedom from tariff and non-tariff barriers to trade), and freedom from EU product regulations, social and employment legislation, and budgetary contributions. Some of these options are clearly more likely than others, either because of resistance on the UK or the EU side.

For example, the UK House of Commons Foreign Affairs Committee in its report on The Future of the European Union: UK Government Policy in 2013 concluded:

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. If it is in the UK’s interest to remain in the Single Market, the UK should either remain in the EU, or launch an effort for radical institutional change in Europe to give decision-making rights in the Single Market to all its participating states.

As both parties will want some formal trade relationship after Brexit, this points to an FTA along Canadian or US lines as the most likely alternative. Assuming that such an FTA can be successfully concluded during the two years scheduled for the withdrawal negotiations, it might be possible to ensure full tariff liberalisation in the agricultural sector (given that the UK is such a minor exporter to the EU, the latter has no real defensive interests at stake and also the UK is unlikely to want to maintain high tariffs on EU imports). In that scenario the main disruption to existing EU-UK agri-food trade would come from the re-introduction of customs procedures, changes in UK trade policy with third countries, and any issues arising from the prospect of increasing regulatory divergence over time.

Possible UK trade policy with non-EU countries after Brexit

Access conditions to the UK market for EU exporters will also be influenced by UK trade policy towards non-EU countries (as it is relative conditions which determine the value of trade agreements). So an important consideration in post-Brexit trade policy will be the applied MFN tariff the UK adopts for imports from non-EU countries. Also relevant will be the status of the EU FTAs and PTAs which currently give many third countries preferential access to the EU (and UK) markets, and the UK’s desire to add to this list.

It is likely that the UK post-Brexit would not want to raise applied tariffs on trade, and is more likely to lower them on agri-food imports. Lower UK agri-food tariffs would increase competition on the UK market for EU current suppliers. Also important would be the role played by UK FTAs other than with the EU. There is debate over whether the UK could simply inherit the existing EU FTA agreements or whether it would have to re-negotiate these agreements with the third countries. As the UK has signed and ratified all agreements as a member state in addition to the EU, one view is that these agreements would continue even if the UK were no longer a member of the EU. Also, it would not be in the interests of third countries to see tariffs re-imposed or raised on their exports to the UK even for a temporary period. So it is most likely that existing third country access to the UK market would continue as before.

However, in the case of agricultural trade concessions, these often take the form of tariff rate quotas and it seems most likely that these would remain with the EU even where exports under these quotas are mainly sold in the UK. Examples would be New Zealand’s butter quota and sugar imports from African countries. Under WTO rules, the UK would not be allowed simply to re-open these quotas as this would be discriminatory under WTO rules. If the UK wished to continue to import from these countries at zero or low tariffs, its only options would be to either reduce the relevant MFN tariffs which would benefit all exporters or to open a new tariff rate quota as part of an FTA with those countries.

The UK may find it easier to conclude new or more extended FTAs with some partners. For example, building on pre-existing historical links, one could envisage early agreements with New Zealand and Australia which could include comprehensive concessions on agri-food trade. The UK might also find it easier to sign an FTA with Mercosur, which could allow, for example, much easier access of Brazilian beef to the UK market than is currently the case, or with the US which would allow easier access for US beef and poultry than the EU is willing to allow in the TTIP negotiations. There is thus a high probability that the trade policy the UK would pursue with non-EU countries would lead to greater competition on the UK market for those EU countries that are current suppliers.

Possible UK agricultural policy after Brexit

The UK has always been a strong critic of the CAP. Based on historical experience, the UK is likely to provide less direct support for its farmers than in the current EU, and is more likely to switch expenditure to agri-environment schemes and promotion of public goods (see discussion on p. 8 of the UK Cabinet Office’s Balance of competences report on agriculture). Future UK agricultural policy will also be constrained by its WTO commitments. One assumes, in the process of unravelling the UK’s links with the EU following Brexit, that the UK would inherit the EU’s current bound MFN tariff schedule and that the EU’s ceilings for trade-distorting domestic support and export subsidies would be partitioned according to the contribution that the UK made to the EU’s base schedules in 1994.

The UK Treasury is unlikely to cut all spending in terms of direct payments, if only because these are hugely important to farmers in Northern Ireland, Scotland and Wales, but a lower level can be expected. The UK might also cut its applied tariffs on agri-food imports, as noted above. Lower support for UK farming might be assumed to lead to lower UK production, and thus to a larger market for non-EU suppliers ceteris paribus. However, the long-term relationship between farm support and output is not clear. Lower support also encourages structural change and productivity improvement which would help to maintain output, as was the case in New Zealand. Overall, I would not expect Brexit to result in much change in UK self-sufficiency in the short-to medium-term.

Possible UK regulatory policies after Brexit

The main driving force behind a British exit from the EU is the argument that the EU is over-reaching its regulatory competences, making too many regulations and setting too many standards which should remain the prerogative of national parliaments. Given this motivation, one might expect that, after Brexit, the UK would make use of its new-found regulatory freedom to repeal many measures that have irked supporters of a British withdrawal from the EU. At the same time, consumer, environmental and public health organisations have significant influence in the UK and one might expect stronger regulations in some areas than has been possible in the EU. Thus, over time, one would project increased regulatory divergence between the two jurisdictions.

However, there will be a number of countervailing forces. One is that the EU will remain an important trading partner for the UK, and the latter might well find it in its self-interest to align its regulations and standards closely to those in force in the EU. Also, in many areas including food and agricultural policy, EU standards are based on wider global standards (e.g. Codex Alimentarius) and we would not expect independently-formulated UK standards to be that different. Nonetheless, there are a number of areas where the UK has been a vocal critic of EU regulations and where changes would be expected. Examples would include the regulation of plant pesticide products, genetically-modified crops and animals, and food labelling.

Impact of Brexit for EU farmers and food sector

On the basis of the previous analysis, the most likely outcome post-Brexit would be free trade in agricultural and food products but the UK would no longer have access to the single market. Essentially, traders would find themselves back in the pre-1992 situation before the single market was created. In that period, as clearly documented in the well-known Cecchini Report on The Costs of Non-Europe, many non-tariff barriers, stemming from food safety, plant health, and veterinary regulations for example, impeded the free flow of products between member states. Thus, trading costs between the UK and the EU would increase following Brexit. In Ireland, for example, where a high proportion of supermarket groceries are sourced from the UK, consumer food prices could be expected to rise.

Most costs will be associated with the re-introduction of customs controls (rules of origin checks, import licence requirements, documentation, physical border checks) as well as the additional costs of complying with two different regulatory regimes where regulatory divergence occurs. Rules of origin checks are necessary in a free trade agreement without a common external tariff; they currently apply, for example, to goods exported from Norway to the EU within the EEA. Import licences are currently required under Common Agricultural Policy (CAP) regulations to import certain agricultural products originating outside the EU, including beef and veal; cereals; ethyl alcohol of agricultural origin; flax, hemp and hempseeds; garlic and preserved mushrooms; milk and milk products; olive oil and table olives; pig meat; poultry; rice; seeds; and sugar. One assumes these rules would apply to the UK following Brexit.

Key to the single market is the principle of mutual recognition, that is, a member state must allow a product to be marketed if it has been lawfully marketed in another EU or EEA state and cannot, except in clearly defined circumstances, require compliance with their own technical standards. The principle applies exclusively to products or features of products that are not subject to harmonisation measures at the EU level. If the UK withdraws from the EU and the single market, this principle would no longer apply to EU exports to the UK or UK exports to the EU, necessitating additional compliance and certification costs.

For example, animal slaughtering facilities that wish to export to the UK would have to be certified by both the UK authorities as well as the EU authorities in the absence of a separate mutual recognition agreement. The UK might negotiate continued participation in the EU plant passport scheme which allows the free movement of plants and plant products between EU member states as part of its withdrawal FTA but in that case would be bound to follow EU legislation in this area. If this did not happen, the previous system of phytosanitary certificates verifying freedom from pests and diseases would need to be reintroduced for EU-UK trade. If the UK were to develop different food labelling regulations in future (e.g. the nutrition traffic light system), this would require different packaging by EU food firms wishing to sell on the UK market.

Agricultural policy-making in the EU without the UK

Agricultural policy in the EU might be slightly different in future if the UK were to leave, but it would be wrong to over-estimate its impact. The UK has been, together with Sweden, the Netherlands and Denmark, traditionally hostile to a high degree of agricultural market regulation within the CAP. However, with successive reforms of the CAP and the greater flexibilities for member states introduced by the 2013 CAP reform, many of the UK criticisms have been addressed. The UK would also be in favour of reducing the overall share of CAP spending in the EU budget and reducing the amounts spent on direct payments. But the fact that direct payments (the largest single item of CAP expenditure) are fixed in nominal terms means that CAP spending is anyway set to slowly fall in real terms even in the absence of discretionary reductions in the CAP budget.

Furthermore, even if the balance of opinion in the Council of Ministers and European Parliament shifts marginally in favour of stronger CAP protection, the departure of the single largest net budget contributor after Germany will work in the opposite direction. If the remaining member states wish to maintain farm support at currently foreseen levels, then they must be prepared to contribute more to the EU budget to ensure this. In this calculation, some member states that now see themselves as benefiting from high CAP spending could well move to the other side of the ledger. Undoubtedly, the voice of the UK in favour of more open trade would be missed in negotiations on agricultural exceptions and sensitive products in free trade agreements, but the overall impact of a Brexit on the future trajectory of CAP reform may not be that great.

Conclusions

It does not make sense to consider the ramifications of a British withdrawal from the EU solely through the lens of agri-food trade and policy. There are much broader and more important issues at stake. It seems hard to believe that the UK would take this step, against the unanimous advice of its friends both inside and outside the EU, but it would be foolhardy not to assess and prepare for its possible consequences.

I argue in this post that, for the agri-food sector, the possible consequences will depend primarily on the nature of the post-Brexit trade arrangement with the EU. Under the most likely scenario of a free trade agreement which would remove all tariffs but also the UK’s access to the single market, trade conditions would revert to what they were in the early 1990s prior to the introduction of the single market. Trade costs will be higher than they are today, which will put downward pressure on producer prices in EU countries exporting to the UK and upward pressure on consumer prices in EU countries importing from the UK. If the UK chose to pursue a pro-consumer trade policy with non-EU countries, adopting lower applied MFN tariffs than at present and concluding FTAs with more comprehensive liberalisation of agri-food trade, this would lead to greater competition on the UK market for current EU suppliers. EU agricultural policy might move marginally towards a position of greater protection for EU farmers, but the extent of this shift will be diminished by the budgetary consequences of UK withdrawal.

The adverse effects of higher trade costs could be minimised by encouraging as wide a range of bilateral mutual recognition agreements as possible, but inevitably the benefits of these agreements will be less complete and less comprehensive than membership of the single market would provide.

The British government is currently discussing with other EU countries the shape of feasible reforms that might satisfy British demands. While other EU leaders have ruled out British à la carte membership of the single market, there is some sympathy with its call for a clearer delineation of EU competences. The next step in this saga will be the outcome of the British general election in May. Even before then, some precedents may be set depending on how the Greek situation evolves in the coming months. Brexit is not an immediate threat, but it is a slow-burning fuse with unforeseeable longer-term consequences.

This post was written by Alan Matthews

Picture credit: Reuters

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