Annex
MAFF ASSESSMENT OF THE IMPACT OF PROPOSED
REDUCTIONS IN EXPORT REFUNDS FOR PROCESSED PRODUCTS
INTRODUCTION
1. This note sets out the MAFF assessment
of the impacts in the UK of the proposals in the Commission's
Communication to the Council on Non-Annex 1 export refunds.
BACKGROUND
2. Export refunds are payable on basic agricultural
products (cereals, milk, sugar, rice and eggs) contained in processed
products (mainly food and drink, eg chocolate, biscuits, spirit
drinks and beer, but also certain chemicals and pharmaceuticals).
Their purpose is to compensate manufacturers for the higher cost
of using EU-sourced raw materials under the Common Agricultural
Policy.
3. Following the WTO Uruguay Round, the
EU is committed to reducing expenditure on export refunds. The
ceiling for Non-Annex 1 products for budget year 2001 (starting
October 2000), from when these reductions are expected to bite,
is
415 million, whilst the Commission estimates unfettered
requirements would be around
560 to
600 million. Unless agricultural support prices can
be significantly reduced (which is unlikely to be achievable within
the required timescale) some means has to be found of containing
expenditure within that ceiling.
THE COMMISSION'S
COMMUNICATION TO
THE COUNCIL
AND SUBSEQUENT
DEVELOPMENTS
4. The Commission has presented to the Council
a Communication proposing a strategy by which to contain expenditure
within WTO expenditure limits, as well as CAP budget limits for
the current year (started October 1999). To meet CAP budgetary
limits it has been imposing a 4.5 per cent across the board cut
in refund rates since November 1999 which it has indicated will
continue until the longer-term strategy is implemented.
5. This Communication contained proposals
for:
— the withdrawal of eligibility for
export refunds from a range of processed food and drink products
whose competitiveness on global markets was considered to be relatively
insensitive to the price of the agricultural raw materials used
in the manufacture;
— restrictions on export refunds for
those products—largely industrial in nature—that would
be eligible for production subsidies;
— removing export refunds for those
products where the agricultural raw materials used in manufacture
did not qualify for subsidy;
— reductions in export refunds on agricultural
raw materials used in the distillation of spirits; and
— the provision of more flexible access
to Inward Processing Relief (IPR) to enable processors to access
agricultural raw materials at world prices.
6. The reductions and restrictions above
will not be sufficient to achieve the savings needed: the balance
would be found by scaling back the issue of refund certificates
to match the funds available, and relying on more flexible access
to IPR to offset the effects of this on the industry.
7. The Agriculture Council discussed the
Commission's Communication in March and accepted that the targeted
approach set out therein was the most appropriate in the circumstances,
though it noted that member states had difficulty with a number
of specific elements of the approach, and asked the Commission
to take these into account when implementing its strategy. The
Council also asked the Commission to monitor the effects of the
measures once adopted on the export markets for the different
products affected and to take immediate corrective action in the
event of market disturbance in any sector.
8. The Commission presented its detailed
proposals to Member States in Management Committee on11 May. Work
on the detail is to continue in individual Management Committees
with a view to implementation of measures by which to achieve
savings by 1 July. The Commission is re-examining its estimate
of the level of savings it considers necessary in the light of
currency fluctuations and other developments since its Communication
was first tabled.
9. Separate to this strategy a system of
controlling and monitoring expenditure to keep within WTO limits
has already been agreed and is currently in its transitional phase.
With effect from 1 October, exporters will no longer be able to
receive refunds on all their exports which would make those exports
uncompetitive on world markets. Increased flexibility in the use
of Inward Processing Relief to enable processors to access raw
materials at (cheaper) world prices as proposed in the strategy,
whilst not ideal for practical and logistical reasons, is accepted
to be the only feasible option.
ASSESSMENT OF
THE COMMISSION'S
COMMUNICATION TO
THE COUNCIL(a) Products
less sensitive to the price of agricultural raw materials
10. The proposal is to delete a lengthy
and heterogeneous range of products from eligibility for export
refunds. A comprehensive analysis was not feasible and MAFF's
assessment focused on the one product: beer, selected largely
because of the availability of relevant data. The removal of export
refunds on cereals incorporated into beer was unlikely to have
a major impact on the profitability or competitiveness of brewers.
However it was found that the UK would be disproportionately affected
as it is the third largest Community exporter of beer (after Germany
and the Netherlands).
(b) Products eligible for production refunds
11. Implementing this measure would eliminate
the choice that exporters of certain goods have concerning the
type of subsidy they can claim for exports to non-EU destinations
(either a full export refund or a production refund and a supplementary
refund)—only production refunds would be available. The
proposal would effectively reduce the export subsidy for cereals
and sugar used as raw materials by manufacturers producing modified
starches, organic chemicals and pharmaceuticals. The impact of
implementing this measure on the profitability and competitiveness
of the industries concerned would be quite modest overall. This
broad analysis though disguises potentially serious problems for
certain sectors. Notably agricultural raw materials are a very
important cost component for the manufacture of certain pharmaceutical
products and the reduced export subsidy would have a considerable
adverse impact, perhaps leading to an eventual re-location outside
the EU. The proposal's impact on some individual businesses will
be more severe than the costs to the economy. Businesses specialising
in the manufacture of the affected products and especially those
with dedicated facilities for processing targeted agricultural
raw materials will find it hard to rapidly diversify to reduce
their exposure.
(c) Removing export subsidy from products
which do not qualify for subsidy in an unprocessed state
12. The proposal is understood to be aimed
exclusively at yoghurt. The loss of export refunds on sweetened
yoghurts would largely impact on Germany which accounts for the
bulk of exports to non-EU destinations. By contrast UK exports
are very small.
(d) Reduction of export refunds on spirits
13. Export refunds on cereals used in distilling
spirits would be subject to reductions of about two-thirds from
recent levels. In the case of Scotch whisky this is equivalent
to about 1 per cent of the export value. The reduction of export
refunds is likely to have its major impact on the competitiveness
of the less expensive grain whiskies. The evidence suggests demand
for these is very price sensitive and Scotch competes directly
with US whisky whose distillers have access to cheaper grain.
Cereal raw materials are a proportionately lower cost element
for more expensive malt whiskies, sales of which will also tend
to be less price-sensitive, so a less significant effect can be
expected here.
14. The Commission proposal would therefore
reduce profitability of spirit distillers. The scale of the impact
on the profits of Scotch distillers can be gauged by the prospective
loss of subsidy on non-EU exports. In 1999 export refunds were
reckoned by the Scotch Whisky Association to be worth £20
million and Commission proposals would reduce this by two-thirds.
(Note that the cuts in cereal support prices due to take effect
over the next two years as a result of Agenda 2000 would in any
case have triggered reductions in export subsidies, since EU cereal
prices will be brought closer to world levels. The net loss due
to this proposal is therefore likely to fall over the next two
years.) The UK would be disproportionately affected within the
EU because of the importance of Scotch and Irish whiskies (the
Republic of Ireland will also be affected but to a much smaller
extent). The UK is also an important exporter of non-whisky spirits
such as vodka, where it ties for third place with the Netherlands
(the largest EU vodka exporter by a considerable distance is Sweden
followed by Finland).
(e) More flexible access to Inward Processing
Relief
15. The Commission proposals contained in
the Communication to the Council includes provision for more flexible
use of existing arrangements for Inward Processing Relief (IPR).
IPR allows agricultural raw material to be purchased by processors
on world markets, processed within the EU and re-exported. The
more flexible arrangements, specific to Non-Annex 1 products,
will operate in tandem with the export refund certificates system.
Flexible IPR therefore will not be applicable to products for
which eligibility for refunds has been withdrawn. Of those products
affected by the Commission's Communication to the Council only
spirits (including whisky) are expected to benefit from the more
flexible IPR arrangements. Other Non-Annex 1 products affected
by the restrictions on export refunds imposed by WTO commitments
will also benefit from access to raw materials at world prices,
offsetting the loss of refunds.
MAFF POSITION ON
COMMISSION'S
COMMUNICATION TO
THE COUNCIL
The MAFF priority is to ensure that WTO and
budgetary commitments are honoured with minimum damage to export
competitiveness of UK industry. Across-the-board cuts are not
the answer; we understand the trade's concern to remove them as
soon as possible.
The only way of achieving an overall solution
would be to make lasting reductions by means of reductions in
CAP support prices. This remains a priority for the UK but cannot
be achieved in the necessary timescale.
MAFF have registered concern over the sensitivity
to refund of a number of goods. However, the Commission will need
to balance any reductions in savings on specific products with
savings in other areas which might be even less palatable.
Whilst the March Agriculture Council accepted
that the Commission's strategy was the most appropriate approach
in the circumstances to meet budgetary and WTO limits on processed
product export refunds, we cannot yet say what the final outcome
will be as changes to the lists of products eligible for refund
will need to be determined by majority vote in Management Committee.
Whilst not ideal, increased use of Inward Processing
Relief allowing access to raw materials at world prices is the
only viable option once industry's export refund requirements
cannot be fully met.
APPENDIX: NON-ANNEX
1 EXPORT REFUNDS
AND THE
UK FOOD PROCESSING
INDUSTRIES
(i) The UK food and alcoholic drink manufacturing
sector is very substantial in macro-economic terms, creating value
added of £18.5 billion in 1998. This amounted to 2.5 per
cent of GDP. UK exports of processed food and alcoholic drink
products to all destinations was about £7.9 billion in 1999,
of which £3.1 billion was exported to non-EU destinations.
Not all the non-EU exports would be eligible for export refunds
under Non-Annex 1 CAP regulations. It seems likely that export
refunds are concentrated in "heavily" processed products
(that is agricultural raw materials that do not retain their recognisable
form). These heavily processed food and drink exports to non-EU
destinations amounted to £2.3 billion in 1999.
(ii) In comparison the UK receipts of export
refunds for Non-Annex 1 products have been running at £40-50
million in recent years. Given that a proportion of these refund
receipts will be assisting eligible chemical and pharmaceutical
products and that many heavily processed food and drink products
are not eligible for export refunds, the assistance provided by
these refunds does not appear to be a significant factor in the
overall export performance of the UK food and drink sector. However
the overall figures mislead to the extent that the availability
of refunds will be critical for certain products and for the manufacturing
companies concerned.
(iii) The tables below set out the annual
value of export refunds, for agricultural food commodities in
unprocessed form plus Non-Annex 1 products, to the UK over recent
years (in euros and sterling respectively).
TABLES: UK RECEIPTS OF EXPORT REFUNDS ON
AGRICULTURAL COMMODITIES 1997-99
Euros million
|
| 1996-97
| 1997-98 | 1998-99 (prov)
|
|
| Cereals | 70
| 30 | 70
|
| Sugar | 80
| 130 | 150
|
| Milk and milk products | 190
| 160 | 100
|
| Non-Annex 1 | 70
| 70 | 60
|
| Total | 420
| 390 | 380
|
|
£ million
|
| 1996-97
| 1997-98 | 1998-99 (prov)
|
|
| Cereals | 50
| 20 | 50
|
| Sugar | 60
| 90 | 100
|
| Milk and milk products | 140
| 110 | 70
|
| Non-Annex 1 | 50
| 40 | 40
|
| Total | 300
| 260 | 270
|
|
Year is a FEOGA budget year—16 October-15 October.
Numbers may not add up due to rounding.
| 
