2Tariff Barriers
Tariff Barriers
9.Tariffs (or customs duties) are a state levy imposed on goods crossing from one customs territory to another. Tariffs can be imposed on exports and imports. Tariffs are the most visible barriers to trade.
10.There are no tariffs on products traded between the EU Member States, and its Common Customs Tariff applies to all goods imported from third countries (with some exceptions e.g. Tariff-Rate Quotas).
11.As soon as the UK leaves the EU Customs Union, both UK exports to the EU, and EU exports to the UK, will be potentially subject to tariff barriers. In the absence of a free trade agreement with the EU or customs union arrangement, the UK and EU will trade under the default framework governed by the World Trade Organisation (WTO).
Most Favoured Nation Principle
12.The WTO’s 164 country members must observe the “most favoured nation” (MFN) principle: this “non-discrimination principle” means the same tariffs must be applied to all countries. Lower-than-MFN tariffs may only be applied where a free trade agreement (FTA) or customs union (CU) agreement has been concluded with one or more trading partners, or when preferential treatment is given to developing countries.4
13.In this Chapter we examine the impact that tariffs could potentially have on different agri-food sectors.
Tariffs on UK-EU exports under WTO rules
14.Individual tariffs vary between different sectors and products. For non-agricultural goods, the average tariffs are relatively small. However, tariffs on agricultural goods are typically much higher, with the intention of protecting domestic markets.
15.The average EU tariff on dairy products is over 30%, while tariffs could be as high as 87% for frozen beef. Some other examples include a tariff of 46% for cheese or 21% for tomatoes. Some individual products have tariffs over 100%.5
16.Witnesses told us that tariff-free access to the EU was “crucial”.6 Tariffs would have a detrimental impact on those agricultural sectors that were dependent on EU exports for their profitability.
17.We heard particular concerns about the impact of tariffs on the sheep sector. The EU is very important for UK sheep meat exports, with more than 95% of its export volume destined for the EU. The Welsh lamb market is very dependent on the EU market, with 92% of exports (by value) and 85% (by volume) destined for the EU.7
18.Sheep exports, with a tariff of at least 50%, would become uncompetitive on the EU market.8 The Agriculture and Horticulture Development Board (AHDB) told us that this would have a “devastating” effect on the sector.9 The Andersons Centre estimated that in Northern Ireland alone, exports to the EU would drop by about 90%.10 It would have serious consequences in Wales, where sheep farming was such a vital part of the Welsh economy, with producer prices estimated to decrease by 30%.11
19.The EU market is also important to the beef market, with more than 90% of UK beef exports shipped to other EU countries in 2015/16.12
20.In addition to their raw value, exports are important in the meat sector in helping to secure value for the whole carcass, finding markets for parts of the animal that are less favourable in the domestic market. In the UK, consumers prefer to eat chicken breast, lamb legs, mince, beef steaks, pork chops. There is little or no domestic market for dark chicken meat, chicken necks, chicken feet, sow meat and pigs trotters, for example.13 Exporting these allow producers to maximise their return.
21.The EU is also a key market for an “export-focused and orientated” dairy market.14 Currently, 15% of current output in the sector is exported, with 85% to 90% going to mainland Europe.15 In Northern Ireland, the situation is exacerbated by the fact that, unlike other regions of the UK, it exports between 70%–85% of its milk product, mostly as milk powders, and does not have a reliance on the liquid milk market.
22.AHDB noted that the introduction of tariffs would prevent most imports of dairy products into the EU.16 Dairy UK stated:
If you take cheese as an example, WTO tariffs on dairy will do what they are designed to do: they will stop trade. The WTO tariff on cheese is of the order of 40% to 50% depending on the cheese variety. We do not make 50% margins in this sector, so the ability to absorb is minimal, if not non-existent.17
23.In the cereals sector, wheat and barley exports would be most affected. Approximately 80% of exports go to EU markets.18 AHDB told us that cereals would find it difficult to compete in the EU market with other third country wheat producers, such as Russia, Ukraine, the US or South America: “They not only have been exporting effectively for a very long time, but they do it in volumes we cannot imagine”.19
24.An exception to the general concern was fruit and vegetables. Exports are minimal, with most trade focused on the domestic market.20
25.George Eustice MP, Minister of State for Agriculture, Fisheries and Food, Defra, recognised that the lamb industry and cereals industry would be affected by tariffs on exports.21
26.During our evidence session with Rt. Hon. Michael Gove MP, Secretary of State, and the Minister of State for Agriculture, Fisheries and Food, we were surprised to hear that Defra had not completed work on sector by sector analysis.22 More surprising was the admission that this work may not be completed before the publication of the Agriculture Bill. Although DexEU had produced Brexit impact assessments and made them available for Members to view, we were not impressed with the depth of analysis in the documents.
27.The EU is the UK’s most significant trading partner. Although the Government’s intention is to agree a comprehensive free trade agreement and customs agreement with the EU, there is no guarantee that this will occur. In the event that the UK leaves the EU without a free trade agreement, UK-EU trade will proceed under World Trade Organisation (WTO) rules. Reverting to WTO tariffs will have a significant impact upon agriculture as tariffs are higher for agricultural products than for other goods and services.
28.We note that the sheep, dairy and cereals sectors, those particularly dependent on the export market, will be most affected.
29.While we recognise and welcome work that has been done by organisations such as AHDB in providing detailed sectoral analysis on the impact of tariffs on the UK’s agricultural sectors, it is imperative that Defra undertakes similar work as a matter of urgency to evaluate the impact of any deal that the Government might be negotiating.
30.We recommend that Defra publishes a sector-by-sector analysis of the impact of Brexit before the publication of the Agriculture Bill.
UK Tariffs on Imports under WTO rules
31.If no trade deal with the EU is struck, any food or agricultural product that we need to import from the EU will be subject to UK tariffs. Under WTO rules, the UK will not be able to set tariffs that discriminate between trading partners, except as part of a free trade agreement or to give developing countries special access to its markets.
32.The Government has said that it wishes to replicate as far as possible the EU’s existing set of tariffs, at least in the short term.
33.Looking ahead, a decision would then need to be taken over whether to maintain the current high level of tariffs or to lower them. The UK would need to set out its own schedule of tariffs and TRQs at the WTO. The two main scenarios discussed by the agri-food sector focus on:
- Fortress UK, applying WTO tariffs on imports
versus
- Trade liberalisation with low/no tariffs on imports.
34.In this section, we look at possible outcomes of both scenarios.
Fortress UK, applying WTO tariffs on imports
Increased prices for consumers
35.Some witnesses told us that applying tariffs on imports would lead to increased costs for importers, leading to higher costs for consumers.23 Which? stated that there was the potential for “stark price rises”.24 The British Retail Consortium told us that, having applied the current WTO tariffs to four typical products in supermarkets, they were able to show that consumer beef and cheese prices could increase by up to 30%, tomatoes by up to 18% and broccoli by up to 10%.25
36.In contrast, Tim Martin, Founder and Chairman of Wetherspoon, has said that no-deal Brexit fears are “overblown”.26 He told the Committee that he disagreed that no-deal would result in higher food and drink prices. He estimated that it would actually reduce the price of a Wetherspoon meal by 3.5p, and reduce the cost of a pint by 0.5p: “We simply looked at all our supplies, found out the tariffs that apply on food that comes from outside of the EU, and then averaged it across all food, including from the UK, etc.”.27
37.George Eustice MP told us that the impact on retail prices would be quite modest, with retail prices rising by 4.3%.28
Opportunities for UK businesses
38.30% of the food consumed in the UK is imported from the EU.29 Some witnesses told us that high tariffs on imports offered an opportunity for import substitution. Price rises on imported products could give an opportunity to British products, making them more attractive to domestic consumers with the potential to displace imports.30 This was particularly significant for certain sectors with high levels of imports.
39.AHDB identified dairy as the sector with the most scope to displace imports. Currently the UK produces approximately 14.5 billion litres of milk per annum, depending on weather conditions and milk prices. For the UK to become self-sufficient, it would need to produce another 3.3 billion litres of milk, which was an extra 20%.31 The UK also currently imports two-thirds of its cheese from the EU.
40.The pig sector was also identified as one with potential to grow, with the UK only 56% self-sufficient in pig meat.32 However, imports would still be required to meet UK consumers demand for certain type of meat. Tulip Ltd told us:
We require a funny pig in the UK … we want it with lots of legs and lots of loins, but not so much shoulder and belly, so we have a rather interesting scenario where we are exporting shoulders and fifth quarter, but we are massively importing loins and legs from Europe.33
41.The horticultural sector was very positive about the opportunities around import substitution. The UK berry industry was approximately 90% self-sufficient from May to October and year-round opportunities could be provided by using technology, such as LEDs and glass houses. It could provide £350 million of sales extra.34 The sector was also importing approximately £350 million a year of hardy nursery stock, and domestic production could be increased with minimal output.35
42.Witnesses agreed that it was unrealistic to think that import displacement would totally remove the need for exports. It was not possible to grow all products that consumers demanded in the UK: “We cannot grow bananas or citrus, and those are the key products that we import in high volumes. There is a lot we can do to improve, but we need to have a realistic perspective on the situation”.36
43.Witnesses agreed that opportunities to increase domestic agri-food sectors would be affected by a decline in attracting overseas labour to the UK. We examined the issue of labour shortages earlier in the Session in our Seventh Report of Session 2016–2017, in Feeding the nation: labour constraints.37 We will return to this issue later in this Session, and therefore do not intend to comment further in this Report.
44.Ladies in Beef told us that there was an increased appetite for British products amongst domestic consumers.38 However, witnesses agreed that import substitution would take time and were concerned that their industry would not be able to adapt to the new requirement post-Brexit—as they were unknown at this stage of the Brexit negotiations. For example, increasing the amount of beef took two years “from conception to killing”.39 Cargill Meats Europe spoke of similar timescales in the poultry sector, and highlighted that getting planning permission to up-scale premises could often take up to three years.40 Ladies in Beef noted that this was a long time to “have your cash and risk tied up”.41
45.We also heard concerns that businesses were afraid to invest without stability and clear direction from the Government: “The willingness is there. The environment needs to be there. You need capital to invest … We need stability in the market to access the capital to do that. We need to be assured that what we are competing with is of a similar standard, so we are not suddenly hit by price falls”.42
46.The National Farmers’ Union (NFU) Dairy Board noted the support that US farmers had received from the US Department of Agriculture’s insurance scheme, in order to help them manage the impact of price volatility on their businesses: “In the first year, the uptake was quite substantial. … As the market has gone the right way, fewer and fewer farmers have bought into it”.43
47.The agricultural industry needs clarity as to the Government’s long-term vision and future support. We call for the publication of the Agriculture Bill as soon as possible.
48.The Government needs to support British farming and agriculture in preparing for business post-Brexit. Defra should consider providing a fund to support our food producing industry to adapt effectively to the challenge ahead.
49.The Government should consider what support can be offered to sectors where imports into the UK and exports out of the UK are roughly equal, such as the dairy industry, that can make us more self-sufficient. This would offer these sectors an opportunity to become more productive. It would give people the confidence to invest, keep food prices down and keep farmers in business.
Trade liberalisation
Cheap imports
50.The UK Government could decide to remove all tariffs on imports into the UK. This would lower the cost of imported goods, leading to reduced prices for UK consumers. Removing tariffs on imports does not guarantee any reciprocal arrangement for our exported goods.
51.Witnesses expressed concern that the removal of tariffs would result in the UK market being flooded with imports produced to different and by inference, lower welfare, environmental and health standards. Which? told us that, although prices were important, they should not be delivered at the sake of undermining standards: “Food safety is absolutely critical … If we compromise on standards, it will have an effect on consumers but also on the wider economy”.44
52.Witnesses highlighted products produced with different methods of farming across the globe that included, higher level of pesticides use, genetically modified organisms (GMOs), growth hormones, animal cloning and cultured meat.45 Two high profile examples are hormone-treated beef and chlorinated chicken. We return to the issue of standards later in this Report when discussing free trade agreements.
53.We also heard concerns about lower farm animal welfare standards in overseas countries, including the EU.46 Although the UK upheld high animal welfare and environmental standards, it was pointed out that they came at a cost to UK producers.47 Dairy UK told us that it was important that UK farmers competed with imports on an even playing-field, with equivalence on animal welfare, quality standards and health standards: “That is a key concept that needs to be borne in mind as we go forward … We compete on a global stage, but we want to compete on an equal footing, so the concept of equivalence is key as far as we are concerned”.48
54.We heard that if UK farmers had to compete with such imports, welfare and environmental standards could fall. Dr Petetin, from the School of Law and Politics at Cardiff University, warned of a potential “race to the bottom”.49 The National Beef Association agreed there was a risk, but told us that this was a situation no farmer wanted.50
55.Many British brands are seen as premium products domestically and across the world, and are in high demand. Any lowering of standards would affect consumer confidence about the farming industry and the product amongst domestic consumers. Hybu Cig Cymru (Meat Promotion Wales) (HCC) told us that being perceived as a country that had lowered animal welfare and environmental standards would make it difficult to maintain trade and establish new markets.51
56.There seemed to be some confusion over whether imports could be restricted on the basis of animal welfare. WTO rules impose limits on the extent to which countries can restrict imports on the basis of welfare concerns. However, Compassion in World Farming were of the opinion that recent developments in WTO case law indicated a shift towards such restrictions.52
57.The Secretary of State told us that there would be no compromise on animal welfare and environmental standards.53
Continued viability of UK businesses
58.High tariffs on agricultural goods have offered a degree of protection from non-EU countries. Witnesses expressed concern that a liberalisation of tariffs could cause “irreversible damage” to the agricultural sector in the UK, affecting the viability of many British farms.54 Scenario forecasting by AHDB show that cereals, upland beef and sheep producers would be most impacted by decreases to farm business income.55
59.HCC projected that producer prices in the beef and sheep sectors could decrease by 45% and 29%, respectively, compared with reductions of 12%, 9% and 10% in producer prices for the pig, poultry and dairy sectors respectively.56 The National Beef Association reported: “If you want to close down the beef sector, including processing, et cetera, you allow as much cheap beef in as possible”.57
60.The dairy industry would also be affected, with domestic products such as butter and cheese under increased competition from global exporters.58
61.The Secretary of State told us that, in the event of no free trade agreement with the EU, he would argue for WTO tariffs to remain.59 He recognised that the removal of tariffs, while leading to reduced food prices, would “put considerable strain on farmers”.60
62.When establishing its own tariffs at the WTO, the Government must give careful consideration to the impact on the UK’s agricultural industry. High tariffs on imports would raise the cost for consumers while removing tariffs could lower the cost for consumers but have a devastating effect on the long-term future of the UK’s agricultural industry. Such a move could put many UK farmers out of business, which would be detrimental to the rural economy, and render the UK dependent on imported food.
63.The Government has offered no clarity to the agricultural industry on its post-Brexit policy. The Government must offer this clarity and stability so that the industry has the confidence to invest and take advantage of the opportunities offered to the industry post-Brexit. We would like to see the Government offer policies that would stimulate home grown food production.
64.The UK has an international reputation for high animal welfare, environmental and food standards. These must not be sacrificed on the altar of cheap imports. Doing so could undermine the premium British brand and might affect our ability to negotiate trade deals with other countries. We will hold the Secretary of State to his assurances that there will be no compromise on animal welfare, environmental and food standards.
Tariff Rate Quotas
65.Tariff Rate Quotas (TRQs) have been set for some products to allow some countries preferential access into the EU Single Market for these products. The UK does not currently have its own national tariffs. They are set for all member states by the EU.
66.WTO members may establish autonomous TRQs at any time. As part of establishing UK-specific WTO schedules, it will be necessary to decide how the EU28’s WTO TRQs will be apportioned between the UK and the EU27. There are currently 128 TRQs on agri-food imports covering approximately 6% of EU agri-food imports by value.
67.The UK and EU have brokered a preliminary agreement on dividing current EU28 WTO Tariff Rate Quotas. The proposed deal does not expand overall quotas, instead it divides up current quotas according to where the goods have historically been consumed amongst the EU28.
68.The idea of dividing up current TRQs was rejected in a public letter signed by major agricultural exporters including the US, Argentina, Brazil and New Zealand.61 Commentators have suggested that they fear the chosen methodology would lead to loss of access for their agricultural exporters to both the EU and UK markets.62
69.The British Retail Consortium stated that they wanted to maintain the same tariff rate quotas. They expressed concern about any delay to agreements as their members needed to agree contracts for 2019 onwards. NFU Scotland told us that any change to the current agreement had the potential to drive down prices and undermine domestic production standards in the UK.
70.George Eustice MP told us that countries such as Thailand and New Zealand had an interest in continuing the current quotas, as the lion’s share of their quotas came to the UK.
71.Post-Brexit, the UK will be responsible for setting its own Tariff Rate Quotas. This should be carefully considered as it will have an impact on England, Scotland, Wales and Northern Ireland. We call on the Government to announce these quotas as soon as possible, so that the UK agricultural industry can have trading certainty for 2019 and onwards.
9 Q98
10 Q89
14 Q283
15 Q280
17 Q296
18 Q205
19 Q210
21 Q530
22 Q543
26 No deal Brexit fears overblown, says JD Wetherspoon boss, The Guardian, 8 November 2017
27 Q399
28 Q530
29 Q393
31 Q300
32 Q336
33 Q330
34 Q144
35 Q146
36 Q189
37 Environment, Food and Rural Affairs, Seventh Report of Session 2016—2017, Feeding the nation: labour constraints HC 1009
38 Q32
39 Q29
40 Q347
41 Q29
42 Q111
43 Q309
44 Q392
47 Q78
48 Q322
50 Q104
52 In EC-Seal Products, the WTO Appellate Body ruled that in the EU (and therefore in the UK) animal welfare is a concern that comes within the field of public morals. WTO dispute panels and the Appellate Body have stated on several occasions that WTO member countries have the right to determine the level of protection that they consider appropriate to achieve a given policy aim for example as regards public health, conservation, prevention of deceptive practices or public morals.
53 Q564
55 Brexit Scenarios: an impact assessment, Agriculture and Horticulture Development Board, October 2017
57 Q104
59 Q559
60 Q530
61 Letter to the Permanent Representative of the European Union and the Permanent Representative of the United Kingdom, 26 September 2017
62 Dividing EU-UK farm trade quotas: no friends, just interests, Global Counsel, 6 October 2017
12 February 2018