Chapter 3: Future trade in agri-food products
Agri-food trade in the EU
22.The EU is the UK’s single largest trading partner in agri-food products. Peter Hardwick, Head of Exports at the Agriculture and Horticulture Development Board (AHDB), told us: “If we look at our agricultural exports, they are currently very dependent on trade with the European Union and, on average, about 80% of our agricultural exports go to the European Union.”37 The FDF, representing food manufacturers and processers in the UK, also told us that “the overwhelming majority of trade (over 70 per cent of exports and vital imports) is with EU member states—and 94 per cent of imports and 97 per cent of exports are with countries with which the EU has negotiated an FTA”.38
23.The value of food, feed and drink exports from the UK in 2015 was £18.0 billion, while the value of imports was £38.5 billion.39 These figures include a wide range of products from raw agricultural commodities through lightly processed to highly processed products.40 When only food and non-alcoholic beverages are considered,41 exports were worth £12.3 billion while imports amounted to £35.1 billion in 2015.42 Regardless of the combination of products considered, the UK is a net importer of food.43
24.Illustrating the significance of the EU market to UK agriculture, figure 1 sets out imports and exports of eight key agricultural commodities to and from the EU as a percentage of the total import and export of those goods.
Figure 1: Trade with the EU as percentage of total trade for key agricultural commodities
Source: Agriculture & Horticulture Development Board, Brexit: implications for agriculture and trade (January 2017): http://www.ahdb.org.uk/brexit/documents/SAOSBrexit26Jan17.pdf [accessed 21 April 2017]
New trading relations
25.The free movement of agri-food products between the UK and the EU, and within the EU, is governed by the customs union component of the Single Market.44 Under the customs union Member States have adopted a Common External Tariff that is applied to goods imported from outside the Union.45 Imported agricultural and food products also need to comply with EU standards and regulations for product safety, which are checked at the EU’s external border posts. Goods that comply with import formalities may circulate freely in the EU.46
26.On 17 January 2017 the Prime Minister announced the Government’s intention to “pursue a bold and ambitious Free Trade Agreement with the European Union … [to] allow for the freest possible trade in goods and services between Britain and the EU’s Member States”.47 This intention was reiterated in the Government’s White Paper, The United Kingdom’s exit from and partnership with the EU, published in February 2017, and forms the basis of the Prime Minister’s letter of 29 March, formally notifying the European Council of the UK’s intention to withdraw from the EU. As a result, the UK will cease to be a member of the Single Market and customs union.
27.In this chapter we explore the implications of new trading relations for the UK agri-food sector only. For a detailed analysis of free trade agreements and trading on World Trade Organization (WTO) terms in general, we refer readers to our report Brexit: the options for trade.48 For a detailed analysis of trade in goods, we refer to our report Brexit: trade in goods.49
World Trade Organization and agriculture
28.In the absence of the UK-EU free trade agreement set out by the Prime Minister, the UK and EU would trade under the default framework for trade governed by the World Trade Organization (WTO).50 The UK is a member of the WTO in its own right—though the EU represents Member States at the WTO—and is bound by its rules. The WTO Agreement on Agriculture (AoA) provides the multilateral rules on international trade and domestic support for agriculture.51
29.WTO membership consists of a balance of negotiated ‘rights’, such as the right to be able to export to other countries, and ‘obligations’, for example to limit restrictions on imports. Both rights and obligations work through rules which apply to all members of the WTO, as well as country-specific commitments known as ‘schedules of concessions’ or ‘schedules’.52 Schedules include:
- Maximum tariff levels for agricultural products, which are often referred to as ‘bound tariffs’ or ‘bindings’;
- Tariff rate quotas, which allow a quantity of products to be imported at a lower tariff (or tariff-free), after which the bound tariff rates apply; and
- Commitments on the levels of domestic support and export competition for agricultural products.53
The UK’s new WTO schedules of concessions
30.In our report Brexit: the options for trade we noted that, in withdrawing from the EU, the UK would have to separate its WTO schedules from those of the EU.54 Alan Matthews, Professor Emeritus of Agricultural Economics at Trinity College Dublin, agreed that without the establishment of UK schedules at the WTO, “It is very difficult to see how you can proceed to negotiate either with the European Union or with third countries.”55
31.The UK’s schedules will have to contain commitments reflecting the Agreement on Agriculture, namely market access (tariffs and tariff rate quotas), domestic support and export competition (subsidies).56 Professor Joseph McMahon, Dean of the Sunderland School of Law at University College Dublin, noted that such commitments would be a pre-condition of any free trade agreement:
“Trade negotiations are about a range of issues, for example, trade concessions on tariffs, tariff quotas, the use of export subsidies and regulatory issues. Negotiations on trade concessions are conducted with respect to a Schedule, so logically this would suggest that a proposed Schedule should be in place before the negotiations begin.”57
Tariff barriers
32.Tariffs impose a charge on the import of a product, usually expressed as a percentage of the value of the product,58 with the percentage varying from product to product.59 In so doing, a tariff raises the price of the imported product.
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WTO members commit not to raise tariffs beyond a certain maximum level (referred to as ‘bound tariff rates’).60 These commitments vary from member to member, and between product categories. They are contained in each member’s schedules of concessions. According to the most favoured nation (MFN) obligation, members cannot normally discriminate between their trading partners. If a WTO member grants a concession (such as a lower tariff) to one member, then it must also do the same for all other WTO members.61 There are limited exceptions to this obligation not to discriminate between WTO members, including forming a customs union,62 negotiating a free trade agreement,63 and giving preferential treatment to developing countries. |
Source: European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), pp 29–30
33.Though tariffs have generally been reduced through successive negotiations, EU agricultural markets remain protected by relatively high tariffs. For example, EU average MFN tariffs on dairy products are 54%, on sugar 31% and on cereals 22%.64 Figure 2 illustrates the levels of tariffs on agri-food products compared to other products.
Figure 2: Average final bound tariff rates applied by the EU by broad category of goods
Source: European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), p 58
34.Lord Price CVO, Minister of State for Trade Policy, Department for International Trade, told the External Affairs Sub-Committee that the Government was “looking to replicate as far as possible the current UK agreements within a new WTO schedule. In that sense, we are not looking to deviate from what we do today.”65 We therefore assume that the UK will retain, at least in the short term, the EU’s tariff schedules.
35.But despite the Government’s intention to preserve the EU’s external tariffs after Brexit, the External Affairs Sub-Committee heard that there could be pressure from both within the UK and from third countries for the UK to change its levels of tariffs and tariff rate quotas.66
36.This was borne out by evidence given by the Rt Hon Lord Forsyth of Drumlean, former Secretary of State for Scotland, to the European Union Select Committee in March: “Leaving the EU’s Internal Market (the Single Market) and the associated Customs Union offers the opportunities to reduce considerably the cost of living through access to lower-priced foods”.67 The Rt Hon Owen Paterson MP made a similar point in his recent paper UK agricultural policy post-Brexit:
“Leaving the European Union and its Customs Union is a precondition for the UK to become a leader in global free trade, boosting our exports and lowering prices for all consumers. It is estimated that prices will be reduced overall by around 8%, with the price of food dropping by around 10%.”68
In a similar vein, Ryan Bourne, Head of Public Policy at the Institute for Economic Affairs (IEA), set out a tariff-liberalisation vision for food and farming in his IEA blog: “Brexit gives us the opportunity to rid ourselves of this blatant protectionism, to the benefit of our consumers.” By applying lower tariffs—or abolishing tariffs altogether—UK consumers could experience “lower prices in our shops directly”.69
37.In evidence to this inquiry, Alan Swinbank, Emeritus Professor of Agricultural Economics at the University of Reading, told us that the UK could “open up our markets and have much cheaper imports coming into Britain”, which could put “some downward pressure upon food prices”.70 Which? also said that there was “a possibility that trade deals may open the market to cheaper products, which could help keep prices lower more generally” though they cautioned that “this should be delivered without reducing standards.”71 We return to the issue of standards below.
38.We therefore acknowledge the argument that a low-tariff open-market policy could deliver the benefit of lower food prices for consumers.
39.Yet we also acknowledge the views of some witnesses, who were concerned that such a liberalisation of tariffs would damage the agricultural sector in the UK. The NFU told us: “A potential unilateral lowering of British tariffs would be damaging”, and added that “many UK farm businesses would be put at significant competitive disadvantage if current tariff barriers were removed or slashed without great care being taken to ensure a level playing field”.72 NFU Scotland agreed: “Any Brexit outcome that results in the UK importing cheaper food would be hugely damaging to the farming, food and drinks sectors of Scotland and the UK.”73
40.The high tariffs on agricultural goods have, we heard, offered a degree of protection from non-EU countries. The National Pig Association explained:
“The level of protection afforded to the EU pig sector by import tariffs is significant … With pig production costs in the USA, Canada and Brazil considerably lower than in the UK (due to lower welfare, legislation and environment standards) the removal or reduction of tariffs for pork products from those countries will have a significant negative impact on British pork producers.”74
41.Scottish Land & Estates agreed: “Some of our farming sectors are currently protected from cheaper imports because of the barriers imposed by the EU. These sectors would be vulnerable to imports if those barriers are not maintained once we leave.”75
42.Reflecting on the need to balance these conflicting interests, Prof Swinbank noted: “There are lots of different economic interests involved in this. Farmers may see various opportunities in one outcome whereas food consumers might see disadvantages.”76 Prof Matthews agreed that the Government would have to find the “political balance” between “providing tariff protection to the domestic industry [and] providing access to food at world market prices, or close to world market prices”.77
43.The Minister, George Eustice MP, acknowledged that “there are economists out there who will say that we could just stop farming and buy all our food cheap at world prices and this sort of thing”. But he continued: “If you look at the evidence it is much more complicated than that.”78
44.As well as setting the bound tariffs for the import of agricultural goods, the UK will have to negotiate formally with the EU to separate out its Tariff Rate Quotas (TRQs) and Aggregate Measurement of Support (AMS) from those currently shared between the EU’s 28 Member States.79 TRQs and the AMS—or Amber Box allowance for financial support—are important for the trade in agricultural goods. We consider each in turn.
Tariff Rate Quotas (TRQs)
45.A Tariff Rate Quota (TRQ) allows a customs territory to impose a lower tariff rate up to a quantitative limit, but apply the higher bound tariff for imports after that limit has been reached.80 TRQs were introduced to provide some market access in the context of the high tariffs on some agricultural products. The EU’s TRQs include dairy, beef, lamb, poultry meat, sugar, fruit and vegetables.81 They can be country-specific or open to any country that meets the import criteria—or a hybrid.82
46.The UK is currently covered by the EU’s schedules of concessions and thereby also by the TRQs contained therein.83 That means the UK can import agricultural products from third countries at lower, or zero, tariffs. By virtue of its free trade agreements with third countries, the EU has also negotiated export TRQs that enable EU Member States—including the UK—to export agri-food products to those countries at preferential or zero tariffs.
47.The FDF told us that “The Government has indicated that it intends to secure the UK’s fair share of existing TRQs post-Brexit”—an aim that they supported from the perspective of the food and drinks sector:
“Achieving this will be important for importers that rely on these quotas to bring in essential imports of raw materials from third countries, particularly in the meat sector, as well as for companies that export finished goods outside the EU by taking advantage of these preferential tariffs secured via EU bilateral trade agreements.”84
48.Securing a share of the export TRQs negotiated by the EU with third countries is also relevant because without them some UK exports may become uneconomic. Christian Häberli, Senior Research Fellow at the World Trade Institute, reflected that “Angus Beef from Scotland presently exported to Korea (presumably) under a TRQ for the whole EU-28 may not be competitive at Korean out-of-quota (MFN) rates. Negotiations for new quotas reserved for UK beef may be the only way to retain market shares for Scotch Angus in Korea.”85
49.The Minister, George Eustice MP, told us: “We suspect that the right way to approach this is simply to look at technical rectification86 and to say during a reference period that the UK’s use of the tariff-rate quota on lamb was X and, therefore, that is how we should split it going forward.”87
50.Others, though, identified possible complications. Peter Ungphakorn, former Senior Information Officer, WTO Secretariat, noted that, based on “recent experience in WTO negotiations”, there could be some “bargaining over which representative period to use as a basis for calculations. Possible options include averages over the last three or five years, including or excluding the highest and lowest numbers”.88
51.The FDF also saw difficulties, because “Trade statistics on use of TRQs by UK industry are lacking.” 89 They added: “The matter is further complicated by the trans-shipment of goods from third countries through ports elsewhere in the EU such as Rotterdam, Hamburg or Naples.” Mr Häberli consequently believed that “negotiations with the EU-27 about export and import quota rights will have to consider intra-EU trade flows, transit trade and other factors”.90 Prof McMahon concurred:
“A detailed examination should be undertaken of the existing tariff quotas in the EU Schedule to determine if the UK is the major/principal beneficiary of those quotas. If so, there is an argument that the tariff quota in the UK Schedule should match the traditional pattern of trade for a particular product with a consequent reduction in the EU Schedule for that product.”91
52.Other WTO members, such as Australia, will take an active interest in this process, as Prof Swinbank told us: “How those tariff rate quotas are reallocated between the EU and the UK matters enormously to some of their trade interests. They may find that some reallocations are not to their liking.”92
53.In a similar vein, Prof Matthews told us that the EU would have an interest in preserving access to the UK market through quotas. Splitting the TRQs was “not just a question of allocating the New Zealand share or the American share”,93 but of what share of access to the UK market the EU would get under the revised TRQs, if a free trade deal were not reached. He concluded: “The idea that we will be able to arrive at the UK Schedule for tariff rate quotas through sharing the existing ones … may not be the right way or an acceptable way to go.”94
The views of other WTO members
54.The UK will need to present its schedules to other WTO members, as discussed in our report Brexit: the options for trade.95 Prof McMahon observed that “in relation to tariff rate quotas, you cannot see WTO members being happy with what will in essence be a move towards protectionism.”96 Prof Matthews elaborated the point:
“I could see attempts by producer interests in other countries to say, ‘this is an opportunity to improve our access, so let’s try to get our Governments to be a bit more aggressive than they otherwise might be’. We might put forward … the idea that somehow we might just share the obligations that the EU 28 has at present … but I could see other [WTO] members seeing this as an opportunity to try to improve their position.”97
55.Prof McMahon agreed: “If the UK gets a tariff rate quota split-off, you can imagine that other members of the WTO will be very annoyed, because there will be a tariff rate quota coming into existence after tariff rate quotas were supposed to come into existence.98 They were supposed to come into existence in 1995 or on accession to the WTO. The UK has been a member since 1948.99 This is a very unusual occurrence.”100
56.The Minister acknowledged the potential difficulties: “There may be some countries that say that we have lost the option to be able to choose a market because part of it is now separated out. That is a consequence, largely, of the fact that we are leaving the EU and, therefore, it is not a single market anymore.”101 However, he believed that “those countries will still want a tariff-rate quota to the UK, and it is difficult to think of a better way to do it than to look at the historical track record during a reference period and to allocate it in that way”.102
57.Mr Ungphakorn questioned the Minister’s approach: “Many who have first-hand experience of how the WTO works … doubt whether other WTO members would accept the UK’s legal arguments, and whether the legalistic approach would be enough. I share that view.”103 For example, he said: “To account for current UK-EU trade in sheep and goat meat, almost 100,000 tonnes would be added to the combined UK and EU-27 tariff quota, around 33% more than its present size. That seems to stretch the idea of ‘rectification’ (a technical correction) too far.”104 He concluded that “the UK and EU quotas should be settled by negotiation, where both political and commercial interests would play a part.”105
Splitting the Aggregate Measurement of Support (AMS)
58.Under the WTO Agreement on Agriculture WTO members started to move away from giving farmers domestic support that was tied to production, or production subsidies.106 The types of permitted domestic agricultural support are classified according to which WTO ‘box’ they fall into. Green Box subsidies are permissible under WTO rules and are not subject to spending limits, whereas Amber Box subsidies are severely restricted (see Box 2).
Box 2: Domestic agricultural support
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Green Box contains measures of support that have “no, or at most minimal, effects on production”, and which do not distort trade. Such measures must be government-funded and cannot take the form of price support. Examples of Green Box measures are subsidies which are de-coupled from production levels or prices, some environmental protection programmes and rural development programmes. Any domestic agricultural support measure that falls under the Green Box is permissible. Annex 2 to the Agreement on Agriculture sets out the details of when a support measure falls under the Green Box. Amber Box contains domestic support measures which are considered to distort production and trade. After subsequent rounds of domestic support reduction, some 30 WTO members have declared a level of maximum Amber Box support in their schedules. This is a commitment to capping and reducing their levels of trade-distorting domestic support. This commitment is known as the ‘aggregate measurement of support’ (AMS) and represents the maximum allowable level of Amber Box domestic support the Member can give. Any trade-distorting support beyond the level of the AMS is a breach of the rules and can be disputed by other WTO members. The EU has a single AMS on behalf of all Member States. De Minimis: Under the Agreement on Agriculture, there is no requirement for developed countries to reduce their trade-distorting domestic support in a given year provided that the aggregate value of any product specific support does not exceed 5% of the total value of production of the agricultural product in question. In addition, non-product specific support which is less than 5% of the value of total agricultural production is also exempt. This is known as the de minimis provisions. Even WTO members without an Amber Box allowance may provide trade distorting domestic support up to the de minimis levels. Blue Box measures include direct payments made under a production-limiting programme. This means the aim should be to limit production by imposing production quotas requiring farmers to set aside part of their land. Only a handful of WTO members use Blue Box measures. |
Source: World Trade Organization, Domestic support—amber, blue and green boxes (October 2001): https://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd07_domestic_e.htm [accessed 21 April 2017], Article 6, and Annex II World Trade Organisation, Agreement on Agriculture (2017): https://www.wto.org/english/docs_e/legal_e/14–ag_01_e.htm [accessed 21 April 2017] and written evidence from Prof Michael Cardwell (ABR0049)
59.The UK is currently covered by the EU’s AMS or Amber Box commitment. If the UK does not negotiate a share of the EU’s AMS, the UK could see its future agricultural policy choices constrained. In the words of Prof Swinbank: “How the maximum amount of subsidy that the EU is currently allowed to give to its farm sector would be shared out between the EU and the United Kingdom … could be crucial depending upon the sort of policy we wanted to pursue later.”107 The Minister told us:
“There is a school of thought that says that if we are going to go into a world where we are pursuing policies that are less market-distorting and more about supporting environmental outcomes and animal welfare, how important is it to have that share of the Amber Box? I think the problem is that the more we look at this the answer is that it probably is still quite important to have that share.”108
60.Michael Cardwell, Professor of Agricultural Law at the University of Leeds, explained that one way to divide the Amber Box allowance would be to determine the EU’s current permitted level of domestic support; according to the most recent Notification by the EU the AMS was “72,378 million Euros.”109 However, this was “in the name of the EU without distinction as to separate entitlement of individual Member States”, and it was “not possible to identify a separate ‘share’” for the UK, because the UK was already a member of the EU when the AMS was first calculated.110 It would also be difficult to determine the amount of UK support which formed part of the original calculation of the AMS, thanks to “problems in obtaining historic data and in fixing sterling conversion rates”.
61.An alternative approach, he told us, would be to determine the UK’s entitlement based on current UK receipts of CAP payments. This could be “calculated as a ratio of UK:EU CAP payments (over a representative period of three years) applied to the EU’s total subsidy commitments”.111 He noted, however, that “questions might arise as to whether exempt support should also be included in the calculation; and the UK may suffer disadvantage as a result of a pattern of relatively low expenditure on rural development programmes when compared with other Member States”.112
62.The Minister favoured the second approach: “We suspect that the logical way to deal with that is through a process of technical rectification where you simply say that the UK’s share of the EU’s Amber Box and Blue Box is X based on our allocation of the CAP budget. That would seem to be the simplest, most sensible way to proceed.”113 He added that “I do not think at the moment that the EU comes anywhere close to using all of its Amber Box, so it is not that it is a box that people want to fight over”.114 We return to the issue of funding in Chapter 5.
The views of other WTO members
63.Though the Minister was confident about the prospect for negotiating a share of the AMS, others were more cautious. Prof Matthews told us that a Brexit split of the AMS would mean that the UK would claim an AMS entitlement, while many WTO countries who “would love to have such an entitlement today” do not.115 He mentioned China and India as “obvious examples where both countries are currently alleged to exceed their current de minimis limits on trade-distorting support … One might not be surprised if some objections were raised from these quarters to the idea that the UK would be entitled as of right to an [AMS].”116 On the other hand, he noted:
“Splitting the EU-28 AMS between the UK and the EU-27 may be an acceptable outcome to the other WTO Members because (a) it is the reverse procedure to what happens when a country joins the EU, and (b) it would lead to a lower Bound Total AMS (BTAMS) for the EU-27 which would be more restrictive on future EU trade-distorting agricultural policies.”117
64.The Minister believed that “the likelihood is that nothing we are proposing will cause much trouble with the WTO rules”.118 But he also acknowledged that other WTO countries could cause difficulties: “We do not know whether people will want to press this point and have an argument about it. If they do, then they may be sacrificing their ability to ask something else of us that they want from us. That is the nature of a negotiation.”119
Agricultural support without an AMS entitlement
65.The Government has committed to matching current levels of CAP funding until 2020. But some witnesses questioned whether this would be possible if the UK withdrew from the EU without a share of the EU’s AMS. According to Prof Swinbank, if the UK “ended up with a very small allowance” and continued granting “that same support” after Brexit, “we could end up exceeding our WTO allowances. What would then follow from that would depend upon whether anyone challenged us, how long it took and what sort of measures were taken against us.”120
66.But Prof Cardwell believed that, as long as the Basic Payment and greening measures were regarded as decoupled income support, “there should be no difficulty in meeting domestic support commitments” if the UK continued to implement the CAP regime until 2020.121
Conclusions and recommendations
67.In our report Brexit: trade in goods we concluded: “When establishing its own schedules at the WTO, the UK Government must give particular consideration to the implications of tariffs on the UK agricultural sector. High tariffs on imports would raise the cost to UK consumers, whereas lower tariffs could reduce the cost of food to consumers, but might undermine the domestic agricultural sector’s competitiveness.” We endorse this conclusion and underline its importance.
68.Reaching agreement on dividing the EU’s Tariff Rate Quotas for agricultural products could be challenging, not least because the proposed reallocation will be open to negotiation by WTO members, not only the EU. We urge the Government to analyse the current patterns of trade under existing TRQs and the implications of a proposed split on the agricultural sectors and food manufacturers that benefit from the current TRQs in preparation for these negotiations.
69.There is no precedent for splitting the Aggregate Measurement of Support—or the Amber Box entitlement—and in our view the Minister was over-confident that other WTO members would accept such a split. We invite the Government to confirm that it is considering alternatives, should the split be contested.
Negotiating a UK-EU trade agreement
70.Further to establishing its WTO schedules, the UK will need to negotiate trade agreements with the EU and third countries.122 The Minister told us that “the first thing coming down the tracks is the negotiation on a future free trade agreement with the EU”.123
71.In approaching those negotiations, Prof Matthews noted that “In global terms, the UK is a very attractive market. It is a big, prosperous market and it is a net importer of food. Therefore, a lot of countries will be very interested to try to improve their access to this market.”124 The Minister agreed: “We have a trade deficit in food and drink alone with the EU of around £18 billion a year, so this is an area where it is in their interests really to do a free trade agreement.”125
72.Mr Ungphakorn, on the other hand, reminded us that “Agriculture is a particularly sensitive sector for various reasons: politics, culture, concerns about rural society, food security, and so on.”126 The Institute of Grocery Distribution (IGD) agreed: “All new trade deals are complicated”, but “food related issues tend to take centre stage in most trade deals … and are often the trickiest and most sensitive elements to negotiate”.127
73.Mr Ungphakorn explained that the challenge for the UK would be:
“To strike a balance between:
- the demand for support and protection from the UK’s own farmers
- the demand from UK consumers and processors for cheaper food and raw materials
- the demand from exporters in the other countries for access to the UK market.”128
Priorities for trade with the EU
74.We asked witnesses about their priorities for EU-UK agri-food trade. Guy Smith, Vice President of the NFU, told us: “We would like to see business as usual so that we trade with our ex-EU partners much the same as we did before.”129 He added that “it is in our interests to have free trade access to those [EU] markets, much as we have done in the past, not encumbered by tariffs or border controls, which would add costs into our industry”.130 Mr Hardwick agreed that “some form of continued tariff-free access to the European Union would be my absolute number one priority”, describing it as “absolutely essential”.131
75.Fergus Ewing MSP, Scottish Government Cabinet Secretary for the Rural Economy and Connectivity, agreed:
“Retaining tariff free access to the European Single Market is crucial to sustainability and growth in the rural economy. The [EU] continues to be Scotland’s top food export market and this trade creates a virtuous, mutually beneficial relationship for our food producers.”132
76.From a Welsh perspective, NFU Cymru told us:
“The EU single market is by far our largest export destination with around a third of our lamb crop ending up on the European Market, and around 90% of Welsh food and drink exports going in to the single market … It is vital that we continue to enjoy free and unfettered access to these markets, free of tariff and non-tariff barriers.”133
77.Dairy UK provided a sector-specific example: “With 80% of dairy exports going to EU countries, mostly in the form of cheese, butter, cream and milk powders, continued access to the EU market is essential for UK dairy companies.”134
Tariff barriers and EU trade
78.In a free trade agreement tariff levels are generally lower than those provided for by the MFN principle under WTO rules. In the absence of such an agreement, our witnesses expressed concern at the impact of the higher MFN tariffs upon EU-UK trade. Focusing on exports, the AHDB explained:
“Higher tariffs on exports to the EU (indeed any tariffs as there are none at present) would put UK at an immediate disadvantage over competing countries with continued tariff free access … in the primary agriculture sectors where margins on primary products are low, small additional costs can make products uncompetitive.”135
79.Scott Walker, CEO at NFU Scotland, told the EU Select Committee that “If we do default to WTO rules for trading with Europe, in effect that closes any food exports across to Europe … just pure tariffs just close the deal altogether.”136 Mr Ewing agreed: “Should the UK fail to reach agreement with the EU … and fall back to trade under World Trade Organization terms, this would entail significant risk for sections of Scottish agriculture, such as cattle and sheep.”137
80.The Rt Hon Carwyn Jones AM, First Minister of Wales, raised a similar concern:
“The effects of trading with the EU under the WTO rules on Welsh agriculture, fisheries and food will be very significant. Products from these areas will be hit by some of the most extreme tariffs under the WTO rules … It has been predicted trade opportunities in food related areas may fall by around 70–90%.”138
81.We heard particular concerns about the impact of tariffs on the sheep sector. The National Sheep Association told us that “the UK sheep sector exports up to 40% of production, with 96% of this going to the EU”.139 Scottish Land & Estates warned: “Hill farming could face very difficult times.”140
82.The British Meat Processors Association (BMPA) cautioned that beef exports would also be at a disadvantage: “In most cases, [the EU] tariff equates to an addition of 50 per cent or more to the value of imports, which seriously impacts on the ability of imported beef to compete with EU meat.” As for pigs: “The high level of tariffs effectively means that most non-EU pork is uncompetitive on the EU market.”141
83.Tariffs would also hit other sectors. Dairy UK told us that: “Imposition of the WTO schedule by the UK would make EU [dairy] imports into the UK much more expensive”.142 The National Association of British and Irish Flour Millers (nabim) raised similar concerns for the cereal industry, highlighting the “significant volumes” of trade with the EU: “This trade (whether imports or exports) would not be maintained if tariffs were imposed. Therefore the health of the cereals sector on both sides of the channel depends on the retention of tariff free trade between the UK and the EU 27 once we leave the Union.”143
84.One exception to the general concern was fruit and vegetables, where the Food Foundation noted that “for horticultural produce the EU’s external tariff rate is … relatively low … there are currently around 300 fresh fruit and vegetable EU tariff lines, and a similar number for processed products; and most of these tariffs are already minimal”.144
85.Against this backdrop, the Minister, referencing a study commissioned by the NFU, struck an optimistic note:
“It is difficult to look at this in isolation, [but] what it showed is that a straight reversion to WTO rules would probably, in most sectors of agriculture, lead to a firming in farmgate prices because competition from Europe would go down. The only exception is the sheep sector, which is heavily dependent on access to the French market in particular. From our point of view—although it is not what we want, and obviously we are going into this asking for that bold and comprehensive free trade agreement—most sectors of agriculture do not have a great deal to fear from that if that were the outcome.”145
Supply chains and agricultural inputs
86.Complex and extensive supply chains link the UK and the EU. The Farmers’ Union of Wales (FUW) told us: “If post Brexit policies have the effect of severing well-established supply chains which currently extend across the current EU, disruption would be widespread.”146
87.At the beginning of the supply chain, the British Growers Association told us that UK producers were “reliant on importing raw materials and inputs”, and that “it is not clear the extent to which tariffs might apply to these inputs and the impact on production costs and ultimately the cost of food to consumers”.147
88.The Agriculture Industries Confederation (AIC) told us that significant volumes of animal feed were imported from the EU or from non-EU countries through the EU. They noted that “the UK pig and poultry sectors in particular are very reliant on this imported vegetable protein, a quantity and quality which cannot be replicated domestically and both sectors would face massive risks if supplies were disrupted or their cost was increased”.148 Turning to crop protection products, such as pesticides, they noted that “some 85% of the market is supplied with products manufactured elsewhere in the EU.”
89.The AIC also told us that the “significant majority of oilseed rape seed, all forage maize seed and … all sugar beet seed is imported from the EU”.149 They cautioned: “Without this access at a commercially viable rate these crops would suffer significantly in their competitive position.” Nabim, representing the UK flour milling industry, told us that they would “strongly support” retaining a system with “low to zero duties on raw materials”.150
90.The broader issue of supply chains present a unique challenge on the island of Ireland.151 Noel Lavery, Permanent Secretary of the Department of Agriculture, Environment and Rural Affairs (DAERA) in Northern Ireland, told us: “The level of North/South integration in production/processing chains is considerable. Many agri-food businesses are structured and operate on a cross-border basis.”152 This made them especially vulnerable to the imposition of customs controls and tariffs. Ian Wright, Director General of the FDF, gave an illustration: “If you take one example—a bottle of Baileys Irish Cream—one in five cows in Ireland produces the milk and, if you are a Northern Irish cow, your milk crosses the border five times before it goes into the bottle. The idea that that would be subject to tariffs hither and yon is really very scary.”153
Non-tariff barriers
91.As we noted in our report Brexit: trade in goods,154 non-tariff barriers can be as costly, or costlier, to producers than tariffs. Non-tariff barriers, which are prohibited between Member States by the EU Treaties,155 include all government-imposed and sponsored actions or omissions that act as prohibitions or restrictions on trade, other than ordinary customs duties, and other duties and charges on imports and exports.156 Examples include sanitary and phytosanitary measures, labelling requirements, pre-shipment inspection and formalities, subsidies and rules of origin as well as protected product descriptions known as Geographical Indicators (GIs).157
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The Agreement on Sanitary and Phytosanitary Measures (SPS Agreement) sets out the basic rules on food safety and animal and plant health standards. WTO member countries are encouraged to base their policies on existing international standards, guidelines and recommendations. They are then unlikely to be challenged in a WTO dispute. The SPS Agreement also allows countries to set their own higher standards, but these must be based on ‘sound science’ and should only be applied to the extent necessary to protect human, animal or plant life or health. They should not discriminate between countries where identical or similar conditions prevail. The Agreement on Technical Barriers to Trade (TBT Agreement) aims to ensure that technical regulations, standards, and conformity assessment procedures are non-discriminatory and do not create unnecessary obstacles to trade. The TBT Agreement also recognises WTO members’ right to implement measures to achieve legitimate policy objectives, such as the protection of human health and safety, or protection of the environment. The TBT Agreement encourages members to base their measures on existing international standards. |
Source: World Trade Organization, Technical barriers to trade (2017): https://www.wto.org/english/tratop_e/tbt_e/tbt_e.htm [accessed 21 April 2017] and World Trade Organization, Standards and safety (2017): https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm4_e.htm [accessed 21 April 2017]
92.Post-Brexit the UK and the EU could seek to minimise non-tariff barriers in three main ways: harmonisation of standards, mutual recognition of standards and equivalence. These terms are explained in Box 4.
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Source: European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), paras 144–145
93.Non-tariff barrier-free trade with the EU after Brexit was a key priority for our witnesses. NFU Scotland wanted to see “limited regulatory divergence so that no non-tariff barriers are introduced”.158 Dairy UK agreed.159 WWF also highlighted the risk of regulatory divergence: “Any weakening of [current] regulations, either as a result of domestic policy or trade agreements, will result in restricting access to the EU markets. This will impact the farming sectors [sic] ability to trade with its biggest market.”160
94.Mr Hardwick was therefore clear that “whatever we do, if we want an ongoing trading relationship with the European Union we will have to align ourselves largely with their legislation”.161 In a recent speech, Phil Hogan, European Commissioner for Agriculture, struck a similar note: “We would never accept a lowering of our standards in the EU, and we have been consistently effective in protecting standards in all our global trade agreements.”162 We therefore concluded in our report Brexit: trade in goods that “If the current level of EU-UK trade is to be maintained, ongoing harmonisation or mutual recognition of regulatory standards may be required.”163 We welcomed the Government’s decision—by means of the Great Repeal Bill—to preserve existing EU regulations in domestic law as a first step towards this goal.
95.The Minister told us that the Great Repeal Bill would bring technical legislation, such as “rules on labelling, food standards, standards in slaughterhouses and maximum residue limits” into domestic law, meaning that at the outset of negotiations there would be “a remarkable degree of equivalence.”164 He concluded: “Some of those non-trade tariff barriers that slow down other trade deals are less of a factor when it comes to the EU and it is why I think that, if the will is there, we could put together a free trade agreement quite quickly.”
Non-tariff barriers and border controls
96.As the UK withdraws from the customs union UK-EU trade will be subject to customs checks and controls to ascertain that products are of a satisfactory standard. In our report Brexit: trade in goods, we concluded that this would “result in costly administrative requirements and customs procedures, whatever new framework for trade is established”.165
97.Border and customs checks are a particular challenge for the agri-food sector. Prof Swinbank gave a graphic example: “One thinks of the port of Dover trying to cope with products coming in and coming out. If we have to start checking microbiological contamination of chicken carcasses coming from the Netherlands, for example, those tests can take several days and the product wastes in that period.”166 The ADHB also raised concerns over “delays at ports/points of entry for perishable goods such as fruit, vegetables and meat”.167
98.Prof Matthews told us the EU would need to certify that UK products entering the Single Market meet EU standards, and that this process of certification becomes increasingly important if UK regulations underpinning the production of those products “begin to differ”.168 He noted: “If it is a Welsh meat product, say, the European Union might need to inspect that Welsh meat plant in addition to your own Food Standards Agency doing that for your domestic market”. He therefore suggested that “it would be highly desirable to ensure that there are … co-operation agreements—Mutual Recognition Agreements—whereby the EU would recognise that your Food Standards Agency, in inspecting that Welsh meat plant, would also be certifying for export to the EU.”
99.From a food manufacturing perspective, the FDF told us that the current regulatory cohesion between the UK and the EU is “the key to trading on a level playing field” and that, in the event that the regulatory framework in the UK is reviewed after Brexit, there needs to be a “mechanism” in place “to ensure mutual recognition of potentially different regulatory systems”.169
100.Regarding the practicalities of demonstrating equivalent standards, the AHDB informed us that monitoring and demonstrating equivalent standards was not “necessarily that difficult or onerous as the UK, in effect, already acts as the primary guarantor to the EU of compliance with EU standards and indeed those required in third countries”.170
101.If the UK and the EU did negotiate a free trade agreement, agricultural goods and food would also have to comply with rules of origin. These determine where a product and its components were produced, and are essential to determining which tariff to levy.171 The AHDB explained that “If the UK wishes to have the complete freedom to secure similar trade agreements outside the EU then rules of origin are likely to make additional controls inevitable”, adding that “it is imperative that these controls do not create a situation in which supply chains do not operate as freely as they do now.”172 The Minister acknowledged that “if you were to do a trade deal with another country, there would be country of origin rules that mean that you cannot use that same product to circumvent whatever external tariffs the EU has”.173 He told us: “There is a means of doing this; it is what every other country in the world does with the trade agreements they have, and we would adopt a similar approach those country of origin rules where it was necessary.”
Northern Ireland
102.The land border in Northern Ireland again presents a particular challenge. Dr Viviane Gravey, Dr Brian Jack and Dr Lee McGowan from Queen’s University Belfast stated: “The mere introduction of border controls alone, without even considering customs tariffs, would have a significant impact on the agri-food industry on the island of Ireland. The cost of producing the necessary paperwork has been placed at €20 to €80 per border crossing.”174
103.Furthermore, DAERA pointed out: “The fact that Northern Ireland has a land border adds an additional dimension to this, with the very real possibility of illegal movements. Therefore, both tariff and non-tariff arrangements post the UK’s exit from the EU are of major concern for the agri-food sector.”175
Geographical indicators
104.Some witnesses mentioned geographical indicators (GIs)176 as a priority for a trade agreement with the EU.177 Only products meeting the requirements of the GI can use the protected name, for example Cornish pasties or Scotch Whisky.178 According to the AHDB there are 61 UK-registered products protected by some form of GI, many of which are cheeses or meat products.179
105.Mr Hardwick saw GIs as one way of adding value to a product, and therefore told us that “we would want to retain those that we have”.180 Jon Woolven, Strategy Director at IGD, noted that “for those people who have that protection it has been hard-fought-for, it is very valuable and those companies would not want to relinquish it”.181 But he noted that other companies might wish to produce products called, for instance ‘Parma-style ham’, and that this had been “a particular sticking area in some of the international trade negotiations, for instance with the US”.
106.Prof McMahon told us that the EU scheme for GIs allowed for international registration, “So once the UK leaves it will become a third country and it will still be able to register [GIs].”182 Wyn Grant, Emeritus Professor of Politics at the University of Warwick, and Mr Hardwick agreed.183
Conclusions and recommendations
107.The UK is a net importer of food and therefore a very attractive market for agri-food products both from the EU and globally. We expect this to give the UK a strong position during trade negotiations for those products both with the EU and, after Brexit, with third countries.
108.Nevertheless, leaving the Single Market and the Customs Union will create significant uncertainty for the UK agri-food sector. The EU is the single largest market for UK agriculture and food products, and our witnesses were clear that preserving tariff and non-tariff barrier free trade with the EU should be a priority. If the UK leaves the EU without agreeing a comprehensive UK-EU FTA, or a form of transitional arrangement, UK-EU trade would have to proceed according to WTO rules. Many of our agricultural producers, and our food manufacturers, would incur substantial costs associated with tariff and non-tariff barriers when exporting to the EU, with sectors such as pig and sheep meat at particular risk.
109.Moreover, the agricultural and food manufacturing sectors are integrated into EU-wide supply chains. It is imperative that a UK-EU trade deal should avoid the imposition of tariffs on trade in both directions, to minimise the potential for disrupting those supply chains.
110.Non-tariff barriers could be equally if not more disruptive to trade in agricultural products and food. Products must meet the standards of the EU market in order to enter it. If UK and EU regulatory frameworks begin to differ after Brexit, there is a risk of substantial non-tariff barriers for agri-food producers. The greater this divergence, the greater the need for customs checks and certification of products and production facilities. This could be costly and time consuming for UK farmers and food manufacturers wishing to export to the EU.
111.In our report Brexit: trade in goods we urged the Government “to maintain close dialogue with the EU over the development of UK and EU standards post-Brexit, to avoid unnecessary divergence.” We endorse and re-state this recommendation.
112.Customs procedures and associated delays would have a particularly strong negative impact on the agri-food sector, where products are often perishable and food supply chains are highly integrated across the UK and the EU.
113.Agri-food supply chains are particularly highly integrated between Northern Ireland and the Republic of Ireland. The re-introduction of border controls and tariffs could severely disrupt this industry, and could lead to an increase in cross-border smuggling. We therefore repeat the recommendation made in our report on Brexit: UK-Irish relations that the Government should make every effort to avoid the re-introduction of customs controls on the Irish land border.
New market opportunities
Non-EU markets
114.Brexit may also open up new non-EU trading opportunities. Mr Smith told us: “It must always be our ambition to seek out markets wherever we can find them and to place an expectation on the British Government to help us find those markets. There are emerging really interesting markets, particularly in the Far East, for poultry, pigs, red meat in particular.”184 Wesley Aston, Chief Executive of the Ulster Farmers’ Union, agreed:
“We want to look at new markets, particularly for what we call fifth-quarter products, which are products that British and European consumers do not eat, that go to China or wherever. We certainly see that if those could be opened it would give us a better return for those particular products that currently we have to pay to dispose of.”185
Tim Breitmeyer, Deputy President of the Country Land and Business Association (CLA), George Dunn, Chief Executive of the TFA, the FDF and FUW all took a similar view.186
115.Though there are opportunities for increasing trade globally, some witnesses were not convinced that this could off-set a potential loss in UK-EU trade.187 The First Minister of Wales told us: “Curtailing access to [the European Market] for our produce will leave a hole which will not be easy or quick to fill.”188 The British Poultry Council agreed: “Contrary to popular belief, third countries are not able to ‘take up the slack’ in trade that may be caused by Brexit … loss of trade with [EU] Member States will not inevitably lead to increases elsewhere.”189 The IGD echoed the point from the perspective of the wider food sector: “Reduced trade in agriculture and food with the EU might be offset, at least in part, by increasing trade elsewhere but there is no single country or trading bloc that could be a like-for-like substitute.”190
116.The AHDB agreed that it would take time to develop alternative markets.191 EU trade could be off-set in some cases, “but not immediately as the trade within the EU enjoys the enormous benefits of proximity and speed of delivery (crucial for perishable products) and trade free of official customs controls and duties”.192
Grandfathering existing FTAs
117.Some witnesses thought it important to review the status of the more than 36 preferential trade agreements, covering 60 third countries,193 which the EU has negotiated on behalf of Member States. DAERA told us that “we should be striving to retain current access arrangements in the short term”,194 while Mr Smith suggested that some “interim arrangement” could perhaps be agreed so that the UK could “continue to use the agreements we have in place by virtue of EU membership when we have left the European Union”.195
118.Prof McMahon suggested that the UK might be able to negotiate continued access to such FTAs after Brexit:
“Those agreements are what are termed in EU law mixed agreements. This means that the UK remains bound by that particular arrangement … because it is a mixed agreement the UK also has the opportunity to figure out, in association with the third country, how it will deal with the relationship.”196
Mr Hardwick, however, warned that “whilst you could try to grandfather part of a trade agreement with another country, and that might be accepted, it just takes one member [of the WTO] to step in the way”.197
119.In our report Brexit: the options for trade we considered the question of whether the UK could preserve, or ‘grandfather’ existing FTAs, concluding as follows: “On the balance of evidence, we conclude that the UK is unlikely to be able to retain access to the EU’s FTAs with third countries following Brexit, whether they are mixed agreements or not.”198 In our subsequent report, Brexit: trade in goods, we endorsed that conclusion: “We remain of the view that the UK is unlikely to be able to maintain access to the EU’s preferential trade agreements with third countries, such as Switzerland and South Korea, after Brexit.”199
Domestic opportunities
120.There may also be opportunities to develop the UK’s domestic market. DAERA argued that “The UK’s exit from the EU provides opportunities for export growth, particularly in the GB market and to the rest of the world.”200 Mr Aston agreed, suggesting that the UK should use Brexit as an opportunity to review its status as a net importer of food: “We are only 61% self-sufficient across the commodities and 75% self-sufficient in our indigenous products, so there is huge scope to make sure we provide the standard of product that our consumers want.” 201 Mr Smith argued: “It is often forgotten that the trade gap between food and drink in this country has doubled in real terms in the last 15 years from £5 billion to £10 billion … A lot of that could be grown in the UK. Our ambition as part of this process is to narrow that trade gap.” 202
121.However, reducing trade imbalances, as the BMPA told us, is complicated by a multitude of factors. They explained that exports and imports were about “getting value for whole carcase, cultural eating habits … the cost of production, which varies according to the season, the price of feed, and the value of sterling”.203 Therefore, they argued, finding “an outlet for the parts of the animal we do not eat and for which there is, therefore, no market in the UK—known as achieving carcase balance—and the offals and animal by-products is crucial.” The FUW also highlighted “the seasonality of production, the perishability of goods, and the degree to which sectors rely on exporting certain types of products and cuts (‘quarters’) which do not generally appeal to UK consumers”.204 All these factors would have to be considered when assessing whether trade could be offset with domestic consumption.
Non-EU trade agreements and tariffs
122.Reflecting on trade agreements with third countries, NFU Cymru told us that that “if the UK were to enter into trade agreements with the countries such as New Zealand and Brazil, then there could be a temptation on the part of the UK government to unilaterally lower tariffs for food imports”.205 That, they cautioned, “would have a devastating impact on Wales’ livestock industry”.
123.Scottish Land & Estates also cautioned that “Trade deals that open our markets to cheap imports could prove disastrous for some agricultural sectors”.206 Mr Woolven went further: “The real nightmare scenario would be if we had an unlevel playing field with free trade in and then restricted trade out.” Therefore, he argued, there should be “at least equal tariffs in and out”.207
124.At the same time, as we noted above, a lower-tariff approach to trade in agri-food products could lead to lower prices for UK consumers (see paragraphs 36–38).
Non-EU trade agreements and standards
125.The area of most concern to our witnesses when discussing trade with third countries was standards. Mr Hardwick explained that “the single biggest obstacle in exports is … the sanitary and phytosanitary rules you have to meet in the importing country”.208 He gave an example: “To get the deal that we have with China on pork took us negotiating around seven years to complete because of the sanitary requirements.”209
126.Witnesses cautioned that producers in the UK—particularly meat producers—would be hard-pressed to compete on price. In Mr Smith’s words, “British farmers tend to operate to high standards, which we are very proud of, but those lead to higher costs of production than you would find elsewhere.”210
127.The AIC cautioned: “Whilst there have been populist claims that free trade will bring even cheaper food prices, the reality is that further cost reductions can both damage domestic production and raise the chances of quality and welfare issues being undermined.”211 Mr Smith agreed: “The danger is that we suddenly see ourselves as a new globalised player that scours the world for the cheapest food to feed the British population irrespective of the standard it is produced to.”212 The Welsh First Minister argued that “A key consideration is for UK producers to not be undercut by imports where production standards are poor, and consumers not put at risk.”213
128.Against such a backdrop Mr Wright told us that from a food and drinks perspective “we cannot conceive of a world in which British consumers are subject to lower standards. That is not acceptable either to my members or to anybody in the food chain and, most importantly, to the consumers themselves.”214 Mr Hardwick agreed: “It would be inconceivable to explain to British consumers that you are doing something to reduce standards.”215
129.Which? explained that maintaining current standards for products was “essential for consumer confidence”.216 This, they told us, means that “consumers can have confidence that the food they buy is safe and what it says it is”, which in turn “benefits the food industry which relies on consumers’ trust”.
130.Dr Viviane Gravey et al also reminded us that failure to uphold internationally defined sanitary standards would “place UK exporters at risk of trade barriers in export markets beyond the EU”.217 For this reason, any steps taken to lower domestic standards would need to respect international commitments. We note the Minister’s assurances that the Government intends to engage actively in the setting of international food safety standards in the UN system known as Codex, and similar fora.218
Brand Britain
131.If UK producers continue to adopt higher standards—thereby incurring higher costs—they will not be competitive in a global, liberalised market on price alone. They may, however, be able to compete on quality. Lord Forsyth of Drumlean, in evidence to the EU Select Committee, argued that “it is always possible to sell a quality product”.219
132.NFU Scotland agreed: “’Scottish is premium British’, and it is on this reputation of provenance and high production standards that NFUS sees opportunities in new export markets elsewhere in the world.”220 The National Pig Association told us that “British pork boasts the unique selling points of high standards of animal welfare, whole supply chain traceability and independently verified assurance”.221
133.Focusing on the domestic market, WWF also suggested that “adopting the best standards in the world would differentiate British produce from cheaper lower quality overseas imports whilst enhancing British food’s reputation for safety and quality”.222 And yet, according to Mr Smith, consumers may not support the costs of higher standards: “While we are always very keen to trade up and produce to very high standards, we are wary that sometimes in that scenario our consumers can let us down.”223
134.Mr Smith also noted that high domestic standards could be double-edged in terms of trade:
“We have an extremely robust assurance system in our agriculture that gives us very good food safety standards. If we can convince the Chinese that that gives us a premium status and they should open up their markets to us, we will walk through that door. If the Chinese are of the view they want to go for the cheapest supplier, we will have a problem in as much as our costs of production may well be greater.”224
Hormone-treated beef and chlorinated chicken
135.Witnesses highlighted two areas of particular concern with regard to imports: hormone-treated beef and chlorinated chicken. Mr Dunn argued that the UK should “protect” itself from products “such as chlorinated poultry or hormonetreated beef” in any potential trade deal with the US.225 Dr Gravey et al noted:
“Past negotiations between the EU and US have raised wide-spread concerns about agriculture—in particular facilitating the access of genetically modified foods, chlorine washed chickens and beef from cattle treated with growth promoting hormones. This is a logical objective for US negotiators in future UK-US deals.”226
136.Which? noted that the issue of hormone beef “illustrates different national approaches to ensuring food safety and standards and raises concerns regarding future trade deals with countries, such as Brazil or the US, once the UK leaves the EU”.227 These concerns, we heard, included “less rigorous food safety controls and, in some cases, a much more relaxed approach to use of ingredients or production methods that consumers are likely to have concerns about”. Prof Grant agreed: “I think this is an issue which consumers and others might be concerned about … It may be… that consumers, if they were aware of the way in which the beef is being produced, would not want to buy it, but then of course price is often a very big driver of consumer behaviour.”228
137.The Minister acknowledged this concern: “Beef produced in Brazil, Uruguay and the US is cheaper than in the EU and, in particular, in the UK, but that comes at a price of using hormones in beef and all sorts of approaches that probably would cause consumer reaction here, and the quality of that product is far inferior to what we have.”229
Box 5: The beef hormone dispute
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The EU has banned the import of beef produced with certain growth hormones since 1989, citing concern over the risks to human health posed by hormone residues. The USA brought a dispute against the EU to the WTO Dispute Settlement Body, arguing that the measures taken by the EU restricted or prohibited imports of meat and meat products from the United States. The Appellate Body230 found that the European import restrictions were inconsistent with article 5.1 of the Sanitary and Phytosanitary (SPS) Agreement that: “Members shall ensure that their sanitary or phytosanitary measures are based on an assessment, as appropriate to the circumstances, of the risks to human, animal or plant life or health, taking into account risk assessment techniques developed by the relevant international organizations.” Nevertheless, the EU still upholds its ban on importing beef reared with hormones. By way of compensation, a higher tariff rate quota for non-hormone-treated beef from the USA was agreed, providing improved access to the EU market for that beef. |
Source: World Trade Organization, European Communities: Measures Concerning Meat and Meat Products (Hormones) (2017): https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds26_e.htm [accessed 21 April 2017]
138.The Chief Veterinary Officer (CVO), Professor Nigel Gibbens CBE, told us that after Brexit the UK would be “masters of our own import standards”, which meant that, in relation to hormone treated beef, “the UK will be at liberty to take up the same position [as the EU]”. He acknowledged, though, that:
“There is a cost to holding that position because the EU lost a WTO case on the basis of hormone-treated beef and continues to pay a penalty as a consequence, but we have that choice; we have that sovereign right. Again, that will apply whenever one wants to apply higher standards, for whatever reason, that go beyond the standards set by the standard-setting body, in this case the OIE or Codex, or what can be scientifically justified so that if you want to apply a condition for trade you have to be able to scientifically justify it.”231
139.We note that Phil Hogan, the EU’s Agriculture Commissioner, has endorsed EU standards, and that it seems unlikely that the EU will be willing to accept hormone reared beef or chlorinated chicken after Brexit.232 Should such products be admitted into the UK market through trade with third countries, it may therefore pose a challenge to trade with the EU. We asked the CVO about the potential difficulties of aligning third country pressure to allow hormone beef to enter the UK market with the EU’s continued reluctance to import such meat. In response, he said: “There will be a constant interplay between what agreements we are seeking to have, what we therefore commit to do and what we can do in other arenas in different free trade agreements.”233
Farm animal welfare standards
140.We also heard concern over farm animal welfare standards. Mr Breitmeyer told us:
“We are very proud of our quality and our high standards of animal welfare. There is significant difficulty in making sure that that is taken into account when it comes to any import deals that are done around the world, such that we are not undercut by cheaper food that is not of the same quality standards.”234
141.For this reason, NFU Scotland told us that “a consistent approach must be adopted which requires potential trade partners to produce to certain standards so that the UK’s very high animal welfare and traceability standards are not undermined”.235 Sustain agreed: “We must maintain and enhance the high animal welfare standards in the UK for consumer acceptance, biosecurity and on moral grounds. We must not cut standards to facilitate new trade deals.”236
142.Witnesses questioned, however, whether imports could be restricted on the basis of animal welfare. The CVO told us that “In WTO terms, animal welfare is not a legitimate barrier to trade”.237 Mr Hardwick agreed: “We will remain subject to WTO rules, which means that you cannot use methods of production as a mechanism for obstructing trade.”238
143. Compassion in World Farming disagreed: “It is commonly assumed that the WTO rules do not enable restrictions to be placed on imports on animal welfare grounds. This, however, is to ignore WTO case law of the last sixteen years.”239 They continued:
“A number of WTO Panel and Appellate Body rulings suggest that a WTO member country may be able to require imports to meet welfare standards equivalent to its own provided that there is no element of discrimination that favours domestic producers and no discrimination between different would-be exporting countries.”
144.Prof Cardwell supplied a detailed analysis of the case law, setting out the complexities associated with the rulings and the technical requirements that the UK would need to adhere to in order to restrict imports on farm animal welfare grounds in the absence of a free trade agreement. In summary, he noted:
“The extent to which WTO Members may restrict imports on the basis that they do not meet domestic animal welfare standards is an issue which remains contested … Attempts to condition imports on the basis of such concerns have not generally met with success before the WTO Dispute Settlement Body, but more detailed examination of the decisions would indicate that the door is not necessarily closed. A key factor is the need to ensure that the detailed rules which are imposed do not result in the measures being characterised as ‘protectionist’.”240
145.Conversely, the CVO pointed out that when there is a free trade agreement in place “you can choose to put common or required animal welfare standards into those free trade agreements”.241 He added: “If the UK is seeking to negotiate free trade agreements you can definitely put animal welfare on the table.”242 Prof Swinbank concurred: “Within the framework of a free trade area, you may have an agreement that certain animal welfare standards are kept and only products that meet those can circulate within that free trade area.”243 Compassion in World Farming insisted that “it is vital that when negotiating new trade agreements, the UK insists on the inclusion of a clause permitting it to require imports to meet UK animal welfare standards”.244
Conclusions and recommendations
146.The EU is the UK’s biggest trading partner for agricultural and food products. The evidence suggests that, for a considerable period of time, it will not be possible to off-set this trade by increased trade with third countries or by expansion of domestic markets.
147.As an EU Member State, the UK has access to preferential trade agreements with a number of third countries. As we have concluded in successive reports, we doubt that UK participation in these agreements can be preserved after Brexit. It is essential therefore that the Government should, as a matter of urgency, clarify whether or not such agreements could indeed be grandfathered to preserve preferential trade arrangements for agri-food products.
148.Our witnesses were concerned that increased trade with third countries that operate different—often less stringent—regulatory standards than the UK could render UK producers uncompetitive in the domestic market due to an influx of cheaper products produced to lower standards.
149.It could also lead to increased pressure on the Government to reduce standards domestically in order to lower the cost of production and increase price competitiveness. Yet we note that UK producers are proud of their high standards, and that our witnesses questioned whether consumers would welcome such a downward trend in current standards.
150.In looking to expand trade in the longer term with third countries, such as China, we also heard that high standards were crucial to the British brand. The Government should therefore maintain the current standards to enable the export of UK food and farming products.
151.We welcome the Government’s commitment to maintaining high levels of animal welfare in the UK. There is some doubt over whether animal welfare can be used as a rationale to restrict imports from other countries under WTO rules. However, we encourage the Government to secure the inclusion of high farm animal welfare standards in any free trade agreements it negotiates after Brexit.
152.In developing new trading relations with the EU and the world, the Government will need to balance the sometimes conflicting needs and expectations of farmers, consumers and trading partners with respect to quality and costs.
153.It may be hard to reconcile the Government’s wish for the UK to become a global leader in free trade with its desire to maintain high quality standards for agri-food products within the UK. Striking this balance will require extensive consultation with both industry and stakeholders. We note that it will be challenging to complete such a consultation in the two-year period set out by Article 50.
Transitional arrangements
154.The doubts over whether the EU and the UK could reach agreement on a comprehensive free trade agreement within the two year period set out by Article 50 TEU have been widely rehearsed, as has the desirability of a transitional arrangement to bridge the gap between Brexit and the conclusion of an FTA.245 DAERA, for instance, urged that “significant thought” should be given to “the nature and duration of transition arrangements when it comes to trade.”246 Mr Dunn also argued that “we do need to ensure that we have a transitional agreement”, which should include “reciprocal access to the EU market on a free basis, as we have today, for a period of years while we negotiate a bespoke trade deal for the long term.”247
155.Mr Wright told us that from the perspective of the food and drinks sector: “It is really important that we do not have some kind of shock on 1 April 2019, or whenever the leave date is.”248 In his opinion, “Two years from now is not a long time in many business planning cycles, so the level of uncertainty about what that might mean is very important.” The FUW believed that “a transition period of ten years should be agreed, despite the political difficulties this may cause”.249
Conclusions and recommendations
156.Despite the regulatory conformity between the UK and the EU, there is broad consensus among experts—including those on the EU side—that it will not be possible to negotiate and conclude a comprehensive free trade agreement with the EU within two years. It is therefore essential that the Government should agree transitional arrangements with the EU, in order to mitigate the potentially disastrous effects of trading on WTO terms on the agricultural and food sectors.
157.In our report on Brexit: trade in goods we concluded that it was “critical that the Government considers negotiating access to the EU’s preferential trade arrangements with third countries for a transitional period”. We reiterate that conclusion: the fact that the UK may not be able to grandfather existing FTAs with third countries makes it all the more important, particularly to the agri-food sector, that there should be a phased transition, so as to allow time for the UK to negotiate new FTAs with third countries.
39 Department for Environment, Food and Rural Affairs, Agriculture in the United Kingdom 2015, (May 2016), p 84: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/557993/AUK–2015–05oct16.pdf [accessed 20 April 2017]. These figures are for a wider sector than was considered by our recent report Brexit: trade in goods, which considered food and non-alcoholic beverages only.
40 Examples of lightly processed foods are meat, cheese and butter, powdered milk, flour and sugar. Highly processed products include confectionery, canned meats, jams, alcoholic drinks and ice cream.
41 This includes manufactured goods and processed and unprocessed ingredients.
42 Food and Drink Federation, ‘UK-EU food and drink statistics’, (July 2016): https://www.fdf.org.uk/eu–referendum–food–drink–statistics.aspx [accessed 24 April 2017]
44 A ‘customs union’ refers to an agreement between countries to remove tariffs and restrictions on the movement of goods within their borders, and to agree a common external tariff for all goods imported from countries outside their borders. European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 20
45 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 12 and Article 3(1)(e) and Article 207 Treaty on the Functioning of the European Union, OJ C 326 (consolidated version of 26 October 2012).
46 Goods imported into the EU also need to follow ‘rules of origin’, which determine where a product and its components were produced in order to ensure that the correct customs duty is levied. European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), p 28
47 Prime Minister Theresa May, Speech on the Government’s negotiating objectives for exiting the EU, 17 January 2017: https://www.gov.uk/government/speeches/the–governments–negotiating–objectives–for–exiting–the–eu–pm–speech [accessed 20 April 2017]
48 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
49 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)
50 The WTO has 164 member countries, which together account for 95% of world trade. European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), p 51
51 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Agriculture (2014), p 17: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/335026/agriculture–final–report.pdf [accessed 19 April 2017]
52 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), p 52
53 Export competition, that is export support, has been reduced over time. World Trade Organization, Legal texts: the WTO agreements (2017): https://www.wto.org/english/docs_e/legal_e/ursum_e.htm#aAgreement [accessed 20 April 2017]
54 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 172
56 Articles 3 and 4, World Trade Organization, Agreement on Agriculture (2017): https://www.wto.org/english/docs_e/legal_e/14–ag_01_e.htm#articleIII [accessed 20 April 2014]
58 Known as an ad valorem tariff. World Bank, ‘Forms of Import Tariffs’ (2010): http://wits.worldbank.org/WITS/WITS/WITSHELP/Content/Data_Retrieval/P/Intro/C2.Forms_of_Import_Tariffs.htm [accessed 20 April 2017]
59 Most countries use a nomenclature comprising about 5000 commodity groups to list the different products. The nomenclature is referred to as the Harmonised System and is maintained by the World Customs Organization.
60 Members of the WTO provide information regarding their bound tariffs in their goods schedules. However, they are able to provide more favourable applied tariffs if this is done on an MFN basis.
61 World Trade Organization, ‘Principles of the trading system’ (2017): https://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm#seebox [accessed 20 April 2017]
62 WTO members can form a customs union. The EU is an example of this. 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. European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
63 WTO members can negotiate an FTA. In the case of the EU, this includes third country FTAs (such as that between the EU and South Korea), Switzerland’s bilateral agreements with the EU, and the European Economic Area (which brings together the EU Member States, Norway, Iceland and Liechtenstein). Article XXIV: 8: World Trade Organisation, General Agreement on Tariffs and Trade 1994, (2017): https://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_09_e.htm [accessed 20 April 2017]. We note that the European Economic Area is treated as a free trade agreement under WTO rules.
64 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Trade and Investment (February 2014), p 45: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/279322/bis_14_591_balance_of_competences_review_Trade_and_investment_government_response_to_the_call_for_evidence.pdf [accessed 21 April 2017]
65 Oral evidence taken before the EU External Affairs Sub-Committee, 8 February 2017 (Session 2016–17), Q 122
66 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), para 122
67 Written evidence submitted to the European Union Committee, 4 March 2017 (Session 2016–17), DEV0019 (Lord Forsyth of Drumlean)
68 Rt Hon Owen Paterson MP, UK Agricultural Policy Post-Brexit, All Souls College, Oxford University, (January 2017): https://www.owenpaterson.org/sites/www.owenpaterson.org/files/2017–04/UK%202020%20Agricultural%20Policy%20Post–Brexit.pdf [accessed 21 April 2017]
69 Ryan Bourne, ‘Brexit could slash food prices — but only if we make it a free market Brexit’, blog for the Institute of Economic Affairs (18 October 2016): https://iea.org.uk/brexit–could–slash–food–prices–but–only–if–we–make–it–a–free–market–brexit [accessed 21 April 2017]
79 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 177
80 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 178
81 Written evidence submitted to the EU External Affairs Sub-Committee, 17 October 2016 (Session 2016–17), ETG0005 (Peter Ungphakorn)
82 Some tariff rate quotas can be shared in specific amounts by a fixed number of countries, whereas others are open to any country that meets the import criteria. In the latter case, shares of the TRQs are allocated to the eligible countries on a non-discriminatory, ‘first come first served’ basis. Some tariff rate quotas may be a hybrid. Peter Ungphakorn, ‘The Hilton Beef Quota: a taste of what post-BREXIT UK faces in the WTO’, Trade ß Blog (10 August 2016: https://tradebetablog.wordpress.com/2016/08/10/hilton–beef–quota/ [accessed 26 April 2017]
83 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), paras 178–179
86 A country’s schedules can be amended either through rectification or modification. Rectification is possible for amendments that do not alter the scope of concession, while modification implies a substantive change. However, this is not an uncontroversial process. European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), paras 173 and 188
95 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
98 Tariff rate quotas were introduced by the WTO Agreement on Agriculture to maintain existing access levels for agricultural imports and to guarantee minimum access opportunities. This was in response to the conversion of non-tariff barriers on agricultural products into tariffs (“tariffication”). Under the General Agreement on Tariffs and Trade (GATT) TRQs can be put in place as a “compensatory adjustment” to the terms on which two (or more) WTO members trade following a finding of a WTO dispute settlement panel: see World Trade Organization, European Union-Measures Affecting Tariff Concessions on Certain Poultry Meat Products, WT/DS492/R (March 2017)
99 The UK has been a signatory to the General Agreement on Tariffs and Trade (GATT) since 1948. It was the predecessor to the WTO, which was established in 1995. World Trade Organization, The GATT years: from Havana to Marrakesh (2017): https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm [accessed 21 April 2017]
106 L. Madureira, J. Lima Santos, A. Ferreira et al, Feasibility Study on the Valuation of Public Goods and Externalities in EU Agriculture (JRC Scientific and Policy Reports, European Commission, 2013) 14.
120 Q 6. Prof Alan Swinbank explained that the direct payments made to farmers under the CAP are currently considered to fall within the Green Box, though some have questioned whether they should be Amber Box instead. He added that no-one has challenged the EU on this matter in the past because of its large allowance.
122 The priorities for a new EU arrangement on food and beverages and for new FTAs with non-EU countries were discussed in our report Brexit: trade in goods.
128 Written evidence from Peter Ungphakorn (ABR0001) also mentioned “the trade-off with UK producers in other sectors (such as services) wanting access to the other countries’ markets, which might entail opening up UK agriculture.” However, this is beyond the scope of this report and will not be considered in detail.
136 Oral evidence taken before the European Union Select Committee, 1 February 2017 (Session 2016–17), Q 49
140 Written evidence from Scottish Land & Estates (ABR0032), see also further supplementary written evidence from AHDB (ABR0040) and Q 28 (Tim Breitmeyer)
151 This issue is discussed in detail in our reports European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72) and European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129).
154 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)
155 Articles 24–36, Treaty on the Functioning of the European Union, OJ C 326 (consolidated version of 26 October 2012)
156 A taxonomy of non-tariff measures was developed under the leadership of UNCTAD. United Nations Conference on Trade and Development, International Classification of Non-Tariff Measures (2012), p 3: http://unctad.org/en/PublicationsLibrary/ditctab20122_en.pdf [accessed 21 April 2017]. We consider ‘rules of origin’ in detail in our report European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), pp 44–45
157 Agriculture & Horticulture Development Board, What might Brexit mean for UK trade in agricultural products? (October 2016), p 7: http://www.ahdb.org.uk/documents/Horizon_Brexit_Analysis_Report–Oct2016.pdf [accessed 21 April 2017]
162 European Commission, Keynote Address by Commissioner Phil Hogan at the 73rd FNPL Congress in Langres, France (March 2017): https://ec.europa.eu/commission/commissioners/2014–2019/hogan/announcements/keynote–address–commissioner–phil–hogan–73rd–fnpl–congress–langres–france–16th–march–2017_en [accessed 5 April 2017]
163 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), para 182
165 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), para 226
171 For a more detailed analysis of rules of origin, please European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)
176 GIs are a form of intellectual property right in the same way as a patent, copyright or a trademark. There are three types of geographical indicators (GIs) for agri-food products in the EU: the Protected Designation of Origin (PDO) and the Protected Geographical Indication (PGI) both require a specific link to the region where the product comes from, while the Traditional Speciality Guaranteed (TSG) highlights a traditional production process. European Commission, ‘EU quality logos’, (2017): http://ec.europa.eu/agriculture/quality/schemes_en [accessed 21 April 2017]
177 Under Council Regulation (EC) No 510/2006 of 20 March 2006 on the protection of geographical indications and designations of origin for agricultural products and foodstuffs OJ L 93/12 (31 March 2006) food and agricultural manufacturers can register products that are linked to a specific geographical area, have been produced according to traditional methods, and/or include specific ingredients to obtain given legal protection (for example, ‘Scottish Beef’). The EU’s system of intellectual property protection is administered and regulated by the EU’s Intellectual Property Agency in Alicante the EUIPO.
178 European Commission, ‘E-Spirit-Drinks’, (January 2012): http://ec.europa.eu/agriculture/spirits/index.cfm?event=searchIndication [accessed 21 April 2017]
179 Agriculture & Horticulture Development Board, The impact of Brexit on protected food names (December 2016), p 9: http://www.ahdb.org.uk/documents/Horizon_Brexit_Analysis_Report_GI_Highres_06December2016.pdf [accessed 21 April 2017]
186 Q 29 (Tim Breitmeyer, George Dunn), supplementary written evidence from Food and Drink Federation (ABR0044) and written evidence from Farmers’ Union of Wales (ABR0045)
187 This issue is also considered in our report European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129).
193 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), para 231
196 Q 31 and International Trade Committee, UK trade options beyond 2019 (First Report, Session 2016–17, HC 817)
198 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), para 168
199 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), p 5 (Summary)
219 Oral evidence taken before European Union Select Committee, 6 March 2017 (Session 2016–17), Q 107
230 The Appellate Body is part of the WTO dispute settlement system.
232 European Commission, Keynote Address by Commissioner Phil Hogan at the 73rd FNPL Congress in Langres, France (March 2017): https://ec.europa.eu/commission/commissioners/2014–2019/hogan/announcements/keynote–address–commissioner–phil–hogan–73rd–fnpl–congress–langres–france–16th–march–2017_en [accessed 5 April 2017]
245 See European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)