Strategies for Post-Brexit UK International Agricultural Trade Relations

Vincent H. Smith and Ryan Nabil APRIL 2018

AMERICAN ENTERPRISE INSTITUTE Executive Summary

s the United Kingdom and the European Union relations with non-EU countries. If the UK decides Anegotiate future trading relations, bilateral nego- to abandon its current EU customs union arrange- tiations are likely to prominently feature agricultural ment, the UK government must also develop a com- trade. Currently, the UK’s EU membership provides prehensive international trade strategy. In this paper, the framework for Britain’s trading relations with the we discuss the prospects of trade agreements with EU and the rest of the world. Following Brexit, the UK four countries—the United States, Canada, Austra- government appears to have five major options for lia, and New Zealand—which have already expressed its future international trade relations with the EU: interest in signing trade agreements with the UK. agreements based on the EU’s current arrangements Trade agreements with these countries, along with with Norway, Switzerland, Turkey, or Canada or trad- the EU, would cover more than 75 percent of the ing under World Trade Organization rules. UK’s overall agricultural trade. With these agree­ These arrangements present different degrees ments in place, the UK could be well positioned to of integration within the EU single market, as well leave the EU single market and customs union after as varying degrees of autonomy regarding the UK’s the Brexit transition period ends on December­ 31, domestic agricultural policies and the country’s trade 2020.

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Strategies for Post-Brexit UK International Agricultural Trade Relations

Vincent H. Smith and Ryan Nabil

he United Kingdom and the European Union com- on the final agreement regarding the UK’s relationship Tpleted an initial Brexit framework on December 7, with the EU, the UK might be able to sign separate 2017, paving the way for negotiations on agricultural trade agreements with non-EU countries. However, trade and policy issues between the two parties.1 Addi- British and European farmers might also face higher tionally, on March 19, 2018, Westminster and Brussels tariff and nontariff barriers to bilateral agricultural agreed on a Brexit transition period that would end trade, an outcome that depends on the structure of on December 31, 2020. Until then, the UK will remain any UK-EU agreement. part of the EU single market and customs union.2 Fol- Beyond the UK’s international agricultural trad- lowing the end of this transition period, the UK will ing relations, Brexit is likely to affect British farmers’ face several challenges concerning its agricultural incomes measurably and in complex ways because trade relationships with EU and non-EU countries. of possible changes in domestic policies. In particu- Since the early 1970s, membership in the EU has lar, the CAP has played an important role in providing shaped British agricultural policy in three import- financial support to British farmers since 1971. Cur- ant ways: by incorporating the UK agricultural sec- rently, CAP payments account for between 50 and tor into the EU food supply, providing price supports 60 percent of total farm incomes in the UK.3 Despite and income to British farmers through the common the price and income supports that British farmers agricultural policy (CAP), and assuring a reliable sup- receive under the CAP financing rules, the UK is a ply of low-skilled labor to the UK agricultural sector. major net contributor to the CAP payment scheme. Through the EU single market and customs union, The current CAP payment framework is scheduled to the EU provides the framework for the UK’s trade expire in 2020, after which the UK government will in agricultural products, both within and beyond the have the option of introducing new farm payment 27 EU member countries. Further, the EU is currently programs for its agricultural sector or abandoning the UK’s largest agricultural trading partner. If the UK such programs altogether. decides to abandon the customs union component of its current EU membership, the UK will have to rene- Overview of UK Agricultural Trading gotiate terms of agricultural trade with both EU and Relation non-EU countries. In this context, the UK has several options, includ- As has been the case since the end of World War II, ing Norway-, Switzerland-, Canada-, or Turkey-style food imports are a central component of the UK food arrangements with the EU or trading under current supply chain. In 2016, the UK produced only 49 per- World Trade Organization (WTO) rules. Depending cent of the total value of food consumed in the UK

3 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Figure 1. Sources of Food Consumed in the UK, 2016

Rest of Europe 2% Australasia 1% South America Nort h America 4% 4% Asia 4% Africa 5%

49% UK

30% EU

Source: Department for Environment, Food and Rural Affairs, “Food Statistics in Your Pocket 2017—Global and UK Supply,” Novem- ber 14, 2017, https://www.gov.uk/government/publications/food-statistics-pocketbook-2017/food-statistics-in-your-pocket-2017- global-and-uk-supply.

and imported the remaining 51 percent (Figure 1).4 The EU accounted for £18.4 billion ($25.9 billion) International trade in agriculture, especially with EU in annual deficits with the UK, while the rest of member countries, is clearly important to the BritAm- ericaAmtheer worldicaEuro peaccounted for the remaining £4.3 billion ish food supply chain. In 2016, the EU accounted for ($6.1 billion) (Figure 3).7 30 percent of UK food supply, while Asia, Africa, Aus- The UK’s trade in agricultural goods is dominated tralasia, North America, South America, and the rest by the EU, which accounts for 61 percent of the total of Europe each accounted for between 1 and 5 percent value of UK agricultural exports and 71 percent of the of UK food supply.5 total value of UK agricultural imports.8 EU countries Given the relatively small size of the UK agri- account for seven of the top 10 exporters of agricul- culture sector and the relatively large size of the tural goods to the UK and nine of the top 10 import- country’s population, the UK is a net importer of ers of UK agricultural goods (Figures 4 and 5). In agricultural products. In 2017, the value of food, bev- terms of the value of goods, the Netherlands, Ire- erages, and animal feed exports from the UK was land, France, Germany, and Spain are the five larg- £21.5 billion ($30.3 billion), while UK imports of food, est exporters of agricultural commodities to the UK, beverages, and animal feed products amounted to while the Netherlands, France, Ireland, Germany, £44.2 billion ($62.3 billion), yielding an agricultural and Spain are the five largest importers of UK agri- trade deficit of £22.7 billion ($32.0 billion) (Figure 2).6 cultural products.

4 VINCENT H. SMITH AND RYAN NABIL

Figure 2. UK Exports and Imports in Food, Beverages, and Animal Feed Products, 1948–2017

£50

£45

£40

£35 Imports (£m)

£30

£25 Billions £20

£15

£10 Exports (£m) £5

£0 48 56 60 12 16 952 964 968 972 976 980 984 988 992 996 19 1 19 19 1 1 1 1 1 1 1 1 1 2000 2004 2008 20 20 Source: Department for Environment, Food and Rural Affairs, “Agriculture in the UK,” May 25, 2017, https://www.gov.uk/government/ collections/agriculture-in-the-united-kingdom.

Figure 3. UK Exports and Imports in Food, Beverages, and Animal Feed Products, 2017

£35

£30

£25

£20 Billions £15

£10

£5

£0 Exports Imports EU Non-EU

Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Table.aspx.

5 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Figure 4. UK Exports of Food, Beverages, and Animal Feed Products by Country of Destination, 2016

Ireland

United States

France

Netherland s

Germany

Spain

Belgium

Italy

China

Hong Kong

0% 2% 4% 6% 8% 10%12% 14%16% 18%

Source: Department of Environment, Food and Rural Affairs, “Agriculture in the United Kingdom Data Sets,” January 12, 2018, https:// www.gov.uk/government/statistical-data-sets/agriculture-in-the-united-kingdom.

Figure 5. UK Imports of Food, Beverages, and Animal Feed Products by Country of Dispatch, 2016

Netherland s

France

Ireland

Germany

Spain

Italy

Belgium

Poland

Denmark

United States

0% 2% 4% 6% 8% 10%12% 14%

Source: Department of Environment, Food and Rural Affairs, “Agriculture in the United Kingdom Data Sets,” January 12, 2018, https:// www.gov.uk/government/statistical-data-sets/agriculture-in-the-united-kingdom.

6 VINCENT H. SMITH AND RYAN NABIL

Major Exports and Imports. The UK’s main agri- agricultural producers since WTO tariffs for agri- cultural exports include beverages, cereals, meat cultural products are substantial. In fact, agricul- products, fish, and dairy products (Figure 6). In 2016, tural products imported from non-EU countries cereals, meat products, fish, beverages, and dairy feature prominently among commodities facing the products accounted for 68.3 percent of the total value highest EU tariffs. Without a UK-EU trade agree- of UK agricultural exports.9 Conversely, fruits and ment, the EU would apply estimated weighted aver- vegetables, meat products, beverages, cereals, cof- age tariff rates of 43.7 percent on imports of tobacco fee, and tea are the UK’s primary agricultural imports products, 39.4 percent on imports of dairy prod- (Figure 7), accounting for 67.5 percent of the total ucts, and 37.8 percent on imports of meat products. value of UK agricultural imports.10 (Table 1). Because of such high tariffs, agricultural sectors—such as dairy and meat industries—would be among the sectors facing substantial losses if the Current Trading Arrangement with the EU UK and EU were to apply tariffs onUK-EU trade in agricultural goods (Table 2). Since the UK is a member of the EU single mar- While the EU single market membership allows ket, UK producers can export goods and services British producers tariff- and quota-free access to EU to any EU country without facing tariffs or quo- markets, this membership comes at a price. In 2016, tas. Similarly, farmers in other EU countries can the UK’s net contribution of £8.6 billion ($12.1 bil- export products to the UK free of tariffs and quota lion) to the EU budget made the UK the third-largest restrictions. Such access is especially important for net contributor to the EU budget, after France and

Figure 6. Shares of Total UK Agricultural Exports by Class of Product, 2010–17

Beverages

Cereals

Meat Products

Fish

Miscellaneous

Dairy Products

Coffee,Tea, etc.

Fruits and Vegetables

Animal Feed

Sugar

Tobacco

0% 2% 4% 6% 8% 10%12% 14%16% 18% EU Non-EU

Source: Department of Environment, Food and Rural Affairs, “Agriculture in the United Kingdom Data Sets,” January 12, 2018, https:// www.gov.uk/government/statistical-data-sets/agriculture-in-the-united-kingdom.

7 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Figure 7. Shares of Total UK Agricultural Imports by Class of Product, 2010–17

Fruits and Vegetables

Meat Products

Beverages

Cereals

Coffee, Tea, etc.

Dairy

Miscellaneous

Fish

Animal Feed

Sugar

Tobacco

0% 5% 10%15% 20%25% EU Non- EU Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Table.aspx.

Table 1. 10 Biggest Losers by Percentage: UK and EU Industries Facing the Most Tariffs, 2015 (Weighted Percentage)

Average Average UK Exporters of: Tariff Rate EU Exporters of: Tariff Rate

1 Tobacco and manufactured tobacco 1 Dairy products 39.9% substitutes 43.7% 2 Preparations of meat or fish 39.9% 2 Tobacco and manufactured tobacco substitutes 39.5% 3 Dairy products 39.4% 3 Meat products 32.3% 4 Meat products 37.8% 4 Preparations of meat or fish 31.8% 5 Sugars and sugar confectionery 31.6% 5 Sugars and sugar confectionery 30.2% 6 Products of milling (flour, etc.) 25.5% 6 Products of milling (flour, etc.) 35.2% 7 Cereals 23.9% 7 Preparations of vegetables and other parts of plants 19.7% 8 Residues and waste from the food 8 Waste from food industries and industries 22.8% animal fodder 18.4% 9 Preparations of vegetables and other 9 Vegetables 15.1% parts of plants 17.7% 10 Preparations of cereals 12.7% 10 Animal or vegetable fats and oils 14.8%

Source: Justin Protts, “Potential Post-Brexit Tariff Costs for UK-EU Trade,” Civitas, October 2016, http://www.civitas.org.uk/content/ files/potentialpostbrexittariffcostsforeuuktrade.pdf.

8 VINCENT H. SMITH AND RYAN NABIL

Table 2. 10 Biggest Losers by Value: UK and EU Industries Facing the Most Tariffs, 2015 (£, Millions)

Tariff Tariff UK Exporters of: Estimate EU Exporters of: Estimate

1 Vehicles (including parts and 1 Vehicles (including parts and accessories) £1,348 accessories) £3,896 2 Meat products £378 2 Meat products £1,023 3 Dairy products £331 3 Dairy products £956 4 Plastics and plastic products £286 4 Preparations of meat or fish £563 5 Nuclear reactors, boilers, and 5 Plastic and plastic products £498 mechanical appliances £210 6 Mineral fuels, oils, and other products £167 6 Electrical machinery and equipment (including parts) £477 7 Preparations of meat or fish £154 7 Preparation of vegetables and other parts of plants £372 8 Electrical machinery and equipment 8 Nuclear reactors, boilers, and (including parts) £144 mechanical appliances £366 9 Organic chemicals £134 9 Vegetables £326 10 Waste from food industries and 10 Preparation of cereals £303 animal fodder £123

Source: Justin Protts, “Potential Post-Brexit Tariff Costs for UK-EU Trade,” Civitas, October 2016, http://www.civitas.org.uk/content/ files/potentialpostbrexittariffcostsforeuuktrade.pdf.

Germany.11 The UK is also required to comply with country is the destination for their exports. The com- EU product standards, food safety, labor, and energy mon external tariff results in trade diversion—that is, regulations, which impose significant regulatory when a source is not a member of the customs union, costs on the UK economy.12 The five costliest regula- a customs union member will often obtain imports tions are the Renewable Energy Strategy, the Capital from another member instead of from the lowest Requirements Directive IV, Working Time Directive, cost source of the commodity. For example, when Climate and Energy Package, and Temporary Agency the UK joined the EU, the UK substantially reduced Workers Directive, which are estimated to cost the imports of lamb, grain, and dairy products from coun- UK economy £19 billion a year.13 While the UK’s EU tries such as Australia, Canada, New Zealand, and the membership minimizes barriers to UK-EU trade, the United States that were lower cost suppliers than EU accompanying regulations are nevertheless costly, member countries. The trade diversion effects are with the top 100 EU directives estimated to cost the reflected in the shift that occurred in the UK’s total UK roughly £33.3 billion ($47.0 billion) annually.14 volume of agricultural trade with the EU and former Under current arrangements with the EU, the UK is Commonwealth countries (and the United States), effectively part of an EU customs union area, through which declined in preparation for and after the UK’s which EU countries apply a common tariff struc- entry into the European Economic Community in ture to trade with non-EU members. Non-EU coun- 1973 (Figures 8 and 9). tries face the same tariff rates regardless of which EU

9 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Figure 8. UK Exports from EU and Commonwealth Member Countries Plus the United States, 1961–2016

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 1960 1970 1980 1990 20002010 Exports to EU as Exports to US, Canada, Entry European Economic Percentage of Total Australia, New Zealand, Community 1973 South Africa, Singapore, and India as Percentage of Total Source: International Monetary Fund, “Exports and Imports by Areas and Countries,” http://data.imf.org/regular.aspx?key=61013712.

Figure 9. UK Imports from EU Commonwealth Member Countries Plus the United States, 1961–2016

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 1960 1970 1980 1990 20002010

Exports to EU as Exports to US, Canada, Entry European Economic Percentage of Total Australia, New Zealand, Community 1973 South Africa, Singapore, and India as Percentage of Total

Source: International Monetary Fund, “Exports and Imports by Areas and Countries,” http://data.imf.org/regular.aspx?key=61013712. 10 VINCENT H. SMITH AND RYAN NABIL

Post-Brexit Trade Agreement Options for similar to Norway-, Turkey-, Switzerland-, or Canada- the UK style arrangements with the EU or simply trad- ing under existing WTO rules. Under the Norwe- As the UK negotiates post-Brexit agricultural trade gian model, the UK would retain membership of the relationships with the EU, the British government European Economic Area (EEA) but would be free appears to have five options: signing trade agreements to establish its own agricultural policies and sign

Table 3. Comparison Between Five Post-Brexit Trade Arrangements

The Swiss The Cana- The Norwe- The Singapore EU Model: A The Turkish Model: dian Model: gian Model: Model: Trading Member- Series of Customs Union Bilateral Trade EEA Mem- Under WTO ship Bilateral with the EU Agreement bership Rules Agreements with the EU EU Member Yes No No No No No Possible, not Possible, not Possible, not EFTA Member No Yes Yes mandatory mandatory mandatory Party to the EEA Yes Yes No No No No Agreement 83 percent of Turkey receives 40 percent of the current funding under the the current per capita UK Instrument for Pre- per capita UK contribution Accession Assistance contribution level; Post- II framework,16 which Net Contribu- £8.5 billion level; Post- rebate: the UK is unlikely tion to the EU ($12.0 rebate: None None £3.4 billion to receive; Whether Budget billion)15 £7.1 billion ($4.8 billion); the UK would have ($7.3 billion);17 Pre-rebate: to contribute to the Pre-rebate: £5.2 billion EU budget remains £10.7 billion ($7.3 bil- subject to future ($15.1 billion)19 lion)18 negotiations Free Move- ment of People Between the UK Yes Yes Yes No No No and EU Member Countries EU MFN rate: Weighted aver- Roughly 90 per- age tariff rates of No tariffs for pro- Tariffs Faced by Tariffs for Tariffs for cent of tariffs on 39.4 percent for cessed agricultural UK Agricultural several several agricultural prod- dairy products, No tariffs goods; EU MFN rate Exports to the agricultural agricultural ucts eliminated; 37.8 percent for non-processed EU products products Several products for meat, and agricultural goods not covered 31.6 percent for sugar and sugar confectionery20

(continued on the next page)

11 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Table 3. Comparison Between Five Post-Brexit Trade Arrangements (continued)

The Swiss The Cana- The Norwe- The Singapore EU Model: A The Turkish Model: dian Model: gian Model: Model: Trading Member- Series of Customs Union Bilateral Trade EEA Mem- Under WTO ship Bilateral with the EU Agreement bership Rules Agreements with the EU MFN rate: Weighted average tariff rates of 39.9 Roughly 90 per- percent for dairy No tariffs for pro- Tariffs Faced Tariffs for Tariffs for cent of tariffs on products, 32.3 cessed agricultural by Agricultural several several agricultural prod- percent for meat, No tariffs goods; MFN rate for Imports to the agricultural agricultural ucts eliminated; 30.2 percent for non-processed UK products products Several products sugar and sugar agricultural goods not covered confectionery; Reduced or zero tariff in case of unilateral liberal- ization Rules of Origin No Yes Yes No Yes Yes Costs Compliance with EU Product Standards for Yes Yes Yes Yes Yes Yes Exports to the EU Compliance with EU Product Yes, but not for Standards for non-processed UK Domestic Yes Yes Yes agricultural products No No Production (excluded from the and Non-EU agreement) Exports21 Yes, but the Yes, but the Ability to UK might be UK might be Sign Trade No, Turkey is obliged constrained constrained by Agreements No to sign trade agree- Yes Yes by compliance compliance with with Non-EU ments as the EU with EU prod- EU product stan- Countries uct standards dards The UK free to The UK free to The UK free to set The UK free to The UK free to The UK set its domes- set its domes- its domestic price set its domes- set its domes- required to tic price and tic price and and income support tic price and tic price and UK Agricultural comply with income sup- income support programs within WTO income support income support Subsidies the EU CAP port programs programs within framework programs within programs within framework within WTO WTO framework WTO framework WTO framework framework

Source: Authors using data from Civitas, House of Commons Library, London School of Economics Centre for Economic Performance, Open Europe, National Farmers Union, and World Trade Organization.

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separate trade agreements with non-EU countries. and energy, which is likely to be politically controver- According to the Swiss model, the UK would not sial.22 Furthermore, like other non-EU members of the be part of the EU or EEA but would remain part of EEA—Iceland, Liechtenstein, and Norway—the UK the European Free Trade Area (EFTA) and be free would have no direct influence in shaping regulations to sign trade agreements with non-EU countries. If that would affect British agriculture. The UK would the UK adopted the Canadian model, the UK would also remain subject to the rulings of the European Free be required to establish a trade agreement similar Trade Association Court, which takes into account the to the Comprehensive Economic and Trade Agree- European Court of Justice rulings.23 In addition, the ment (CETA) between Canada and the EU. Finally, UK would still have to make annual contributions to upon exit from the EU, the UK can develop trading the EU budget. Although Norway is not an EU mem- relationships with the EU and other countries under ber, Norway still contributes roughly 83 percent of the existing WTO rules. Under WTO rules, each member UK’s current level of annual contributions to the EU state grants another the most favored nation (MFN) budget on a per capita basis.24 Whether the UK would status, which means that each WTO member must pay a similar amount following Brexit remains unclear receive the tariffs granted to the most favored trading and would be subject to negotiations. partner. Each of these models are discussed in Table 3. The Swiss Model: A Series of Bilateral Agree- The Norwegian Model: EEA Membership. The ments. Under the Swiss model, the UK would not Norwegian model provides the softest form of Brexit. remain a part of the EU or the EEA but join the EFTA Under this arrangement, the UK would leave the EU, and negotiate a series of bilateral trade agreements retain membership of the EEA, and join the EFTA. with the EU. Under the Swiss model, as with the Nor- As an EEA member, Norway has full access to the wegian model, the UK would be free to negotiate EU single market except in agriculture and fisheries. trade agreements with non-EU countries and estab- However, under its current arrangement with the EU, lish its own domestic agricultural policies.25 Further- Norway enjoys tariff-free access to the EU single mar- more, this arrangement would potentially be cheaper ket in 36 agricultural products, as well as generous than a Norway-style arrangement. Whereas Norway tariff-free quotas on several other agro-food exports, pays roughly 83 percent of the UK’s current level of including meat and dairy products. The extent to annual contributions to the EU budget, Switzerland which the UK would have access to the EU single pays only 40 percent of the UK’s contributions on a market in agriculture under a similar arrangement per capita basis.26 remains subject to further negotiations. Despite the benefits of aSwitzerland-style arrange- In addition to providing partial access to the sin- ment, such an agreement would pose several chal- gle market, a Norway-style arrangement would not lenges for the UK. First, compared to a Norway-style require the UK to implement the EU’s CAP after its arrangement, the Swiss model provides relatively less expiration in 2020, providing the UK the freedom comprehensive access to the EU single market. For to keep or change current EU membership levels of instance, trade in several agricultural commodities income support provided to farmers. Since the UK and processed products is subject to significant tar- would not remain part of the EU customs union under iff and nontariff barriers.27 Even more importantly, this arrangement, the UK would be free to negotiate the Switzerland-EU trade agreement does not provide separate trade agreements with other countries. Switzerland access to the EU single market in services. However, the Norwegian model would pose sev- In particular, Swiss financial institutions lack passport eral challenges to the UK. As an EEA member, the UK rights to the EU, meaning that Swiss banks must set would be required to accept free movement of labor up EU or EEA subsidiaries to conduct business in the between the UK and EU member countries and EU EU. Further, several attempts by Switzerland to secure regulations in employment, production standards, passporting rights for its banks have already failed.28

13 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Given the importance of financial services to the UK a similar agreement, the EU and the UK would have economy, such an outcome will likely be unpopular to remove tariff and nontariff barriers to trade in with the British government and businesses. non-processed agricultural commodities.31 Addition- Furthermore, in exchange for access to the sin- ally, the EU-Turkey agreement is designed for the even- gle market, Switzerland has to accept EU regulations tual accession of Turkey to the EU. As a result, instead and free movement of labor between Switzerland of contributing funds to the EU budget, as a potential and EU member countries, which has proved politi- EU member, Turkey receives funding under the Instru- cally controversial among the Swiss. Under a similar ment for Pre-accession Assistance Regulation frame- arrangement, the UK would also have to accept EU work,32 an outcome that would not be available for the regulations without directly influencing those regu- UK. As such, whether the UK would contribute to the lations, which might prove politically controversial EU budget under a Turkey-style arrangement remains with the British government and electorate. unclear and is subject to further negotiations.

The Turkish Model: Joining the EU Customs The Canadian Model: Bilateral Trade Agree- Union. Under a Turkey-style arrangement, the UK ment with the EU. A trade agreement between the would not be a member of the EU, EEA, or EFTA but UK and the EU could also take a form similar to the would remain a member of the EU customs union, CETA between Canada and the EU. As part of CETA which would minimize the costs associated with the provisions in 2017, Canada eliminated 90.9 percent of rules of origins in UK-EU trade. Under the Turkish its tariffs for EU agricultural imports, while the EU model, the UK would be exempt from the CAP and removed 92.2 percent of tariffs for Canadian agricul- free movement of labor between the UK and the EU. tural imports.33 A CETA-style arrangement would These exemptions would accord the UK greater free- offer the UK several advantages. Under a similar dom in designing domestic agricultural and labor mar- arrangement, the UK would not be required to con- ket policies. tribute to the EU budget or accept free movement of Although the Turkish model offers certain advan- labor between the UK and EU member countries. The tages, the UK would nonetheless face several signifi- UK would still be required to comply with EU food cant challenges. First, in return for access to the EU standards for agricultural exports to the EU, but the single market, the UK would have to comply with EU UK would not have to comply with those standards regulations in food standards, industrial design, com- for domestic production or exports to non-EU coun- petition law, environment, and agricultural subsidies tries, in contrast to the requirements associated with without having any influence in setting such regula- Norway-, Turkey-, or Switzerland-style arrangements. tions.29 More importantly, as the UK would remain in The UK would also be exempt from many EU direc- the EU customs union, the UK would have to apply tives with which EEA members have to comply. Addi- the EU common external tariff to UK imports from tionally, in contrast to the Norwegian model, the non-EU countries, despite playing no role in deter- UK would not be subject to European Court of Jus- mining those tariffs.30 Further, although countries tice rulings, and, unlike a Turkey-style arrangement, covered under bilateral or multilateral trade agree- Westminster would be free to develop separate trade ments with the EU would gain access to UK markets, agreements with non-EU countries. UK exporters would not automatically have access to Notwithstanding the benefits under aCETA-style markets in those countries and might have to negoti- arrangement, such an agreement would pose several ate separate trade agreements with them. difficulties for the UK. Understandably, the CETA’s Further, the current EU-Turkey customs union design reflects the trade patterns between Canada and agreement does not lower tariff and nontariff barri- the EU, which differ from theUK-EU trade patterns. ers on agricultural commodities that have not been Pearls, precious metals, machinery and appliances, processed. To reduce agricultural trade costs under transport equipment, and mineral products—not

14 VINCENT H. SMITH AND RYAN NABIL

Table 4. Import Quota Restrictions Under EU-Canada CETA

EU Import Quota Accepted by Canada Canadian Import Quota Accepted by the EU

• Cheese: 17,000 metric tons (128 percent increase)36 • Beef: 50,000 tons (1,101 percent increase) • Bison: 3,000 tons • Pork: 80,500 tons (1,364 percent increase) • Canned sweet corn: 8,000 (at zero duty)37 • Wheat (low and medium quality): 100,000 tons (157 percent increase)

Source: Authors’ calculations adapted from M. Jean-Luc Angot et al., “Report to the Prime Minister: The Impact of the Comprehensive Economic and Trade Agreement (CETA) Between the European Union and Canada on the Environment, Climate and Health,” Food- watch, September 7, 2017, https://www.foodwatch.org/uploads/tx_abdownloads/files/France_experts_Report_CETA_impact_on_ environment_climate_health_2017_ENGLISH.pdf; and House of Commons International Trade Committee, “UK Trade Options Beyond 2019,” House of Commons, March 7, 2017, https://publications.parliament.uk/pa/cm201617/cmselect/cmintrade/817/817.pdf. financial services andagro-food products—com- that MFN tariffs must apply to all other WTO mem- prise the bulk of trade between Canada and the EU.34 bers, except when preferential market access is granted Indeed, the CETA excludes financial services alto- to developing countries or countries covered by multi- gether and fails to reduce tariff and nontariff barriers lateral or bilateral trade agreements. to trade in several agricultural products. For exam- Since the WTO places no requirements on bud- ple, under the CETA, the EU imposes a tariff rate of getary contributions or free movement of labor, the 12.8 percent on beef imports. Additionally, several UK would have no financial obligations to the EU products are subject to import quotas, though the budget or to accept free movement of labor between quantity allowed under the new quotas for several the UK and EU member countries. However, the UK of these products represents a considerable increase would lose access to the EU single market, and Brit- from past years (Table 4). However, Brussels and ish exports to the EU would most likely be subject to Ottawa consider several products—chicken, tur- the EU common external tariff andtariff-rate quo- key, and eggs—to be politically sensitive and simply tas (TRQs). Most EU tariffs on manufactured and exclude those products from the agreement.35 To other products are low, but EU tariffs are particularly reduce costs to bilateral trade, the UK and the EU high for agriculture, automobiles, and textiles. The would likely have to design a more comprehensive costs associated with such tariffs would be particu- version of a CETA-style arrangement, which would larly burdensome for trade in meat and dairy prod- take into account the more extensive patterns of ucts. For example, UK exporters of meat products to UK-EU bilateral trade in goods and services. the EU would face an estimated loss of £378 million ($533 million), while EU exporters of meat products The Singapore Model: Trading Under WTO Rules. to the UK would face a loss of £1,023 million ($1,442 If the UK fails to negotiate a satisfactory trade deal with million).40 Only the automobile sector would experi- the EU, the UK could simply resort to WTO rules for ence losses greater than the meat and dairy sectors. trading with the EU, which is established on sets of mul- British exporters of processed meat, fish, and animal tilateral rules agreed on under the General Agreement fodder and EU exporters of processed meat, fish, veg- on Trade and Tariffs (GATT) and the General Agree- etables, and vegetable products would also face signif- ment on Trade in Services (GATS).38 Under GATT and icant losses due to high tariffs. GATS, member countries must grant each other MFN In addition to tariff barriers, accessing the single status for market access.39 This arrangement stipulates market under WTO rules creates several challenges

15 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

for UK-EU bilateral trade in agricultural commodities tariff schedules with more than 160 WTO mem- and food products. First, the UK would face consid- bers will be time-consuming, the UK could propose erable uncertainty in determining its ceiling on tariffs to adopt the current EU schedule of concessions.45 and the appropriate WTO-compliant level of domes- Under this arrangement, most WTO members would tic and export subsidies for agricultural producers.41 It retain their current level of access to the UK market. is also unclear whether the UK will be able to negoti- Nevertheless, some WTO members might wish to ate a schedule of concessions by December 2020, the improve their access to the British market and there- end of the transition period. In particular, it may well fore object to the UK’s adoption of EU schedule of be time-consuming to separate UK tariff-rate quotas concessions. However, this objection is less likely if and appropriate agricultural subsidy levels from the the UK unilaterally reduces or eliminates tariffs for overall WTO allotments for the EU.42 all WTO members, including EU member countries. Second, WTO rules do not address nontariff barri- ers such as product labeling and mutual recognition Alternative Post-Brexit UK Trade of rules and standards. Thus, the UK might face sig- Relations Strategies nificant increases in nontariff barriers to trade with the EU. For example, divergence in product standards Until December 31, 2020, the end of the Brexit tran- and mutual recognition of rules could well increase sition period, the UK will remain part of both the nontariff barriers, which might prove to be greater EU single market and customs union.46 If the UK than tariff barriers in the end.43 Third, imposition of decides to abandon its EU customs union arrange- tariffs might necessitate the installation of a customs ment following the end of the transition period, the border between the UK and the EU, which raises the UK must develop a strategy for agricultural trad- question of a hard border between Northern Ireland ing relations with the EU and the rest of the world. and the Republic of Ireland, an outcome that is not Under the new transition arrangement, the UK can favorable to Brussels, Dublin, or Westminster. pursue new trade agreements that will take effect as Nevertheless, if the UK decides to trade with early as January 1, 2021.47 the EU under existing WTO rules, the British gov- Given the potentially extensive scope of Brexit trade ernment can use several strategies to mitigate the negotiations, the UK government would have to prior- effects of tariff barriers and trade friction costs. First, itize agreements based on their importance to Brit- instead of retaliating against the EU with equally ish trade and the ease of signing such agreements. In high tariffs, the UK can unilaterally reduce or elim- fact, only five trade agreements—with the EU, United inate tariffs on all agricultural imports. This means States, Canada, Australia, and New Zealand—would that, like Singapore, agricultural exports to the UK cover more than 75 percent of the UK’s current agri- would face reduced or zero tariffs, irrespective of the cultural trade.48 Here we discuss potential trade agree- tariff schedule applied to British exports. Although ments with four countries—namely, the United States, unilateral tariff reduction might increase compe- Canada, Australia, and New Zealand and the opportuni- tition for British farmers, consumers are likely to ties they present for British producers and consumers. benefit from lower prices of imported agricultural and processed food products, which is estimated United States. Currently, the UK has a positive trade to decrease by 10 percent, according to a report by balance with the United States in agricultural prod- the International Trade Committee at the House of ucts. In 2017, the United States accounted for 10 per- Commons.44 Second, the UK can reduce trade fric- cent of UK agricultural exports and 3 percent of UK tion costs by implementing electronic systems to agricultural imports.49 The UK exports mostly bever- assess imports at the UK border, especially between ages, cereal preparation products, dairy products, and Northern Ireland and the Republic of Ireland. Third, fish, and it imports beverages, fruits, grains, and vege- as Bruegel’s André Sapir points out, since negotiating tables in trade with the United States (Table 5).

16 VINCENT H. SMITH AND RYAN NABIL

Table 5. UK-US Agricultural Trade by Value, 2016

Top 5 UK Exports to the United States Top 5 UK Imports from the United States

• Beverages, spirits, and vinegar: £1,559,270,376 • Beverages, spirits, and vinegar: £271,430,327 ($2,198,571,230) ($382,716,761) • Fish and crustaceans, mollusks, and other aquatic • Edible fruit and nuts and peel of citrus fruits invertebrates: £199,872,101 ($281,819,662) or melons: £209,224,025 ($295,005,875) • Miscellaneous edible preparations: £87,630,948 • Miscellaneous edible preparations: £181,155,594 ($123,559,637) ($255,429,388) • Dairy products, birds’ eggs, natural honey, and • Oil seeds and oleaginous fruits; miscellaneous grains, edible products of animal origin, not elsewhere seeds, and fruit; industrial or medical plants; straw specified or included: £71,955,872 ($101,457,780) and fodder: £120,003,723 ($169,205,249)

• Preparations of cereals, flour, starch, or milk; pastry • Edible vegetables and certain roots and tubers: cooks’ products: £60,190,105 ($84,868,048) £109,305,133 ($154,120,238)

Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Table.aspx.

Figure 10. Average Bound Tariffs on Select Agricultural Products, 2018

(248.9%) 50

45

40

35

30

25

20 Tariff Rate (Percentage) 15

10

5

0 Animal Dairy Fruits and SugarBeverages and Products Produc ts Vegetables Tobacco Products

Australia Canada New Zealand United States European Union

Source: World Trade Organization, “Tariff Profiles,” accessed March 22, 2018, http://stat.wto.org/TariffProfile/WSDBTariffPFReporter. aspx?Language=E.

17 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Table 6. Transatlantic Regulatory Differences in Agriculture: Procedural Rules and Risk Tolerance (6 = banned, 4 = permitted) EU US WTO Case Procedural Rules For genetically modified food • Public license registry 4 Nonexistent For animal and plant epidemics • Regionalization approach Region often Region often the differentiated state • Escherichia-coli test or crustacean animals In animal meat In the water

Principles of Risk Tolerance For genetically modified food • Approval 4 EU-wide 4 EU convicted 6 By member state • Labeling requirement 4 If content — > 0.9 percent

For meat • Decontamination • With chlorine 6 4 Still no decision • With lactic acid 4 4 • Use of hormones/beta-blockers • As performance enhancer 6 4 EU convicted • Veterinary use 4 4 • Use of antibiotics • As performance enhancer 6 4 • Veterinary use 4 4 • Veterinary use in organic farming 4 6

For cloning • Marketing of food products 4 New proposal 4 for ban in legis- lative process • Labeling requirement — —

For milk • Raw milk product marketing 4 6 • Use of performance enhancer (bovines, 6 4 somatotropin)

Source: Bettina Rudloff, “Food Standards in Trade Agreements,” Stiftung und Wissenschaft Politik, November 2014, https://www.swp- berlin.org/fileadmin/contents/products/comments/2014C49_rff.pdf.

18 VINCENT H. SMITH AND RYAN NABIL

Table 7. Products Allowed in the US but Banned in the EU

• Hormone-fed beef56

• Pigs, cows, and turkey containing ractopamine57

• Chicken washed with chlorine58

• Milk containing the rBGH hormone (also banned in Canada and Australia)59

• Brominated vegetable oil60

Source: Authors.

Barriers to trade between the UK and the US are levels, which were around 300 percent higher than nonetheless substantial. The EU’s average applied current US exports to the entire EU.53 MFN tariff rates, also the current UK rates, are Similarly, a UK-US trade deal is also likely to 19.6 percent on beverages and tobacco products, increase British agricultural exports to the United 35.4 percent on dairy products, and 10.5 percent on States. In 2016, the UK resumed exports of beef and fruits and vegetables (Figure 10). Conversely, the lamb to the United States after a 20-year ban following United States applies to UK imports average tariff the outbreak of mad cow disease.54 Increased UK ship- rates of 19.1 percent on beverages and tobacco prod- ments of beef and lamb to the United States are pro- ucts, 16.6 percent on dairy products, and 4.7 percent jected to raise the value of British agricultural exports on fruits and vegetables (Figure 10). A UK-US bilateral by £35 million ($49.4 million) annually.55 UK-US bilat- trade agreement could help lower tariff rates in these eral trade in agriculture is likely to increase further if areas, paving the path for increased agricultural trade the two countries harmonize diverging food product between the two countries. standards (Table 6) and if the UK allows the import In addition to tariffs,tariff-rate quotas (TRQs) of several food items currently banned in the UK restrict bilateral trade between the UK and the because of its EU membership (Table 7). United States. As an EU member, the UK faces US Given the opportunities that a UK-US trade agree- TRQs on several agricultural exports, including ment present, the Trump administration has already dairy products, meat products, peanuts, sugar, and expressed interest in negotiating an agreement with tobacco.50 Conversely, the UK applies EU TRQs for the UK.61 However, given the US farm lobby’s influ- several US agricultural products, including cere- ence and the larger size of the US agricultural sector als, dairy products, meat products, rice, and sugar.51 relative to that of the UK, a UK-US trade agreement Such quota restrictions negatively affect trade in might require British farmers to comply with US food several agricultural products between the EU and standards,62 on which British public opinion remains the United States. unclear. A 2003 study by Lusk, Roosen, and Fox found Beef is one important example of of a US product that although both American and British consumers to which the EU applies TRQs. In 2015, the United accepted meat with growth hormones, British con- States exported just under 20,000 tons of high-quality, sumers were less satisfied with genetically modified hormone-free beef to the EU, which is valued at $200 organism–fed meat than their American counterparts million, making up only 0.2 percent of total annual were.63 EU and UK beef consumption.52 Following Brexit, if While the National Farmers Union (NFU) has the UK relaxes nontariff barriers, such as food label expressed support for a potential UK-US trade agree- standards, US beef producers would have an oppor- ment, the NFU has also expressed concerns about tunity to expand beef exports to the UK to pre-1989 equitable trade, stressing the high regulatory standards

19 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Table 8. UK-Canada Agricultural Trade by Value, 2016

Top 5 UK Exports to Canada Top 5 UK Imports from Canada

• Beverages, spirits, and vinegar: £152,735,073 • Cereals: £71,986,437 ($101,500,876) ($215,356,453) • Preparations of cereals, flour, starch, or milk; pastry • Preparations of meat, fish or crustaceans, mollusks, cooks’ products: £32,533,915 ($45,872,820) or other aquatic invertebrates: £65,420,543 ($92,242,966) • Residues and waste from the food industries; • Edible vegetables and certain roots and tubers: prepared animal fodder: £28,993,915 ($40,881,420) £53,485,563 ($75,414,644) • Cocoa and cocoa preparations: £24,115,878 • Fish and crustaceans, mollusks, and other aquatic ($34,003,388) invertebrates: £34,841,859 ($49,127,021) • Miscellaneous edible preparations: £18,862,181 • Preparations of cereals, flour, starch, or milk; pastry ($26,595,675) cooks’ products: £24,078,195 ($33,950,255)

Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Table.aspx.

applied to British agricultural products.64 In particular, agreed to eliminate 90.9 percent of its tariffs on EU the NFU does not want British farmers to be disadvan- agricultural imports, while the EU agreed to remove taged by the lack of production options not currently 92.2 percent of its tariffs on Canadian agricultural available to British farmers because of regulatory dif- products.67 These tariff reductions mostly affect pro- ferences.65 However, the British government would cessed agricultural commodities, such as pasta, bis- have to weigh such objections against the potential cuits, and wine and spirits.68 In 2017, Liam Fox, the UK benefits to consumers, who are likely to experience secretary of state for international trade, expressed lower food prices. interest in pursuing a UK-Canada trade agreement similar to the CETA69 and met with his Canadian Canada. The UK has a modest trade deficit with counterpart, Francois-Philippe Champagne, to dis- Canada in agricultural products, but UK agricultural cuss the prospects of a bilateral trade agreement.70 trade with Canada is significantly smaller than with While the UK government currently intends to sign a the United States, accounting for 1 percent of the CETA-style agreement with Canada, the UK also has UK’s overall trade in agricultural goods.66 Agricultural the additional alternative of joining Canada’s trade exports from the UK to Canada comprise beverages, agreement with EFTA countries (Iceland, Lichten- products used in preparing cereal, and residues and stein, Norway, and Switzerland) instead of designing waste from the food industries. Conversely, agricul- a new UK-Canada trade agreement. tural imports from Canada include cereals, products involved in preparing meat and fish, and edible vege- Australia. The UK exports mostly beverages, cereal tables (Table 8). preparation products, and edible preparation prod- While a CETA-style arrangement might not be suf- ucts, and it imports beverages, meat, and vegetables ficiently comprehensive to meet the needs of agri- in trade with Australia (Table 9). Australia has rela- cultural trade between the UK and the EU, a similar tively low tariffs on agricultural products. However, agreement could facilitate bilateral trade between a trade agreement with the UK would likely lead to the UK and Canada given the relatively small vol- moderate or minimal UK tariffs and nontariff barri- ume of UK-Canada trade. Under the CETA, Canada ers for Australian exports. Currently, the EU applies

20 VINCENT H. SMITH AND RYAN NABIL

Table 9. UK-Australia Agricultural Trade by Value, 2016

Top 5 UK Exports to Australia Top 5 UK Imports from Australia

• Beverages, spirits, and vinegar: £152,301,554 • Beverages, spirits, and vinegar: £238,374,963 ($214,745,191) ($336,108,698) • Preparations of cereals: £53,524,609 ($75,469,699) • Meat: £71,232,789 ($100,438,232) • Miscellaneous edible preparations: £43,342,645 • Edible vegetables: £13,685,452 ($19,296,487) ($61,113,129) • Residues and waste: £27,113,821 ($38,230,488) • Animal or vegetable fats and oils: £10,888,664 ($15,353,016) • Live animals: £18,611,804 ($26,242,644) • Edible fruits and nuts: £8,278,178 ($11,672,231)

Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Table.aspx.

TRQs to cap the total volume of agricultural imports By signing a bilateral trade agreement, the UK and from Australia. For example, in 2015, the EU applied a New Zealand can substantially reduce tariff and non- TRQ of 19,186 tons to Australian sheep meat imports, tariff barriers to trade in agricultural goods. The UK almost all of which Australia used.71 Under a bilat- exports mostly beverages, cereal preparation prod- eral trade agreement, Australia’s exports to the UK ucts, and miscellaneous edible preparations to New are likely to rise, especially through increased sales Zealand, and it imports beverages, meat, and vege- of animal products and beverages. In anticipation of tables from New Zealand (Table 10). New Zealand increased Australian imports, the UK National Sheep is a net exporter of agricultural commodities, espe- Association called for restricted access for Australian cially animal products, which accounted for 73.6 per- lamb and wool to the British market, but proposals cent of its exports to the UK in 2016.74 In the same for protective measures would have to be evaluated year, the UK imported £629 million ($887 million) against the potential benefit of lower prices for con- in agricultural products while exporting £40 million sumers. Earlier this year, the Australian government ($56 million) in agricultural goods to New Zealand.75 expressed interest in signing a post-Brexit trade A trade agreement with the UK would likely allow agreement with the UK.72 Furthermore, the UK has New Zealand products to be more competitive in UK the additional option of joining the new Trans-Pacific markets and could help reduce meat and dairy prod- Partnership—which includes Australia, Canada, uct prices for British consumers. Recently, New Zea- Japan, and Mexico—a membership that Australia land expressed interest in negotiating a post-Brexit appears willing to support.73 trade agreement with the UK. Additionally, the New Zealand government offered to provide technical New Zealand. New Zealand liberalized trade in expertise to assist the British government in nego- agricultural commodities and terminated almost all tiating trade agreements, in return for improved agricultural subsidies in the mid-1980s. As a result, visa conditions for citizens of New Zealand travel- like Australia, New Zealand now has low tariffs on ing to the UK. Furthermore, the UK joining could agricultural products. This policy of agricultural also join the Trans-Pacific Partnership, whose 11 trade liberalization stands in stark contrast to the member countries (including New Zealand) account EU’s approval of high tariffs and TRQs as main- for 13.4 percent of global gross domestic product tained for agricultural products. (GDP).76

21 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Table 10. UK–New Zealand Agricultural Trade by Value, 2016

Top 5 UK Exports to New Zealand Top 5 UK Imports from New Zealand

• Beverages, spirits, and vinegar: £13,203,456 • Meat: £291,015,374 ($410,331,677) ($18,616,873) • Miscellaneous edible preparations: £5,811,264 • Beverages, spirits, and vinegar: £222,569,177 ($8,193,882) ($313,822,540) • Preparations of cereals: £4,173,873 ($5,885,161) • Edible fruits and nuts: £45,279,286 ($63,843,793) • Residues and waste: £3,458,867 ($4,877,002) • Dairy products: £42,323,983 ($59,676,816) • Coffee, tea, mate, and spices: £3,337,167 • Fish: £5,719,2010 ($80,640,734) ($4,705,405)

Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Table.aspx.

Through trade agreements with the EU, United the EU single market in agriculture under a similar States, Canada, Australia, and New Zealand, the UK arrangement remains subject to further negotiations. could cover more than 75 percent of its overall interna- A Norway-style arrangement would also leave the UK tional agricultural trade. In addition to signing agree- free to sign separate trade agreements with non-EU ments, the UK could also pursue trade negotiations countries. Nevertheless, the UK would have to pay with other major economies, including China, India, about 83 percent of its current annual contributions and Japan. Furthermore, under WTO rules, devel- to the EU budget and accept EU regulations and free oping countries would still enjoy favorable access to movement of labor between the UK and EU member UK agricultural markets. In addition, the UK could countries. sign agreements with several trade blocs—such as While a Swiss model would be slightly cheaper and the Association of Southeast Asian Nations (ASEAN), lead to more limited integration within the EU single comprising a combined GDP of $2.4 trillion, and Mer- market, the UK would still have to accept free move- cosur, with a total GDP of $2.1 trillion. These relation- ment of labor between the UK and EU member coun- ships would enable the UK to find cheaper sources of tries. A Swiss-style agreement would also exclude agricultural imports and new markets for exporting trade in financial services and severalagro-food prod- British agricultural commodities, processed food, and ucts. A Turkey-style customs union arrangement beverages. would reduce the rules of origin costs to trade with EU member countries, but EU customs union mem- bership means the UK would not be able to sign trade Conclusion agreements independent of the EU. The UK would also have to accept EU regulations and apply the EU International trade in agricultural and processed common external tariff to UK imports without any food products, especially with EU member coun- input. Although countries covered under trade agree- tries, is clearly important to the British food supply ments with the EU would enjoy preferential access to chain. Among the fivepost-Brexit international trade UK markets, the UK would have to sign separate trade options available to the UK, the Norwegian model agreements with those countries to gain preferential would provide the softest form of Brexit. However, access to those markets. the extent to which the UK would have access to A Canada-style trade agreement would not require

22 VINCENT H. SMITH AND RYAN NABIL

the UK to contribute to the EU budget and would These four countries, combined with the EU, cover allow the UK to pursue trade negotiations with more than 75 percent of the UK’s agricultural trade. non-EU countries and design its domestic agricul- Finally, the UK has the additional option of sign- tural policies. Although the Canadian model provides ing agreements with several trade blocs, including more restricted access to the EU single market than ASEAN and Mercosur, and joining the Trans-Pacific Norway-, Switzerland-, or Turkey-style arrangements, Partnership. With such agreements in place, the UK the UK and the EU could design a more comprehen- could be well positioned to leave the EU single mar- sive version of a CETA-style arrangement to reflect ket and customs union after the Brexit transition the needs of UK-EU trade. As a last resort, the UK can period ends on December 31, 2020. resort to trading with the EU under existing WTO rules before the UK and EU eventually agree on a mutually acceptable trade agreement. About the Authors If the UK decides to abandon the current EU cus- toms union arrangement at the end of the transition Vincent H. Smith is the director of Agricultural period in 2020, the British government will have to Policy Studies and a visiting scholar at the American develop a strategy to sign agreements with key econ- Enterprise Institute. He is also a professor of econom- omies around the world. Under the current transi- ics in the Department of Agricultural Economics and tion agreement, the UK is free to negotiate trade Economics at Montana State University. agreements that will take effect as early as January Ryan Nabil is a global macroeconomy and agricul- 1, 2021. In addition to a trade agreement with the tural policy researcher in the Economic Policy Studies EU, the UK could also pursue negotiations with the department at the American Enterprise Institute. United States, Canada, Australia, and New Zealand.

© 2018 by the American Enterprise Institute. All rights reserved. The American Enterprise Institute (AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization and does not take institutional positions on any issues. The views expressed here are those of the author(s).

23 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

Appendix

Table A1. UK Trading Partners by Value of Agricultural Trade, 2017

Trading Partner Export (£) Export (%) Import (£) Import (%) Total (£) Total (%)

EU 14,347,071,190 61% 35,498,712,724 71% 49,845,783,914 68% US 2,305,723,827 10% 1,486,058,302 3% 3,791,782,129 5% China 658,500,942 3% 767,706,832 2% 1,426,207,774 2% EFTA 417,272,767 2% 634,180,891 1% 1,051,453,658 1% Canada 334,410,445 1% 593,381,906 1% 927,792,351 1% Thailand 93,532,096 0% 759,834,038 2% 853,366,134 1% Australia 416,029,633 2% 424,943,485 1% 840,973,118 1% India 147,695,704 1% 671,962,768 1% 819,658,472 1% New Zealand 49,255,779 0% 650,665,365 1% 699,921,144 1% Turkey 143,254,192 1% 421,701,890 1% 564,956,082 1% Hong Kong 491,553,219 2% 47,245,037 0% 538,798,256 1% Vietnam 70,172,919 0% 404,019,896 1% 474,192,815 1% Singapore 390,447,137 2% 73,178,722 0% 463,625,859 1% South Korea 297,872,136 1% 34,679,638 0% 332,551,774 0% Japan 258,490,934 1% 42,014,156 0% 300,505,090 0% Taiwan 221,687,297 1% 25,233,920 0% 246,921,217 0%

Sum 20,642,970,217 88% 42,535,519,570 85% 63,178,489,787 86% Total Trade 23,572,475,592 100% 49,794,155,071 100% 73,366,630,663 100%

Source: HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/ Pages/Home.aspx.

24 VINCENT H. SMITH AND RYAN NABIL Notes

1. Negotiators of the European Union and the United Kingdom Government, “Joint Report from the Negotiators of the European Union and the United Kingdom Government on Progress During Phase 1 of Negotiations Under Article 50 TEU on the United King- dom’s Orderly Withdrawal from the European Union,” European Council, December 8, 2017, https://ec.europa.eu/commission/sites/ beta-political/files/joint_report.pdf. 2. Financial Times, “UK and EU Agree ‘Decisive Step’ with 21-Month Brexit Transition,” https://www.ft.com/content/ f418a8b2-2b69-11e8-9b4b-bc4b9f08f381. 3. Emma Downing and Sarah Coe, Brexit: Future UK Agriculture Policy, House of Commons Library, January 31, 2018, https://www. parliament.uk/documents/commons-library/Brexit-UK-agriculture-policy-CBP-8218.pdf. 4. Department for Environment, Food and Rural Affairs, “Food Statistics in Your Pocket 2017—Global and UK Supply,” November 14, 2017, https://www.gov.uk/government/publications/food-statistics-pocketbook-2017/food-statistics-in-your-pocket-2017-global- and-uk-supply. 5. Department for Environment, Food and Rural Affairs, “Food Statistics in Your Pocket 2017.” 6. All conversions in this paper, unless otherwise noted, have been made using the conversion rates as of March 23, 2018 (£1 = $1.41 and €1 = 1.23); and Department for Environment, Food and Rural Affairs,Agriculture in the United Kingdom 2016, Crown, 2017, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/672119/AUK-2016-08jan18.pdf. 7. HM Revenue and Customs, “Data by Commodity Code,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/Pages/ Table.aspx. 8. HM Revenue and Customs, https://www.uktradeinfo.com/Pages/Home.aspx. 9. Leigh Riley, “Table 13.1 Trade in Food, Drink and Animal Feed by SITC Division (at 2016 Prices) United Kingdom,” Crown, May 25, 2017, https://www.gov.uk/government/statistical-data-sets/agriculture-in-the-united-kingdom; and Department for Environment, Food and Rural Affairs,Agriculture in the United Kingdom 2016. 10. Riley, “Table 13.1 Trade in Food, Drink and Animal Feed by SITC Division (at 2016 Prices) United Kingdom”; and Department for Environment, Food and Rural Affairs,Agriculture in the United Kingdom 2016. 11. Matthew Keep, “The UK’s Contribution to the EU Budget,” House of Commons Library, February 2, 2018, https://researchbrief- ings.parliament.uk/ResearchBriefing/Summary/CBP-7886#fullreport. 12. Stephen Booth and Christopher Howarth, “Trading Places: Is EU Membership Still the Best Option for UK Trade and What Are the Alternatives?,” Open Europe, June 12, 2012, https://openeurope.org.uk/intelligence/britain-and-the-eu/eu-membership/. 13. Open Europe, “Top 100 EU Rules Cost Britain £33.3bn,” https://openeurope.org.uk/intelligence/britain-and-the-eu/top-100- eu-rules-cost-britain-33-3bn/. 14. Open Europe, “Top 100 EU Rules Cost Britain £33.3bn.” 15. These numbers are for 2015. Emma Downing, “EU Referendum: Impact on UK Agricultural Policy,” House of Commons Library, May 26, 2017, 10, http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7602#fullreport; and HM Treasury, “EU Finances 2015: Statement on the 2015 EU Budget and Measures to Counter Fraud and Financial Mismanagement,” Crown, December 2015, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/483344/EU_finances_2015_ final_web_09122015.pdf. 16. For 2014–20, Turkey was allocated €4.5 billion under the Instrument for Pre-Accession Assistance Framework. This payment does not include allocations for cross-border cooperation. European Commission, “Turkey—Financial Assistance Under IPA II,” https://ec.europa.eu/neighbourhood-enlargement/instruments/funding-by-country/turkey_en. 17. Swati Dhingra and Thomas Sampson, Life After Brexit: What Are the UK’s Options Outside the EU?, London School of Economics Centre for Economic Performance, February 2016, http://cep.lse.ac.uk/pubs/download/brexit01.pdf. Their 40 percent and 83 percent numbers are applied to the UK’s current contribution, but the EU could argue that it should be applied to the UK’s current ­

25 STRATEGIES FOR POST-BREXIT UK INTERNATIONAL AGRICULTURAL TRADE RELATIONS

contribution pre-rebate, in which case it would be higher. 18. Dhingra and Sampson, Life After Brexit. 19. Dhingra and Sampson, Life After Brexit. 20. Justin Protts, “Potential Post-Brexit Tariff Costs for UK-EU Trade,” Civitas, October 2016, http://www.civitas.org.uk/content/ files/potentialpostbrexittariffcostsforeuuktrade.pdf. 21. Booth and Howarth, “Trading Places.” 22. Booth and Howarth, “Trading Places.” 23. House of Commons International Trade Committee, “UK Trade Options Beyond 2019,” House of Commons, March 7, 2017, https://publications.parliament.uk/pa/cm201617/cmselect/cmintrade/817/817.pdf. 24. Full Fact, “Norway’s EU Payments,” https://fullfact.org/europe/norway-eu-payments/. 25. Booth and Howarth, “Trading Places.” 26. Dhingra and Sampson, Life After Brexit. 27. European Union Committee, Brexit: The Options for Trade, House of Lords, December 13, 2016, https://publications.parliament. uk/pa/ld201617/ldselect/ldeucom/72/72.pdf. 28. European Union Committee, Brexit. 29. European Union Committee, Brexit. 30. Parliament, “Chapter 4: Membership of the EU’s Customs Unions,” 2016, https://publications.parliament.uk/pa/ld201617/ ldselect/ldeucom/72/7207.htm. 31. For non-processed agricultural commodities, Turkey and the EU apply most favored nation tariffs to each other’s exports. 32. For 2014–20, Turkey was allocated €4.5 billion under the Instrument for Pre-Accession Assistance Framework. This payment does not include allocations for cross-border cooperation. See European Commission, “Turkey—Financial Assistance Under IPA II.” 33. European Commission, “CETA—Summary of the Final Negotiating Results,” February 2016, https://trade.ec.europa.eu/doclib/ docs/2014/december/tradoc_152982.pdf. 34. European Commission, “CETA—Summary of the Final Negotiating Results.” 35. Alberta Agriculture and Forestry, Agri-Food Exporter’s Guide to CETA, Alberta Government, October 2017, http://www1.agric.gov. ab.ca/$Department/deptdocs.nsf/all/trade11209/$FILE/2017oct_ceta_export.pdf. 36. European Commission, “CETA—Summary of the Final Negotiating Results.” 37. M. Jean-Luc Angot et al., “Report to the Prime Minister: The Impact of the Comprehensive Economic and Trade Agreement (CETA) Between the European Union and Canada on the Environment, Climate and Health,” Foodwatch, September 7, 2017, https:// www.foodwatch.org/uploads/tx_abdownloads/files/France_experts_Report_CETA_impact_on_environment_climate_health_2017_ ENGLISH.pdf. 38. House of Commons International Trade Committee, “UK Trade Options Beyond 2019.” 39. House of Commons International Trade Committee, “UK Trade Options Beyond 2019.” 40. Protts, “Potential Post-Brexit Tariff Costs for UK-EU Trade,” 10. 41. House of Commons International Trade Committee, “UK Trade Options Beyond 2019.” 42. House of Commons International Trade Committee, “UK Trade Options Beyond 2019.” 43. House of Commons International Trade Committee, “UK Trade Options Beyond 2019.” 44. House of Commons International Trade Committee, “UK Trade Options Beyond 2019.” 45. André Sapir, “Should the UK Pull Out of the EU Customs Union?,” Bruegel Blog, August 1, 2016, http://bruegel.org/2016/08/ should-the-uk-pull-out-of-the-eu-customs-union/. 46. Financial Times, “UK and EU Agree ‘Decisive Step’ with 21-Month Brexit Transition.” 47. Guardian, “Theresa May Under Fire over Brexit Transition Deal,” March 19, 2018 https://www.theguardian.com/politics/2018/ mar/19/uk-and-eu-agree-terms-for-brexit-transition-deal. 48. HM Revenue and Customs, “Build Your Own Tables,” https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/Pages/ Home.aspx.

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49. HM Revenue and Customs, “Data by Commodity Code.” 50. US Customs and Border Protection, “Commodities Subject to Import Quotas,” https://www.cbp.gov/trade/quota/guide-import- goods/commodities. 51. European Commission, “Agricultural TRQ Regulations,” December 2, 2014, http://ec.europa.eu/transparency/regexpert/index. cfm?do=groupDetail.groupDetailDoc&id=16987&no=5. 52. Before the 1989 ban, the United States exported slightly over 70,000 tons of beef annually to the EU. See Thad Lively, “EU Trade Barriers and US Meat Exports” (speech, US Department of Agriculture Agricultural Outlook Forum, Arlington, VA, February 21, 2013), https://www.usda.gov/oce/forum/past_speeches/2013_Speeches/Lively.pdf; and Julia Vasquez-Nicholson, “United Kingdom: Exporter Guide,” US Department of Agriculture Foreign Agriculture Service, December 21, 2017, https://gain.fas.usda.gov/Recent%20GAIN%20 Publications/Exporter%20Guide_London_United%20Kingdom_12-21-2017.pdf. 53. Before the 1989 ban, the United States exported slightly over 70,000 tons of beef annually to the EU. Thad Lively, “EU Trade Bar- riers and US Meat Exports.” 54. Katie Morley, “US Set to Import British Beef and Lamb for the First Time in 20 Years,” Telegraph, July 27, 2016, https://www. telegraph.co.uk/news/2016/07/26/usa-set-to-import-british-beef-and-lamb-for-the-first-time-in-20/. 55. Morley, “US Set to Import British Beef and Lamb for the First Time in 20 Years.” 56. Renee Johnson, “The US-EU Beef Hormone Dispute,” Congressional Research Service, January 14, 2015, https://fas.org/sgp/crs/ row/R40449.pdf. 57. Carey Gillam, “US Food, Animal Groups Seek Lower Ractopamine Limits,” Reuters, December 20, 2012, https://www.reuters. com/article/us-usa-meat-hormones/u-s-food-animal-groups-seek-lower-ractopamine-limits-idUSBRE8BJ15N20121220. 58. Simon Dawson, “Chlorine-Washed Chicken Q&A: Food Safety Expert Explains Why US Poultry Is Banned in the EU,” Conversa- tion, August 2, 2017, http://theconversation.com/chlorine-washed-chicken-qanda-food-safety-expert-explains-why-us-poultry-is-banned- in-the-eu-81921. 59. American Nutrition Association, “Milk and Health,” http://americannutritionassociation.org/toolsandresources/milk-america% C3%A2%E2%82%AC%E2%84%A2s-health-problem. 60. Melissa Kravitz, “Six Foods That Are Legal in the US but Banned in Other Countries,” Business Insider, March 1, 2017, http:// www.businessinsider.com/foods-illegal-outside-us-2017-3?r=UK&IR=T. 61. In 2017, both President Donald Trump and Speaker Paul Ryan expressed their interest in signing a comprehensive trade agree- ment with the United Kingdom. See Robert Wright, “Trump Expects to Make ‘Very Quick’ UK Trade Deal After Brexit,” Financial Times, July 8, 2017, https://www.ft.com/content/15cdec38-63b5-11e7-8526-7b38dcaef614. 62. Financial Times, “A Chance to Liberalise British Agriculture,” January 22, 2017, https://www.ft.com/content/759271c4-df36-11e6- 86ac-f253db7791c6?mhq5j=e1; and Jessica Elgot, “Brexit Rush for US Trade Deal Could Force Tough Concessions, Say Critics,” Guard- ian, January 16, 2017, https://www.theguardian.com/politics/2017/jan/16/brexit-rush-for-us-trade-deal-could-force-tough-concessions- say-critics. 63. Jason L. Lusk, Jutta Roosen, and John A. Fox, “Demand for Beef from Cattle Administered Growth Hormones or Fed Genetically Modified Corn: A Comparison of Consumers in France, Germany, the United Kingdom, and the United States,” American Journal of Agricultural Economics 85, no. 1 (2003): 16–29, https://econpapers.repec.org/article/oupajagec/v_3a85_3ay_3a2003_3ai_3a1_3ap_3a16- 29.htm. 64. National Farmers Union, “Farming’s Offer to Britain, How Farming Can Deliver for the Country Post-Brexit,” 2017. 65. National Farmers Union, “NFU Reaffirms Its Principles for Trade Deals,” https://www.nfuonline.com/about-us/our-offices/ westminster/westminster-news/nfu-reaffirms-Its-principles-for-trade-deals/. 66. HM Revenue and Customs, “Data by Commodity Code.” 67. Ernst and Young, “Canada-EU Comprehensive Economic and Trade Agreement Takes Effect,” September 28, 2017, http://www. ey.com/Publication/vwLUAssets/Canada-EU_Comprehensive_Economic_and_Trade_Agreement_takes_effect/$FILE/ 2017G_05545-171Gbl_Indirect_CA%20EU%20CETA%20takes%20effect.pdf. 68. World Trade Organization, “Tariff Download Facility,” http://tariffdata.wto.org/ReportersAndProducts.aspx.

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69. Rachelle Younglai, “Britain Keen to Maintain Trade with Canada After Brexit: UK Negotiator,” Globe and Mail, January 26, 2017, https://www.theglobeandmail.com/report-on-business/economy/britain-keen-to-maintain-trade-with-canada-after-brexit-uk- negotiator/article33786675/. 70. CBC, “Canada in Informal Trade Talks with UK Ahead of Brexit,” http://www.cbc.ca/news/business/brexit-trade-talks-canada- 1.4049364. 71. Meat and Livestock Australia, “Beef, Lamb and Brexit,” https://www.mla.com.au/prices-markets/market-news/beef-lamb-and- brexit-30062016/. 72. Julie Bishop, “Speech at the Australia-United Kingdom Chamber of Commerce” (speech, Commonwealth Bank and Australia- UK Chamber of Commerce, London, February 19, 2018), https://foreignminister.gov.au/speeches/Pages/2018/jb_sp_180219a.aspx?w= tb1CaGpkPX%2FlS0K%2Bg9ZKEg%3D%3D; and Jon Rogers, “Free Trade with Australia in 15 MONTHS: Australia Poised for ‘Quick’ Brexit Deal,” Express, October 17, 2017, https://www.express.co.uk/news/uk/867452/Brexit-news-Australia-trade-deal-Britain-UK- Alexander-Downer-EU-European-Union. 73. Benjamin Kentish, “Australia Says UK Could Join Pacific Trade Group After Brexit,”Independent , February 19, 2018, http://www. independent.co.uk/news/uk/politics/brexit-latest-trans-pacific-partnership-tpp-trade-deal-australia-customs-union-single- market-a8218566.html. 74. European Commission, “European Union, Trade in Goods with New Zealand,” November 17, 2017, http://trade.ec.europa.eu/ doclib/docs/2006/september/tradoc_113425.pdf; and Stats NZ, “Exports for Overseas Merchandise Trade (fob NZ$): Country of Desti- nation by Commodity (HS2) and Period,” http://nzdotstat.stats.govt.nz/wbos/Index.aspx?DataSetCode=TABLECODE7311&_ga=2. 165103803.506846791.1521832459-593860145.1521832459#. 75. European Commission, “European Union, Trade in Goods with New Zealand.” 76. Zachary Torrey, “TPP 2.0: The Deal Without the US,” Diplomat, February 3, 2018, https://thediplomat.com/2018/02/tpp- 2-0-the-deal-without-the-us/.

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