Big deal

When Britain comes out of the European Union, the replacement trade deals that are struck will be crucial for the potential profits – or not – of Britain’s farmers

Ask most farmers what impact Brexit could have on their business and you will usually get a response that mentions the word “subsidy”. Worth £2.5 billion a year to UK agriculture, there is nothing surprising about that.

Trade, however, is only just starting to get mentioned, which is important, because the agricultural sector could lose £2.1 billion if standard tariffs are applied to trade between the EU and the UK post Brexit. Tariffs would also mean that a large quantity of food and drink produced both here and in the EU would be looking for a new international home to avoid these tariffs.

In short, there are two extreme scenarios. One, tariffs are levied on trade between the UK and the EU, which would increase UK food prices substantially because the UK is a net importer of goods and the EU a net exporter. Or two, tariffs are not imposed, which would leave the door open for imports from some of the world’s lowest cost producers.

How do tariffs work at the moment?

Because British products enjoy tariff-free trade with any of the EU’s 27 other member states, food and drink can be bought and sold across borders without any tariff cost. This makes British produce price-competitive in European markets and EU production competitive in the UK.

Other regions of the world can, of course, also trade within the EU, but they usually have to pay a tariff making their produce more expensive.

The tariff rate other nations pay is worked out through all sorts of reciprocal agreements and varies from product to product – and even sub-categories within that product. “For example, a tariff will be levied on beef imported into the EU, but the exact amount of that tariff will depend on what cut that beef is and the specific trade deal that has been agreed with the exporter,” explains policy specialist SimonWard of The Policy Group. “That tariff could change once a specific volume of sales is exceeded and it may well be different to the one paid by its exporting neighbours. Changes to tariffs could change the relative price of fore and rear quarters of beef.”

What might changing tariffs mean to our markets?

Another curiously complex example of a current trade agreement is with New Zealand.

It has a Tariff Rate Quota (TRQ) agreement with Europe that allows a specified quantity of goods to be imported at a reduced or zero tariff. This sees about 212,000 tonnes of New Zealand lamb brought into Europe each year, with a significant proportion sold in the UK.

As Britain is self-sufficient in lamb, the import means that UK farmers can export their surplus at a profit.

Without an agreement post Brexit, the EU will apply tariffs on UK exports to the EU. This would make the UK’s surplus lamb more expensive for EU buyers, so less would be exported.The excess on the UK market would reduce domestic prices and we would cease to be a competitive market for New Zealand.

Tariffs aren't just about money

In addition, as Ian Bailey of Savills Research points out, trade deals are not simply about economics. “If free trade agreements were purely about the level of tariffs applied, negotiation would be relatively straightforward. However, politicians also have to work within the bounds of the World Trade Organization (WTO). Its rules are complex and limit the potential for a country to ban imports on the grounds of, say, pesticide use or genetic modification even if that practice is banned in the importing country.”

At the moment, EU regulations mean that there are common standards of production within the EU. As all producers have to meet these standards, they are all subject to the same costs as there is tariff-free supply to the UK. But exports out of the EU have to be competitive with global prices, therefore any additional cost of meeting EU standards has to be absorbed by the producer.

Low-tariff agreements, however, would open the market to suppliers who did not meet EU standards. “If the government wanted to dispute any of the interpretations ofWTO regulations, it could be a long, drawn out process and could risk tit-for-tat challenges against our exports,” says Simon.

In Britain, we generally have higher production costs than countries that have more land and than those that impose fewer restraints on environmental degradation. Restrictions to production systems might improve food quality and have environmental benefits, but they also add additional costs to production.

All the UK’s trade arrangements are currently defined by the EU. Initially, when the UK leaves the EU, these will pass into UK law with the same tariffs that the EU imposes. This will increase most food prices – as many products are currently imported from the EU with no tariff. If the government then applies a unilateral reduction to tariffs, food costs would go down, but it would make it easier for other countries with lower standards to supply the UK and it would be difficult to exclude them.

How to be ready for Brexit

Savills head of Food and Farming, Andrew Wraith, says there’s little that farmers can do to directly address the trade issue at present and in reality the full complexity of tariffs, how they affect trade and their impact on farms, are little understood by most producers.

However, he says that farmers who make sure they understand their local market and make themselves as lean and agile as possible will be on the front foot when the cloud of uncertainty clears.

“The UK market could be very attractive for the rest of the world depending on the trade deals struck. The protection we currently enjoy on an EU scale won’t necessarily remain in place. Conversely, other market opportunities may well emerge,” says Andrew.

“If your product needs to become cheaper to either export it or to combat imports, how are you going to make that happen?”

Understanding the limiting factors of a farm business and working with others could help producers to make marginal gains. “There could be a new emphasis on co-operation and joint ventures through the production chain to hammer down costs,” Andrew suggests.

Another way UK farms traditionally add value to their produce is by creating a premium product. This is something that Andrew advises farmers to look into, although he acknowledges that it is not straightforward and easier to achieve in some sectors than others.

 

 
 

Key contacts

Andrew Wraith

Andrew Wraith

Director
Food & Farming

Savills Lincoln

+44 (0) 1522 508 973

+44 (0) 1522 508 973

 

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

+44 (0) 207 299 3099

 
 

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