Report

Brexit: the risks and opportunities for you

5th April 2017

The Policy Group The Policy Group https://www.thepolicygroup.co.uk/

Specialists in policy and economic impacts of change in the agricultural and food industries

Please note: the views expressed in this article are that of the author and do not necessarily reflect the views of SellMyLivestock.

How will Brexit be for the UK’s beef & lamb trade?

Nine months after the referendum and less than 24 months before the UK leaves the EU, the need for a positive, realistic and informed debate about the trade policy challenges and opportunities the industry can expect to face after Brexit is increasingly urgent.  Central to this will be the new trade relationship to be negotiated between the UK and EU.

An important part of developing a new UK trade policy is the often heard demands for continued “unfettered access” to the EU market. By this, it is usually meant that there should be no tariffs imposed on goods traded between the UK and the EU.  Agricultural tariffs are generally much higher than non-agricultural tariffs and, for an important group of agricultural products, they are prohibitively high.  These tariff peaks are on average well over 50%, and are designed to protect EU producers of “sensitive” products – mainly meat and dairy products – from import competition.  With overall bilateral trade in agrifood products of over £40 billion through highly integrated supply chains, neither the UK nor EU have any commercial interest in imposing tariff barriers.  To counter any adverse political pressures, it is important that producers in both the UK and EU impress on their governments the importance of maintaining tariff-free market access.

Technically, dealing with tariffs will be one of the easier aspects of forging a new trade relationship between the UK and EU.  Tariff-free trade between the UK and EU could be secured by agreeing to a simple provision in a trade agreement like, Except as otherwise provided in this Chapter, the Parties shall eliminate all customs duties on originating goods, of Chapters 1 through 97 of the Harmonized System that provide for a most-favoured-nation (“MFN”) rate of customs duty, imported from the other Party upon the date of entry into force of this Agreement. But tariffs are only part of the issue.

Many people voted for Brexit because they wanted a great “bonfire of regulations”; they wanted to be free from regulations imposed by Brussels that they felt were ill-considered, were unnecessary and/or impaired the commercial prospects of their businesses.  Leaving aside the merits or otherwise of the particular regulations, changing many of them may have important trade consequences not often recognised.

There is a wide range of plant protection products (PPPs), veterinary pharmaceuticals (VPs) and biotechnologies like genetic modification and cloning, that are severely restricted or banned in the EU, but are in use in other countries such as the US. Such restrictions are known as non-tariff measures, they are subject to a complex set of agreed international rules, and they can be even more of a barrier to trade than tariffs.  Canadian pork and beef producers, for example, have tariff-free access to the EU market through the recently concluded CETA, but much of their product is banned from sale in the EU market because they use the feed additive ractopamine.  Ractopamine is used because it improves feed efficiency by around 10%, and increases lean carcass weight.  In response to similar bans by China and Russia, as well as the EU, the Canadian government along with Alberta and BC producers have developed ractopamine-free certification pork programmes.  These programmes are voluntary, and many producers have not participated due to the implications for their competitiveness in their main market, the US.  Of course UK producers currently adhere to all such EU non-tariff requirements, but if they relax or otherwise change regulations affecting the use of products and technologies banned or restricted in the EU, they can expect to face substantial restrictions on their access to the EU and other world markets. A more detailed look at the international use of such products in livestock production, and the trade implications on UK meat producers of using them, would be advisable before taking any decision to change current practice.

Access to PPPs, VPs, and certain biotechnologies varies from jurisdiction to jurisdiction, with some allowing certain products that are banned in others. Every country has the right to impose whatever product standards and restrictions they want in order to protect human, animal and plant health, and the environment, subject to internationally agreed rules, and exporters have little choice but to meet them.  Often these restrictions are expressed in terms of maximum allowable residue limits for the PPPs and VPs on food.  Although international standards have been agreed for such residue limits, the actual limits that must be met by imports vary significantly from country to country.  While the costs of meeting all these different standards do pose restrictions on international trade, agreements can be negotiated on “equivalence” of standards, and mutual recognition of testing and certification, that can lead to substantial reductions in their actual commercial burden.

Non-tariff measures are often a high priority in international trade negotiations.  US producers have already identified their priorities for a prospective UK-US trade agreement as lifting of the ban on hormone-treated beef, lifting the ban on ractopamine-fed pork, and lifting the ban on meats treated with antimicrobial sprays (“chlorinated chicken”).  Acceding to such demands without giving UK producers access to similar production techniques may create a competitive disadvantage. The use of growth-promoting hormones, for example, can reduce the cost of beef production by an estimated 7%.  Lifting such restrictions, though, will cause substantial problems for accessing the EU market, not to mention the risk of a substantial consumer backlash.

Necessity is often the mother of invention, and solutions can often be found to the specific problems caused by different regulatory regimes.  For example, when the EU lost the WTO dispute over its ban on hormone treated beef, it agreed to provide the US and Canada with an import quota for certified non-hormone treated beef at significantly reduced tariff rates (TRQs). To meet this new opportunity, in 1999 the US introduced its “Non-Hormone Treated Cattle Program” to facilitate the development of dedicated production and supply facilities.  While the costs of participating in this dedicated supply chain are not negligible, US exports through it have increased dramatically, and the TRQs have been opened further. By 2015 the US had become the fourth largest supplier of beef to the EU (mainly to the Netherlands).  Moreover, the US beef exported to the EU is predominantly premium price beef that sells for nearly 60% more than beef from Brazil –  the largest exporter to the EU.

While Canada also put in place a scheme for supplying hormone-free beef, its exports to the EU remain trivial due partly to issues relating to the use of antimicrobial sprays in abattoirs.  More successfully, Australia, New Zealand, Argentina, and Uruguay have all now put in place detailed traceability systems and/or dedicated supply chains, and are increasing their exports of non-hormone treated beef to the EU, as well as to the growth markets in Asia. Australia, for example, which can offer full traceability and certified hormone and ractopamine-free beef, has seen its beef exports to China increase by nearly 400% over the past 3 years.

In charting a new future for the industry, we could opt to retain the EU approach to risk, or we can decide to adopt a more independent approach to the use of science and technology. Provided we develop and implement regulations according to the rules of the WTO, we can do as we like, and we remain free to restrict imports that do not meet our standards and requirements. Because other countries are also able to do this, producers wanting to export need to understand and accommodate the various regulatory measures imposed by others. To do this, there is a range of options available including full traceability, dedicated supply lines, and additional product labelling to allow consumers to choose. The challenges will vary from product to product but, for many, commercially viable solutions can be found.

With lamb the primary issue is continued tariff-free access to the EU market, not non-tariff measures. Loss of market access to the EU market could cause problems for British lamb producers, as current imports, especially from New Zealand, would lead to oversupply of the UK market and a fall in price.  A closer analysis, though, suggests this may not be as big a problem as some have suggested.

New Zealand is the only significant exporter of lamb to the EU and UK, but uses only half its tariff-free quota, while other, minor, exporters do not fill their tariff-free quotas either.  In other words, EU tariffs are not restricting imports of lamb into the EU market.  After Brexit, there is a risk that the UK could become the only significant lamb producer to face prohibitive EU tariffs, but non-EU suppliers may then find the relatively higher prices in France, due to the reduction in UK supply, more attractive than the weaker UK prices. This could lead to a diversion of New Zealand and other lamb from the UK market to the French market, which could leave the total UK lamb supply relatively unchanged and producers under less price pressure.  A more detailed look at this is being done, and some summary results will be provided in a later paper.

It should also be recalled that the WTO Agreement on Agriculture provides for the use of special agricultural safeguard measures to assist producers if imports rise above certain levels or prices fall below certain levels.  While there are some conditions on the use of these measures, they may also be useful for providing support to the domestic market.

Longer term, though, key to the success of British lamb producers will most likely be to build on its international reputation for excellence.  In 2016, for example, British Quality Standard Mark lamb won a prestigious ‘Meilleur Produit de l’Annee’ (‘Best Product of the Year) award in France – the UK’s largest export market for lamb.  Currently, lamb is one of the few agricultural products where exports to the EU are generally of a higher value than imports, due in part to being a premium brand.

Trade policy, the outcome of trade negotiations, and how prepared producers are to meet the challenges of world markets, will be key to the future prosperity of the industry.  The issues and challenges associated with each product vary, and detailed accurate information and analysis will be crucial to overcoming any problems that may arise.

For good or for ill, Brexit means the future of the UK agrifood industry has been ‘brought home’. More than ever before, the industry can influence the future it wants.  For many years, it has complained about rules imposed by Brussels. Now it has the opportunity to change them, but the scope and consequences of the changes need to be properly understood. If businesses are to maximise the advantages and mitigate the costs of Brexit, they need to understand properly the changes now underway.  As Darwin taught us, it is the most adaptable that survive and flourish.

Now, more than ever, it is absolutely vital that the agrifood industry gets the best possible detailed analysis and advice. Objective, unbiased technical analysis and advice on the full range of issues now faced can be difficult to find, but it is provided by groups like as The Policy Group.

DG Wilkinson, March 2017

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