Brexit - agricultural sectors: analysis of impacts

1. Introduction

1.1 Background

With the UK having left the EU and the end of the Transition Period on 31^st December 2020, there will be significant impacts for all aspects of Scottish society, including agriculture. The Scottish farming sector faces major challenges, as the trading arrangements which have provided the framework in which the current market has developed over several decades, are set to change significantly. The UK has recently published its Global Tariffs and Border Operating Model which will provide the default arrangements with third countries/trading blocs with which the UK does not have a free trade deal in place after 1 January 2021. This will include the EU in a No Trade Deal Brexit scenario. Therefore, it is an appropriate time to assess the implications of Brexit across a range of scenarios. Accordingly, RESAS has commissioned this study to quantify the post-Brexit impact of alternative trade scenarios on the agricultural sector in Scotland and the UK generally.

1.2 Project Aim and Objectives

The project aim is to quantify the impact of Brexit on selected Scottish agricultural sectors under two scenarios vis-à-vis the baseline of the UK continuing as an EU Member State:

1. A free trade agreement between the UK and the EU (FTA).

2. No Trade Deal with the EU (No Deal).

To achieve this overall aim, the following objectives were also set:

1. Conduct a literature review of previous studies assessing Brexit impact on Scottish and UK agriculture.

2. Quantify the economic output, trade and labour utilisation of each agricultural sector during 2017 to 2019.

3. Quantify the impact of Brexit on each sector with respect to Tariffs, Non-Tariff Measures (NTMs), Tariff Rate Quotas (TRQs) and overall trade impact at the UK-EU level. These impacts would be assessed on the basis of domestic output, price and supply effects, impacts on imports and exports.

4. Analyse the impact of other economic shocks (Covid-19) under each scenario.

5. Assess the implications for the Scottish agricultural industry at both a sectoral and farm-level.

The modelling assessment covers both the short-run (6-12 months) and longer term impacts. It also considers the consequences for the Scottish Agriculture sector of the imposition of checks and border control infrastructure on trade flows between Northern Ireland and GB.

1.3 Scenarios

The impact of Brexit is examined under two main scenarios, vis-à-vis the Baseline (Base) of the UK continuing as if it were an EU Member State. These scenarios are explained further below. Also, in some Chapters (e.g. Horticulture (Ch. 8), additional sub-scenarios are assessed where there is a particularly sensitive issue (e.g. labour). Whilst the labour issue is independent of the trade scenarios, differing labour-related outcomes have been included below to illustrate a range of possibilities.

1. FTA Deal (FTA): the UK (GB) is outside the Customs Union and Single Market, but with a Free Trade Agreement that includes agriculture, consisting of a zero-tariff, zero-quota free-trade arrangement. Linked with this scenario, the following assumptions are also noted;

• Policy: support remains the same based on the stated intention of the Scottish Government to broadly maintain existing CAP schemes, subject to simplifications and improvements, until 2024 to deliver on the Stability and Simplicity consultation.
• Labour: Seasonal non-UK labour: possible under an expanded SAWS-type scheme which covers the UK's labour needs. Permanent non-UK labour: restricted to 50% of current levels. However, non-UK workers who are already resident in the UK and potentially able to qualify for "settled status" will not be affected.
• NI Protocol: regulatory checks assumed to take place on trade from GB to Northern Ireland, but the NI Trader Support Service (TSS) will provide support on some of these. Minimal changes anticipated for NI to GB trade, based on the UK Government's "unfettered access" commitment.
• Trade facilitation costs: are based on the non-tariff measure (NTM) cost estimates for each sector set out in Chapters 5 to 8 of this study. These include Sanitary and Phytosanitary (SPS) regulations, customs controls, the impact of time delays on product value, haulage costs and also considers various fees charged by Port Health Authorities. Overall, between 25-30 cost categories have been assessed (see Figure 2‑2 below).
• Trade with non-EU: to continue on the same terms at present, whether that is by WTO Most-Favoured Nation (MFN) terms with some countries or via an FTA (including rollover agreements previously under the auspices of the EU) with those countries that have such agreements in place with the UK. The legacy EU28 Tariff Rate Quotas (TRQs) are apportioned between the UK and the EU27 as set out in Chapters 5 to 8, based on a December 2018 agreement between the UK and the EU.

2. No Deal: the UK will apply its recently announced import tariffs (i.e. its proposed Global Tariff (UKGT) schedule) on all imported agricultural produce from the EU27 and third countries which do not enjoy enhanced access via free trade agreements or TRQs. For beef, as Chapter 7 details, an additional 196Kt TRQ for beef is assumed, and a sensitivity analysis has also been undertaken to look at the impacts if a lower (98Kt) TRQ was introduced instead. The assumptions concerning policy, trade facilitation and trade with non-EU outlined in the FTA scenario also apply. Additional points include:

• Labour: Seasonal non-UK labour: possible under an expanded SAWS-type scheme, but only to 50% of existing levels of migrants employed in seasonal roles. Permanent non-UK labour: restricted to 50% of current levels.
• NI Protocol: regulatory checks to take place on trade from GB to Northern Ireland, but the NI Trader Support Service (TSS) will provide support on these. Tariffs would also be payable upon entry into Northern Ireland from GB, as goods would be considered "at risk" of entering the EU Single Market. However, these could be claimed back for agri-food products which are consumed in Northern Ireland. Minimal changes anticipated for NI to GB trade, based on the UK Government's "unfettered access" commitment.

1.4 Scope

1.4.1 Sectors

As requested by the Scottish Government, this study focused on the following agricultural commodities;

• Beef
• Sheep
• Dairy
• Horticulture – focusing specifically on potatoes (seed and ware), strawberries and brassicas (cauliflower and broccoli)
• Wheat
• Barley

In some sections of this report (e.g. non-tariff measures), further detail will be provided on products that sit within these sectors (e.g. chilled boneless beef, chilled beef carcases etc.) to give a picture for the sector as a whole.

1.4.2 Geographic Definitions

Throughout this report, there are numerous geographical terms which are sometimes used interchangeably. It is, therefore, important to define these terms at the outset:

• United Kingdom (UK): includes England, Scotland, Wales and Northern Ireland (NI).
• Great Britain (GB): consists of England, Scotland and Wales.
• Ireland: refers to the Republic of Ireland and is part of the EU27.
• Island of Ireland: includes both Northern Ireland and the Republic of Ireland.
• The European Union (EU): consists of 27 EU Member States (excluding UK); often cited as EU27.
• EU28: includes the EU27 and the UK when it was an EU Member State.
• EU26: EU Member States excluding the Irish Republic as well as the UK. Sometimes referred to as "Continental EU".
• Non-EU: all countries outside of the EU27 and the UK; periodically referred to as Rest of World (ROW) or "third countries".

1.5 Report Structure

This is a Summary Report with the key Chapters and accompanying Annexes set-out below.

• Methodology (Chapter 2): briefly summarises the research techniques, modelling tools, data and information sources used to fulfil the study's objectives. Further detail is provided in Annex I.
• Literature review (Chapter 3): gives a brief summary of the findings from previous studies examining the impact of Brexit on the UK's agri-food sector. It also examines key issues such as tariffs, tariff rate quotas (TRQs), non -tariff measures (NTMs) and labour. These issues are developed further in subsequent chapters. Annex II contains the detailed Literature Review undertaken for this study.
• Output and Trade Overview (Chapter 4): summarises output and trade by product category, based primarily on official statistics from Defra, the Scottish Government and HMRC with the focus on UK to/from EU27 trade as well as UK trade with non-EU countries.
• Brexit Impacts by Sector (Chapters 5-8): here, the impacts of Brexit in terms of tariffs, TRQs and NTMs as well as the projected impacts on output and trade using Agmemod^[3] and the farm-level implications for Scotland are provided for Cereals (wheat and barley), Dairying, Grazing Livestock (Beef & Sheep) and Horticulture.This is supplemented by additional information in Annexes III (output and trade) and IV (Agmemod results and sensitivity analyses).
• Key Conclusions (Chapter 9): highlights key points for consideration by policy-makers and industry participants in Scotland based on the research undertaken during this study.