Brexit - agricultural sectors: analysis of impacts

3. Literature Review Summary

3.1 Introduction

This Chapter summarises the key findings of a review of the relevant literature on the potential impact of Brexit on Scottish agriculture. The full Literature Review is provided in Annex II. The review is broadly split into three parts, the first looks at previous studies into the overall (macro) effect of Brexit at the UK level, focusing primarily on trade with the EU. The second part examines Scottish-specific studies on its farming sector. This past work has been used for two purposes – as a 'check' on methodology and results to inform the design of this report. Also, to provide an initial data source for variables to incorporate into the subsequent economic modelling. The third part looks in more detail at the key variables that are used in the later modelling – tariffs, non-tariff barriers, TRQs, support systems etc. These sections pick-up elements from the earlier 'macro' studies, but also bring in more detailed analysis from elsewhere.

3.2 Results of Previous Studies at UK-EU Level

The Literature Review conducted for this study involved examining over 80 studies looking at the impact of Brexit, particularly at a UK-EU level. The key findings are summarised briefly as follows;

• If a UK-EU FTA is agreed, then the effect on prices and consequently farm incomes is relatively small. There are effects from the additional costs of doing trade with the EU, but as the UK is generally a net importer from the EU, this increases prices for many commodities. In this scenario, with trade effects relatively minimal. Significant drops in farm income are seen if farm support is reduced or withdrawn.
• In the absence of a UK/EU FTA then two alternative scenarios have generally been modelled. One is trade with the EU on WTO terms, but mirroring current EU tariffs with new UK tariff rates. The other is unilaterally opening the UK market to tariff-free imports for the EU and RoW.
• In terms of WTO trade, the effect on a particular commodity largely depends on the UK trade balance. Where exports are required (e.g. lamb and barley) then prices generally fall as access to key markets in the EU are restricted by new tariffs. Where the UK is a net importer (e.g. wheat, dairy products) prices rise as tariffs make EU imports more expensive.
• A unilateral liberalisation of trade causes UK prices to fall in all commodities as UK producers are forced to compete with cheaper prices from non-EU regions which adversely affects farm incomes.
• In either of the 'No Deal' scenarios the negative effect on farm incomes is amplified by any changes to domestic farm support arrangements.
• In studies that have incorporated labour effects, this is generally seen to be detrimental to farm incomes as limits on free movement of labour increase UK costs.

The Brexit process continues to evolve and changes in the political and economic landscape have occurred since previous reports were published. Most notably, the UK Global Tariffs and Border Operating Models have been published which will have a significant impact on imports especially. These will affect the assumptions used in the economic modelling and thus the outcomes for each sector.

3.3 Scottish Studies

In addition to reports focusing on the UK-EU level, several number of studies were also reviewed looking at the impact of Brexit on Scottish agriculture specifically. Annex II contains more information. From an agricultural perspective, two main reports have focused on Scotland.

AHDB

Firstly, the AHDB produced a report in November 2017^[9] looked at the specific effects on Scotland at a farm-level. This built on the assumptions set out in its earlier UK-wide analysis (see Annex II) and so looked at the effects of trade, domestic support, labour availability and regulation.

below summarises the key assumptions used in the modelling and the headline results. It recognised the specific challenges posed by Brexit to Scottish agriculture including;

• The high proportion of Less Favoured Area (LFA) land in Scotland (85% of agricultural land compared to 17% in England).
• Distance to key markets and the lack of local processing facilities in some cases.
• Differences in the relative sizes of sectors, with beef and potatoes being especially important in output terms in Scotland.

It was also noted that Scottish agriculture has advantages in terms of its 'brand' – notably Scotch Whisky, Scotch Beef and its seed potato industry.

Source: AHDB

The study applied the variables to some Scottish-specific farm types and calculated the change in Farm Business Income (FBI) compared to the baseline (current) situation. The 'Evolution' scenario might be considered to approximate an FTA deal. Unilateral Liberalisation as an option now seems unlikely with the publication of the UK's proposed Global Tariff regime. However, the UK/Scotland could approach this situation over time, depending on the future FTAs it strikes with other countries or if it introduces significant new TRQ volumes. The Fortress UK option most closely models the No-Trade-Deal outcome, but the Support assumptions are unlikely to occur in the short-to-medium-term. The projected labour cost increases are also substantial, particularly when viewed in the context of Covid-19 (see Section 3.4). Therefore, it can be seen that none of the scenarios quite model the current Brexit situation.

SRUC

A further report from SRUC for the Scottish Government (Shrestha et. al. Jan 2018^[10]) used the FAPRI-UK model to assess the impacts on Scottish agriculture. This study, summarised in Table 3‑2, used three trade scenarios equivalent to those seen in the AHDB study. Support changes were limited to keeping present subsidy levels (denoted by a '+' in the results) or a complete removal of direct aid ('-'). No account was taken of labour or regulatory changes.

The price changes produced by the FARPI model are mapped onto typical Scottish farm businesses based on the Scottish Farm Business Survey (2014/15 reporting year). Results are presented for four major farm types which cover the majority of Scottish agriculture.

In both the AHDB and SRUC work, a Free Trade deal between the UK and EU leads to the least change from the status quo. However, it can be seen that, particularly under the AHDB 'Evolution' scenario, there are still big changes in Farm Incomes (profit) compared to current levels. Any 'No Deal' outcome, either with or without tariff protection around the UK market, tends to exacerbate the level of change. These points are picked up in more detail in the remainder of this study.

Source: SRUC

3.4 Other Variables

• Tariffs: Most agri-food tariffs under the UK Global Tariff (UKGT) have been maintained at the same levels of the CET, but converted from Euro into Sterling, mostly using the currency conversion rate €1 = £0.83. There are some variations due to rounding and simplifications. Effectively, the protection around the UK market will be kept at the same level as it was round the EU Single Market.
• Tariff Rate Quotas (TRQs): There are three issues concerning TRQs. The first is how to apportion existing EU28 TRQs between the UK and the EU27. The other is whether the UK issues any additional TRQs when it runs an independent trade policy. The apportioning of the old EU28 TRQs between the UK and the EU27 was agreed between both parties in late 2018^[11]; however, third countries such as the US, China and New Zealand rejected these proposals at the WTO^[12]. Table 3‑3 provides a top-level overview of how the EU28 TRQs have been apportioned between the UK and the EU27 with further detail available in Chapters 5 to 8 as well as in Annex III.

Source: European Commission

* Includes goat meat.

• It remains to be seen how this issue can be resolved, but in the absence of a wider agreement, the proposed UK-EU27 apportionments will be used in the modelling for this study. These are shown in summary format in Table 3‑3 above and in more detail in Chapters 5 to 8 for each sector. An announcement on new TRQs that the UK might introduce (second issue) was expected in September, but is now anticipated later in the year. This could include a 'new' Beef TRQ which could have a major impact on the competitiveness of Scottish agriculture (particularly if it is similar to the 230Kt beef TRQ that the UK suggested in March 2019). The third TRQ issue which arose during the primary research are TRQs agreed under FTAs with other countries. For instance, Canada is eligible for TRQ access to the EU for beef under CETA. How these TRQs are dealt with under the continuity agreements that the UK is seeking to complete with third countries that the EU has an FTA with, will also have some (largely limited) impact on Scottish agriculture.
• Northern Irish Protocol^[13]: A major concern is the possibility of an increase in tariff avoidance through illegal smuggling across the border between the Irish Republic and Northern Ireland dependent upon the Brexit Deal or No Deal outcome. This includes instances of avoiding import tariffs if agricultural products were moved through the Single Market (specifically Ireland), into Northern Ireland and then into Great Britain. In such cases, the impact of NTMs would also be significantly reduced compared to a direct import into Great Britain. This concern is emerged during the primary research as potentially having a notable impact in beef, and dairy where existing UK imports from the EU are dominated by that from the Republic of Ireland.
• Non-Tariff Measures (NTMs): These are Government-imposed requirements, unrelated to tariffs, but which are faced by trading businesses. When looking at NTMs it is important to recognise the differences between different products. Whilst using AVE percentages and applying across a whole category of trade (e.g. beef) is unlikely to capture all the nuances (e.g. chilled products more affected by value deterioration than frozen etc.), they have been used in the Agmemod model. However, for some commodities (e.g. beef) consideration has also been given to the top-5 products traded, so that greater nuance is captured. For this study, the NTM estimates are based on Andersons' NTMs model which has been developed as a result of several studies over recent years.
• Rules of Origin (RoO): These determine in which country a product and its components have to be produced to benefit from preferential tariffs agreed under an FTA. It is argued that even if the EU and the UK reach a trade agreement, many UK exports to the EU would not be eligible anymore to preferential access (if value chains remain unchanged) because not enough value added is being produced in the UK. This would especially be the case where in the case of agri-food where UK and EU agri-food supply chains are closely integrated, as compliance with European RoO requirements potentially could increase administrative costs for exports to the EU^[14]. In summary, as long as over 90% of raw materials (based on bill of materials) meet origin requirements as deriving from the UK or EU then they would be permitted tariff-free access under an FTA. If the 'non-indigenous' component is over 10%, then restrictions apply in an FTA scenario.
• Labour: for red meat, a 2017 survey (by QMS) shows 52% of the unskilled workforce, 44% of the skilled workforce and 16% of supervisory and management staff to be non-UK nationals. In total, among those businesses responding to the survey just in excess of 1,500 employees are non-UK nationals or some 43% of the total workforce. In addition, Food Standards Scotland reported that around 98% of their official veterinarians were non-UK nationals. A 2015 study found that a 1% increase in the migrant/non-migrant ratio in the semi/unskilled service occupation group led to a reduction of wages for those in that group of around 0.2%, larger than can be accounted for purely by compositional changes. As any negative effect of migration is skewed towards those at the lower end of the wage distribution, the analysis looked at the effect on different percentiles of earnings. The 6.7% increase in the EU-born working age population ratio between 1993 and 2017 implied a total effect on UK-born nominal wages of EU immigration of a 5.2% reduction to the 5th percentile, and a 4.9% reduction at the 10th percentile. Although not all agri-food jobs are low wage, it is arguable that, in the absence of free-movement, wage costs might have been around 5% higher. These analyses are conducted on permanent, full-time employment. Of course, much employment in agriculture, and especially horticulture is seasonal and casual. Another recent study carried out by Anderson Midlands^[16] for the NFU focused on the additional costs in the fruit and vegetable sector due to Covid-19 restrictions. Although not directly a Brexit issue, Covid has limited the supply of labour from the EU in the same way that ending free movement of labour will. It found that farm employment costs increased by between 6% and 15% in the UK fruit and vegetable sector. Five key areas contributed to this rise; worker availability & recruitment, training, accommodation, transport & logistics and operations.
• Regulation: The cost of regulation is partly captured in the NTMs analysis. However, regulation also impacts at farm level. This is both directly, in terms of complying with farm standards (e.g. NVZs, animal welfare) and indirectly through access to technology and inputs. In this study, it is assumed that there will be no major change in the regulatory burden (and cost) on Scottish agriculture. Both the Agriculture and Environmental Bills in the Scottish Parliament are designed to largely continue the status quo and to keep Scottish legislation in conformity with EU laws (as they evolve). This is contrast to Westminster where there is much talk of 'doing regulation better'. However, across the UK there seems little chance of a 'bonfire of red-tape' in the medium term. The second (indirect) impact of regulation affects the way agricultural technology is regulated. This influences the inputs UK farmers have access to and their relative competitiveness against international competition. Two often-cited examples are the regulation of genetic modification technologies and plant protection products (pesticides). As with on-farm regulation, this study assumes that no substantive changes, large enough to have an economic impact. For example, the Scottish Government has a long-standing policy^[17] of opposing the cultivation of GM crops in the open environment.