Agricultural food and drink sector - impact of future UK Free Trade Agreement scenarios: research

Executive Summary

This study assesses the impact on Scottish agriculture of Free Trade Agreements (FTAs) between the UK and four selected non-EU partners, namely: Australia; New Zealand (NZ); Canada; and the Gulf Cooperation Council (GCC). It quantifies the FTA impacts on selected Scottish agricultural sectors namely: cereals (wheat and barley); livestock (dairy, beef and sheep); and potatoes. This has been done using two FTA scenarios, Low Liberalisation (tariff-free trade with a 25% reduction in non-tariff measure (NTM) costs) and High Liberalisation (tariff-free trade with a 50% NTM costs' reduction). These scenarios are compared to the Main Baseline whereby the UK has left the EU and the Trade and Cooperation Agreement (TCA) is in place, as are the rollover trade deals that the UK agreed during the Brexit process. Additionally, a top-level comparison was given between the Main Baseline and an Alternative Baseline (No-Brexit) scenario.

The research has been undertaken using a combination of MAGNET, a computable general equilibrium economic model to assess the individual and aggregated impacts of each FTA, as well as desk-based research and industry interviews with 19 experts representing organisations in Scotland and the UK, Australia, New Zealand, Canada and the Gulf region.

Assessments were also undertaken on the impact of tariffs, non-tariff measures (NTMs) and tariff rate quotas (TRQs) on UK trade with each selected partner, as well as the EU. These served as inputs to the MAGNET modelling which was undertaken by Wageningen University and Research (WUR) to assess FTA impacts on wheat, barley, beef, sheepmeat and the dairy sector. These modelling results were then used in conjunction with additional analyses on potatoes to ascertain the impact of the FTAs on UK and Scottish agri-food output and farm-level performance in Scotland.

Overall Results

• Impact of the selected FTAs is generally limited, but significant in some sectors: as Table A depicts, the projected long-term impact of the FTAs on Scottish output is relatively small in most cases. The exceptions are sheepmeat, where output is forecast to fall by around 10.5% to 11% under the Low and High Liberalisation scenarios. Beef and wheat are also projected to fall (both by around 3% to 6% depending on the scenario). Conversely, liquid milk output is forecast to grow by 3% to 9% in value terms, indicating significant FTA opportunities for dairy products. Barley is forecast to show a small long-term gain. The input from industry interviews also presents a similar perspective.
• Cumulative impacts of future FTAs will be more significant: although the aggregated impact of the selected FTAs is relatively limited, the cumulative effect of multiple trade deals over the longer term should not be underestimated. This is especially so if the UK agrees FTAs with agricultural powerhouses such as the US and Mercosur (including Brazil and Argentina).

Sources: Andersons, WUR and Scottish Government Note: * in real-terms based on 2019 prices

• FTAs with Australia and NZ are main drivers of declines Scottish sheepmeat output: whilst NZ has only been partially fulfilling its TRQ in recent years (42Kt exported to UK out of a 114Kt TRQ), the introduction of the new FTA is seen by many as a strong signal for NZ businesses to recapture trade with the UK, which was lost when the UK joined the EEC (NZ exported 221Kt of lamb to the UK in 1972-73). Given the provisions of the UK-NZ FTA and the MAGNET modelling results, it is likely that in the coming years, increased imports from NZ will be catered for via the pre-existing WTO TRQ. Australia will also be keen to increase sheepmeat exports to the UK. Whilst both Australia and NZ are heavily focused on Asia, if geopolitics changes the trading relationships with China, it is likely that additional volumes of antipodean sheepmeat will be exported to the UK.
• Beef sector will come under notable pressure but some opportunities also exist: whilst imports from Australia and NZ will exert significant pressure, a trade deal with Canada is likely to generate some export opportunities. Given the brand recognition of Scotch beef, it should be relatively well-positioned to exploit such niches. That said, safeguarding domestic sales, particularly to UK retailers, from overseas competitors will remain most crucial.
• The FTAs with Australia and NZ set important precedents: the recently agreed FTAs with Australia and NZ give important signals to trade negotiators elsewhere as to what the UK is willing to cede in trade negotiations. Therefore, the standards that the UK is willing to accept for imports is pivotal, especially as other FTA partners will likely push for more concessions during negotiations. Any significant changes to standards relating to food safety and hygiene, the environment and animal welfare will have major implications for Scottish produce. This is not just on the home market, but overseas as well, especially in terms of highly-renowned brands such as Scotch Beef.
• FTA opportunities for dairying driven by the GCC: of the commodities assessed, the dairy sector is best positioned to see export growth, particularly to the GCC, where Scottish dairy produce has already gained traction in high-end segments. UK exports to GCC in 2018-20 are valued at £38m and could rise by as much as 49% in a High Liberalisation scenario. Opportunities theoretically exist to export to Canada, but, as it is highly protectionist, sales are likely to be limited to select niches.
• Long-term impact of Brexit is deemed to be limited: Table A also shows relatively small differences in output under the Main Baseline (incorporating Brexit) and the Alternative Baseline (No-Brexit scenario). Although seed potatoes were not modelled using MAGNET, the loss of the EU and NI markets for Scottish seed potato exports is significant and the restoration of this market access is a key goal for the sector. It should also be a primary objective for policy-makers.

Farm-Level Results

Table B shows the profitability impacts of the FTA scenarios and the Main Baseline against the 2019/20 Base Year, using Scottish Farm Business Income (FBI) data. This has been done via a static subtraction from the FBI results comparing Main Baseline and FTA scenarios with the Base Year. Importantly, the production-related FTA impacts have not been modelled at the farm-level and support is held constant.

• Significant FBI declines: in both the Main Baseline and FTA Scenarios in comparison with the Base Year (2019/20) although the differences between the Main Baseline and FTA scenarios are quite small. This is chiefly linked with declining prices resulting from a continuation of the long-term trend towards increased productivity in a perfect competition environment (i.e. farmers as price takers).
  • Price declines are the major driver: milk prices are forecast to decline by 5.7% versus the Base Year. Cattle and sheep prices are projected to reduce by 4.1% and 3.6% respectively whilst cereal price declines are in the region of 3.2% to 3.4%.
  • Brexit only plays a minor role: in any FBI differences between the Main Baseline and 2019/20.
  • Without support, farms will generate losses on average: In some cases (e.g. Lowland Cattle & Sheep), FBI declines almost equate to the levels of support that these farms received during 2019/20. In all instances, the long-term margin from agricultural production is projected to be negative. Thus underscoring the crucial role that support will play in sustaining farm incomes.

Sources: Scottish Farm Business Survey, Andersons

Note: Figures are rounded to the nearest £100

• New FTAs to have negligible impact on potatoes: industry input suggests that the new FTAs will have minimal impact on seed potatoes' profitability. Instead, the impact of the loss of the EU market for Scottish seed potatoes is estimated to have led to a decline in seed potato prices of approximately 4%. Restoring market access to the EU27 and Northern Ireland is a priority for the sector.

Other Key Findings

• Evidence Review shows that NTM arrangements and geographic proximity are crucial: in determining the degree of impact resulting from any FTA and are just as important as tariffs and TRQs. This generally chimes well with the key findings from this study.
• NTM ad-valorem equivalents (AVEs) are less than 10% for the selected commodities and FTA partners: As Table C shows for UK imports, they are highest for potatoes, ranging from 2.7% to 7.2% for imports into the UK. For meat and dairy product imports, NTM AVEs range from just over 1% to 6%. NTM AVEs for wheat and barley are negligible. NTM costs are lowest for NZ as it has a veterinary agreement with the UK and its prices are generally higher. Table D shows that the NTM AVEs for imports into selected partner countries are broadly similar to the AVEs for imports into the UK.

Source: The Andersons Centre

Source: The Andersons Centre

• Impact of selected FTAs on wages is projected to be minimal: in the High Liberalisation scenario, wages are projected to be just 0.8% higher for cereals and 0.2% higher for dairy and red meat. Of more significance, was the ending of Free Movement, which contributed to significant increases in labour costs (7.5% for full-time and 15% for part-time / casual). This impact is most pronounced in meat processing; however, it is in horticulture (not within scope) where there are most difficulties.
• FTAs' effects on employment are linked with GVA impacts: employment in the sheepmeat sector is projected to decline by around 11%. Declines in the wheat and beef sectors are projected at 3% to 6% in the Low and High Liberalisation scenarios respectively. Conversely, dairy sector employment could rise by 9% in the High Liberalisation scenario (3% in Low Liberalisation). Minimal change is forecast for barley but influence of demand for whisky will be important here.
• Short-term impacts of Brexit are more pronounced on UK exports to the EU: in comparison with imports in the opposite direction. This is because the UK Border Operating Model for controlling imports will not become fully functional until the end of 2023. Conversely, UK exports to the EU have been subject to border controls and checks since January 2021. Furthermore, the impact of regulatory controls on UK-EU trade has had a more substantial impact on small and micro enterprises. These businesses have ceased trading with the EU in many cases. Therefore, whilst overall trade might not be that affected, this trade is now in the hands of larger traders to a much greater extent.
• Long-term impacts of Covid-19 deemed to be limited: undoubtedly, the Covid-19 pandemic has had a major economic impact during 2020 and 2021. However, its effect on agri-food was relatively limited. Although Covid-related labour cost and supply-chain issues are anticipated to linger for some time, they are not expected to have a major long-term impact. Most industry experts believe that the Russia-Ukraine conflict will have a more telling impact on the global agri-food industry.
• Land-use change pressures will be highly influential: industry feedback suggests that whilst trade-related pressures will be significant for grazing livestock, other long-term pressures will also feature prominently. In particular, the pressure (incentive) for land-use change arising from poor profitability in grazing livestock as well as societal needs to offset greenhouse gas emissions will heavily influence the future size and structure of the industry. This is especially so in Scotland where tree-planting has already led to declines in sheep populations. This trend is expected to continue.
• Scottish produce is internationally renowned and its reputation can be leveraged: Both domestics and overseas industry interviewees suggest exploiting the brand reputation of Scotch beef, whisky and salmon in overseas markets. UK-based interviewees believe that this reputation needs to be leveraged into other sectors, especially lamb and dairy products.

Final Remarks

The Scottish agri-food and farming industry has entered a "Decade of Disruption" and is grappling with multiple challenges arising from inflation, policy reform, structural challenges, GHG emissions in addition to the prospect of new FTAs. Whilst the onus is ultimately on the industry to adapt to such pressures, it is incumbent on policy-makers to assist where possible in managing the transition ahead.

Environmental concerns have become a central consumer issue. This calls for a compelling value proposition for Scottish agri-food produce that is high-quality and "Eco-friendly". This would help to safeguard the position of Scottish produce domestically and serve as a flagship to capture overseas sales.

Change has always been a feature of farming which has come through multiple crises in the past. The Covid-19 pandemic, Brexit and the Russia-Ukraine conflict have created new challenges. But, these crises have also shown the importance of robust, secure and high-integrity supply-chains. Given the strong international reputation of Scottish food and drink, whilst the new FTAs will bring challenges, there are also opportunities, provided that there is a level playing field for all.