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

6. Comparison Between the Main and Alternative Baselines

Before examining in detail the impact of the selected non-EU FTAs on UK and Scottish agriculture (see Chapters 7 and 8 respectively), this Chapter provides a top-level, long-term, comparison of the Main Baseline and the Alternative Baseline (No-Brexit) scenario results at a UK level.

As set-out in Chapter 1, the Main Baseline reflects the continuation of the current situation concerning the UK's trade with overseas partners in the longer-term. In other words, Brexit has occurred with the UK-EU TCA has been applied and roll-over FTAs have been put in place covering the trade deals that the UK was party to when it was an EU Member State.

The Scottish Government in its original ITT, requested top-level insights on how the Scottish agri-food industry (i.e., selected sectors) might have performed had there been no Brexit. Accordingly, an Alternative Baseline (No-Brexit) scenario was developed. In this section, a top-level comparison between the Main Baseline and No Brexit scenario is outlined, chiefly focusing on comparing long-term exports, imports and Gross Value Added (GVA) in each selected sector as well as for agri-food generally. This comparison is undertaken at a UK level.

6.1 Baseline Drivers

To conduct long-term modelling on the Main and Alternative Baselines, assumptions are required on the expected rates of growth of exogenous variables, technological progress, land expansion, productivity improvements in feed sectors, and historical changes in trade and CAP policies that need to be considered. These are summarised in Table 6‑1 below and constitute the main drivers of the Main and Alternative Baselines.

Table 6‑1: Summary of the Main Assumptions in the Baseline Scenarios

Description: Population growth: Shared Socio Economic Pathways (Scenario 2 (SSP2)) – Medium Variant (Middle of the Road scenario), Historical data from World Bank GDP growth: combination of sources: SSP2, World Bank Indicators Labour supply: based on labour force projections (ILO)

Description: Land productivity: about 0.5% p.a. based on SSP2 Feed efficiency improvements in livestock sectors (combines drivers of better feed conversion (+) and livestock intensification (-)

Description: Biofuel share (blending targets), CAP budget, Implementing FTA between the EU and Canada

Description: Align trade flows in the historical period from COMTRADE

Description: Implement NTM costs for trade between EU and UK (-0.1% ~ -10%) Reduce unskilled labour supply (-2%) Align the UK Global Tariff Lines (increase import tariffs) for the key commodities

Source: WUR

These underlying assumptions are explained in more detail in Annex I (section 1.2.5). At a macroeconomic level, GDP differences between the Main and Alternative Baselines are notable. Between 2019 and 2037, UK GDP growth is estimated to increase by around 37% over this period under the Main Baseline (Brexit) scenario. Under an Alternative Baseline (No Brexit) scenario, GDP growth would have been slightly higher at around 40%.

The other main drivers of change under the Main and Alternative Baseline scenarios were the changes introduced as a result of Brexit. Here, NTM changes introduced into UK-EU trade from January 2021 and detailed in section 5.3.5, were central to the differences between both Baseline scenarios, presented in section 6.2.

As explained in Annex I, a labour supply shock (of -2%) in the UK as a result of the ending of Free Movement, was applied to unskilled labour supply in the MAGNET modelling. This shock resulted in a 7.5% increase in labour costs within agri-food under the Main Baseline vis-à-vis the Alternative (No Brexit) Baseline.

6.2 Comparison Between Both Baselines

Considering the above assumptions, long-term projections of exports, imports and gross value added (assumed here to be a proxy for output in monetary terms) were compiled under both Baselines.

As Table 6‑2 shows, long-term projections of UK exports (calculated as a percentage change of 2037 vs 2019) of the key commodities show declining trends, with the exception of barley. The exports' reduction ranges from about -8.3% for wheat to almost -22% for beef. It is clear that the UK's long-run competitiveness is expected to deteriorate, particularly in the meat and dairy. The projections show that Brexit accentuates the declining export trends for the key commodities of animal origin. This is reflected in the differences in the percentage changes between the Alternative Baseline and the Main Baseline. Brexit makes the exports' decline more pronounced, due to the impeded access to the EU market.

The drivers behind the UK's lower competitiveness are largely determined outside of the UK – on the world markets and, more specifically, by the situation on the EU market. Under both the Main and the Alternative baselines, it is projected that the EU will substantially increase imports of beef and sheep meat from Latin America. This region has the most competitive production costs globally. For wheat and dairy, the EU will enjoy a substantial increase in exports (about 30%) which will be mostly targeted to the Sub-Saharan African countries. At the same time, private domestic consumption of wheat and dairy in the EU will increase only moderately, reducing the need for imports. As the EU is a major export market for the UK, this explains the reduction UK's exports of wheat and dairy in the baseline situations.

UK barley exports increase under both the Main (5.1%) and Alternative Baselines (6.5%), with increases being more pronounced for the latter. The extent to which Scottish barley exports will feature will be contingent on demand within the Scottish whisky industry.

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Table 6‑3 shows long-term trends in UK's imports. The projected growth rates are comparable across the commodities, with an expected increase in imports of around 14% under Brexit, and 18% without Brexit. As seen above, the UK-EU TCA trade deal creates some distortion for trade between the EU and the UK. This is particularly due to NTMs, which reduce the UK's competitiveness in the EU market and reduce trade volumes (both exports and imports) whilst increasing domestic production, ceteris paribus (i.e., all other things being equal).

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Table 6‑4 shows projected changes in Gross Value Added (GVA). In line with the decline of exports, GVA is also expected to decline, with largest declines observed for sheepmeat, barley and wheat^[2].

For some sectors (e.g., wheat, barley, dairy, beef), the effect of Brexit has led to a less pronounced GVA decline. This is because by reducing trade with the EU, British consumers' reliance on domestic production slightly increases, leading to a moderately positive production effect (compared to the no-Brexit situation). This is very much related to the interruptions in trade between the EU and UK and the necessity to reorientate food processing from imports to domestic industry. Similar conclusions were found in Bartelings and Smeets Kristkova (2022)⁹ who studied the impact of Brexit on fisheries.

Regarding sheep, the negative impact of Brexit is related to the slightly lower tariffs applied by the UK compared to the EU that make imports more attractive. In addition, the NTMs imposed on UK sheepmeat exports to the EU, traditionally accounting for 25-40% the UK lamb crop are also important.

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.