Economic impacts for Scottish and UK seafood industries post-Brexit: report

Executive Summary

Fisheries is one of the sectors that has been flagged as likely to be significantly affected by the UK’s exit from the EU. This project provides evidence on the likely impacts of different scenarios for total allowable catch ( TAC) or quota sharing and trade arrangements between UK and the EU, to better understand the potential impacts of different arrangements on fishing, aquaculture and processing, and potential knock-on impacts on other sectors of the economy. It has been prepared by ABPmer Ltd, InterAnalysis Ltd at the University of Sussex and Vivid Economics on behalf of Marine Scotland.

Approach

The potential impacts of four scenarios of UK TAC or quota sharing and trade arrangements (tariffs and non-tariff measures) with the European Union ( EU) and rest of the world are explored for ten different fish and shellfish species (cod, crab, haddock, hake, herring, mackerel, Nephrops, saithe, salmon and scallop) under four different scenarios.

The scenarios range from more liberal trade and greater fishing opportunities ( TAC or quota shares) for the UK to more restrictive trade without growth in fishing opportunity for the UK. They are not predictions of the future and serve only to highlight the relative importance of the international drivers for the UK seafood sector — level of fishing opportunity, tariffs and non-tariff measures ( NTMs). The analysis does not discuss the relative likelihood of any of the scenarios, which are modelled for analytical purposes only. The scenarios modelled are:

• Scenario 1: Removal of all tariffs on UK exports to all countries and the removal of UK tariffs on imports from all countries, a small reduction of non-tariff barriers between the UK and non- EU trading partners, and a reallocation of fishing quotas in the UK’s favour based on the zonal attachment principle.
• Scenario 2: Tariffs on UK- EU trade flows which are similar to the current EU–Norway agreement, a modest increase in non-tariff measures between the UK and the EU, and a reallocation of fishing quotas in the UK’s favour based on the zonal attachment principle, while maintaining current (baseline) trade arrangements with the rest of the world.
• Scenario 3: World Trade Organisation ( WTO) ‘Most Favoured Nation’ tariffs imposed on bilateral trade between the UK and the EU, together with a larger increase (compared to Scenario 2) in non-tariff measures, and a reallocation of the quotas under the zonal attachment principle as in the earlier scenarios, while maintaining current (baseline) trade arrangements with the rest of the world.
• Scenario 4: MFN tariffs applied between the UK and EU, and with non- EU countries. Non-tariff measures increase as in Scenario 3, but there is no reallocation of quotas. Quota allocations remain the same as currently between the UK and EU.

The impacts on prices, output, imports and exports are explored for the UK through partial-equilibrium modelling for each species, using a multi-market model including the UK, the ‘ EU27’ (current EU Member States, less the UK), and other key UK trading partners for each species. The wider economic impacts are explored in terms of the potential direct, indirect and induced GVA and employment impacts of the changes in output for Scotland, and an identification of the main sectors of the economy likely to be affected.

Trade impacts

In the absence of reallocation of quotas in line with zonal attachment, the liberalisation of trade modelled in Scenario 1 results in a decrease in the UK price index for all species, which is expected to benefit consumers, and an increase in both UK exports and imports. However, despite this representing a very substantial liberalisation of the UK’s trade, the changes in trade are modest, with the largest increase in exports being for salmon at 3.5%.

The impact of increased tariffs and non-tariff measures (under Scenarios 2–4) is negative for the UK (again, without considering reallocation of quotas in line with zonal attachment). Exports decline for all species modelled, and quantity and value of output, and imports, decline for all species except haddock. The reductions in output, exports and imports for the UK are 2.3%, 5.9% and 3.7% respectively under Scenario 4. Prices for all species rise, driven by the increase in tariffs and non-tariff measures.

Both tariffs and non-tariff measures contribute to these trade impacts, with the relative contribution variable across species and scenarios. Under Scenario 2 ( EU-Norway level tariffs), non-tariff measures have a bigger impact than tariffs for many species, however in Scenarios 3 and 4 ( WTO Most Favoured Nation tariffs), tariffs and non-tariff measures have a similar magnitude of effect, at the levels modelled here.

The reallocation of quotas in line with the zonal attachment principle results in increased UK production and dominates the impacts of other elements of the scenarios (tariffs and non-tariff measures). The impact of increasing UK production on output and exports outweighs the impact of the imposition of tariffs and non-tariff measures for the species and trade codes modelled, resulting in an aggregate increase in output of 10% and increase in exports of 12%, even with the imposition of WTO Most Favoured Nation tariffs on trade with the EU (Scenario 3). There is also a reduction in imports of 5%. For Scenario 1, the aggregate increase in output is 12% and increase in exports is 17%, with a 0.4% reduction in imports.

The impact varies across species, reflecting differential impacts across fleet segments and the aquaculture industry, and associated processing industry, mostly determined by the potential gains (or not) from the reallocation of quotas in line with zonal attachment compared to the current Relative Stability-based quota allocation. Hake, herring, mackerel and saithe all stand to gain significant percentage increases in quota allocation under zonal attachment, resulting in increases in output and exports, and reductions in imports.

Fleet sectors targeting non-quota species (crab and scallop) and the salmon aquaculture industry, which do not stand to gain from quota increases under the zonal attachment principle, suffer the negative impacts of higher tariffs and non-tariff measures without the benefits of a reallocation of quotas. Therefore, they experience a contraction in output value with the imposition of EU-Norway type tariffs (and non-tariff measures), and a greater contraction with WTO Most Favoured Nation tariffs and non-tariff measures. These are of the order of –0.6% for salmon and –4.4% for scallop (under Scenario 4). The impact on salmon is moderated by the large proportion of exports that go to non- EU countries (mainly the USA), and the low level of the EU’s Most Favoured Nation tariffs on less processed forms of salmon (2% on fresh and chilled fish and fresh, chilled and frozen fillets). Further, current UK trade with most non- EU countries is not based on preferential trade agreements, thus it already faces the WTO MFN tariffs and higher non-tariff measures.

Differences between species also arise from the proportion of UK exports that go to the EU. Without a change to quota allocations, the largest negative impacts are on cod, hake, herring and saithe, due to the large proportion of exports of these species that go to the EU, together with the relative increase in the level of tariffs (which are greater for herring) (Scenario 4).

The focus on ten species and the trade codes that relate specifically to those species means that the impact on trade for more mixed and generic categories, including frozen fillet blocks which are used as inputs to the processing industry, are not modelled. The modelling therefore does not reflect the full potential impact on the processing sector, particularly that part of it that relies on imported processed material. However, the UK would be able to set its own tariffs for imports for these trade codes, and frozen products would be less affected by non-tariff measures that might result in border delays.

Wider economic impacts

In terms of the wider economic impacts, the direct impacts in Scotland of Scenario 1 are an increase in economic output of around £320 million from 2015, the majority of which comes from the processing sector. The indirect impacts add a further £170 million and the induced impacts another £50 million. The total impact is a £540 million or 21% increase in output across the Scottish economy. This would be associated with a total increase of 5,000 FTE jobs and £210 million in GVA from 2015, including direct, indirect and induced effects.

In comparison, the direct impacts of facing WTO Most Favoured Nation tariffs and increased non-tariff measures — with no reallocation of quotas (Scenario 4) — would be a decrease in direct economic output in Scotland of around £50 million. Again, most of the impact is on the processing sector. The indirect impacts would subtract a further £27 million from Scotland’s economy and the induced impacts another £8 million. The total impact would be an £85 million or 3% decrease in economic output from 2015. This would be associated with a decrease of 429 FTE jobs (direct, indirect and induced), of which 44% would be in the processing sector and 43% to the fishing sector. The total GVA under Scenario 4 decreases by £20 million.

The sectors of the economy that are most affected by the indirect effects (purchases by the sectors directly affected) are fishing, fish and fruit processing, and aquaculture sectors. This is because the sectors purchase from each other and within themselves. Other top ten affected sectors relate to the purchase of items associated with co-processing of fish, such as food and packaging. Transport, power and fuel, and financial services sectors are also in the top ten sectors that are indirectly affected. Together, the top ten affected sectors that are indirectly affected account for 72% of the indirect impact.

Conclusions

Overall, the project successfully developed seafood trade models for ten individual fish and shellfish species. In the scenarios analysed, the gains for the UK economy of a reallocation of quotas between the UK and EU in line with the zonal attachment principle are potentially significant and outweigh the negative impacts of an increase in tariff and non-tariff barriers. However, depending on the level of tariffs imposed, some sectors may be overall negatively impacted, particularly fleet sectors targeting non-quota species and the aquaculture industry. A focus on achieving an agreement with the EU on sustainable fishing and TAC or quota sharing arrangements should therefore be a priority for negotiations, along with considerations for free access to the EU market.

Further development of the seafood trade models is recommended, including updating and refining some of the underlying data, developing models for additional species, and developing models for additional trade codes that are important to parts of the UK seafood processing industry and to increase the coverage.