DIRECTORATE-GENERAL FOR INTERNAL POLICIES
Policy Department for Structural and Cohesion Policies
AGRICULTURE AND RURAL DEVELOPMENT
Research for AGRI Committee -
Implications of ‘Brexit’ for the EU
agri-food sector and the CAP:
budgetary, trade and institutional
issues
WORKSHOP
This document was requested by the European Parliament's Committee on Agriculture and
Rural Development.
RESPONSIBLE FOR THE POLICY DEPARTMENT
Research manager: Albert Massot
Project and publication assistance: Virginija Kelmelytė
Policy Department for Structural and Cohesion Policies
European Parliament
B-1047 Brussels
E-mail: [email protected]
LINGUISTIC VERSIONS
Original: EN
ABOUT THE PUBLISHER
To contact the Policy Department or to subscribe to its monthly newsletter please write to:
Manuscript completed in November 2017.
© European Union, 2017.
Print ISBN 978-92-846-2354-9 PDF ISBN 978-92-846-2353-2
doi:10.2861/965335doi:10.2861/947214
QA-06-17-353-EN-C
QA-06-17-353-EN-N
This document is available on the internet at:
http://www.europarl.europa.eu/RegData/etudes/STUD/2017/602013/IPOL_STU(2017)60201
3_EN.pdf
DISCLAIMER
The opinions expressed in this document are the sole responsibility of the author and do not
necessarily represent the official position of the European Parliament.
Reproduction and translation for non-commercial purposes are authorized, provided the
source is acknowledged and the publisher is given prior notice and sent a copy.
DIRECTORATE-GENERAL FOR INTERNAL POLICIES
Policy Department for Structural and Cohesion Policies
AGRICULTURE AND RURAL DEVELOPMENT
Research for AGRI Committee -
Implications of ‘Brexit’ for the EU
agri-food sector and the CAP:
budgetary, trade and institutional
issues
WORKSHOP
Abstract
This is the reference document of the Workshop on ‘The Implications of ‘Brexit’
for the EU agricultural sector and the CAP’ of 9th November 2017, organised by
COMAGRI and the Policy Department B. The purpose of this Workshop was to
examine and debate the main budgetary, trade and institutional issues related to
the Brexit process at the current state of negotiations.
This document is structured in three parts:
1. Possible impact of Brexit on the EU budget and, in particular, CAP funding.
2. EU - UK agricultural trade: state of play and possible impacts of Brexit
3. Possible transitional arrangements related to agriculture in the light of the
future EU - UK relationship: institutional issues
November 2017
PE 602.013 EN
Policy Department for Structural and Cohesion Policies
3
TABLE OF CONTENTS
Possible Impact of Brexit on the EU Budget and, in
Particular, CAP Funding 5
EU - UK Agricultural Trade: State of Play and Possible
Impacts of Brexit 41
Possible Transitional Arrangements Related to
Agriculture in the Light of the Future EU - UK
Relationship: Institutional Issues 107
Policy Department for Structural and Cohesion Policies
4
DIRECTORATE-GENERAL FOR INTERNAL POLICIES
Policy Department for Structural and Cohesion Policies
AGRICULTURE AND RURAL DEVELOPMENT
Research for AGRI Committee -
Possible impact of Brexit on the EU
budget and, in particular, CAP funding
STUDY
Abstract
This note assesses possible consequences of Brexit for the EU budget and
the Common Agricultural Policy. It discusses the importance of the ‘Brexit
bill’ and the loss of the British net contribution. Furthermore, it describes
how the EU budget and spending on the Common Agricultural Policy can
be adjusted to the new situation and estimates how the different options
would affect EU Member States and their net balances.
IP/B/AGRI/CEI/2017-086 October 2017
PE 602.007 EN
This document was requested by the European Parliament's Committee on Agriculture and
Rural Development.
AUTHORS
Jacques Delors Institut – Berlin: Jörg Haas
Notre Europe-Jacques Delors Institute: Eulalia Rubio
Research manager: Albert Massot
Project and publication assistance: Virginija Kelmelytė
Policy Department for Structural and Cohesion Policies, European Parliament
LINGUISTIC VERSIONS
Original: EN
ABOUT THE PUBLISHER
To contact the Policy Department or to subscribe to updates on our work for the AGRI
Committee please write to: [email protected]
Manuscript completed in October 2017
© European Union, 2017
Please use the following reference to cite this study:
Haas J, Rubio E, 2017, Research for AGRI Committee – Possible impact of Brexit on the EU
budget and, in particular, CAP funding, European Parliament, Policy Department for Structural
and Cohesion Policies, Brussels
Please use the following reference for in-text citations:
Haas, Rubio (2017)
DISCLAIMER
The opinions expressed in this document are the sole responsibility of the author and do not
necessarily represent the official position of the European Parliament.
Reproduction and translation for non-commercial purposes are authorized, provided the
source is acknowledged and the publisher is given prior notice and sent a copy.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
7
CONTENTS
LIST OF ABBREVIATIONS 9
LIST OF TABLES AND FIGURES 10
EXECUTIVE SUMMARY 11
1. INTRODUCTION 13
1.1. Objectives and methodology 13
1.2. Basic features of the EU budgetary system 14
2. THE IMPACT OF BREXIT ON THE EU BUDGET 17
2.1. One-off effects: The ‘Brexit bill’ 18
2.2. Structural effects: The ‘Brexit gap’ and the different scenarios to adjust to it 21
3. THE IMPACT OF BREXIT ON THE CAP BUDGET 25
3.1. Basic features of the CAP budget 25
3.2. How Brexit can alter debates on post-2020 CAP spending 28
3.3. Estimating the Brexit effect on the CAP: data and methodology 29
3.4. Current CAP net balances 30
3.5. Adjusting the CAP to Brexit 31
4. CONCLUSIONS AND RECOMMENDATIONS 37
REFERENCES 39
Policy Department for Structural and Cohesion Policies
8
Possible impact of Brexit on the EU budget and, in particular, CAP funding
9
LIST OF ABBREVIATIONS
AMIF
CAP
COMAGRI
EAGF
EARDF
EIB
ESIF
ISF
MFF
OBB
OR
ORD
RAL
TFEU
TOR
Asylum Migration and Integration Fund
Common Agriculture Policy
Committee on Agriculture and Rural Development
European Agriculture Guarantee Fund
European Agriculture Rural Development Fund
European Investment Bank
Europan Structural and Investment Fund
Internal Security Fund
Multiannual Financial Framework
Operating Budgetary Balance
Own Resources
Own Resources Decision
Reste-a-Liquider
Treaty on the Functioning of the European Union
Traditional Own Resources
Policy Department for Structural and Cohesion Policies
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LIST OF TABLES
Table 1
Main components and relative size of CAP budget 2014-2020 26
LIST OF FIGURES
Figure 1
The impact of a €10 billion increase in contributions on Member States’ net balances 22
Figure 2
Spending cuts in comparison 23
Figure 3
CAP pre-allocations per Member State, 2014-2020 (in € million, at current prices) 27
Figure 4
Relative importance of pillar 1 and 2 per Member State 27
Figure 5
CAP net balances of EU Member States, 2014-2016 average 30
Figure 6
Estimated change in CAP net balances resulting from a €3 billion increase in national
contributions 32
Figure 7
Estimated change in CAP net balances resulting from a €3 billion CAP spending cut 33
Figure 8
Estimated change in CAP net balances resulting from a €10 billion CAP spending cut 33
Figure 9
Estimated change in CAP net balances resulting from a €10 billion reduction in CAP
pillar 1 spending 34
Figure 10
Estimated change in CAP net balances resulting from a €10 billion reduction in CAP
pillar 1 spending (only old Member States) 35
Possible impact of Brexit on the EU budget and, in particular, CAP funding
11
EXECUTIVE SUMMARY
This in-depth analysis assesses possible consequences of Brexit for the EU budget and, in
particular, the Common Agricultural Policy (CAP).
We discuss how the negotiations about the ‘Brexit bill’ could affect the current and the
post-2020 Multiannual Financial Framework (MFF), and CAP spending in particular.
We analyse how Brexit affects the EU budget structurally and how the EU can adjust
to the expected budget shortfall.
We offer a quantitative assessment of the impact of Brexit on CAP net balances,
including different adjustment scenarios and estimates of their impact on the remaining
Member States.
The Brexit bill
Negotiations about the so-called ‘Brexit bill’ or ‘financial settlement’ will determine the extent
to which the UK pays its share of the financial obligations jointly undertaken by EU countries
while the UK was member of the EU.
At the moment of writing, negotiations on the Brexit financial settlement are in
deadlock. The EU has published its position on the matter but the UK has so far refused
to detail which obligations it recognises.
The implications of the Brexit bill negotiations for CAP spending depend not
only on the overall size of the bill agreed but on the type of financial obligation
covered. If the UK accepts to contribute to the EU budget until the end of MFF but
does not cover RAL pending in 2020, both EARDF and EAGF spending will be preserved
until 2020 but negotiations about the next MFF will be complicated by an unexpectedly
large amount of RAL.
The Brexit gap
We estimate that Brexit will leave a permanent shortfall of €10.2 billion per year in the
EU budget. This gap has to be filled either through higher national contributions, spending
cuts, a combination of both, or the introduction of new Own Resources.
According to our calculations, an increase in contributions disproportionally
affects some of the EU’s largest net contributors such as Germany, The
Netherlands and Sweden. In part, this is because they currently benefit from a ‘rebate
on the rebate’ on their contributions that will no longer apply once the UK leaves. Brexit
not only increases the financing burden on the EU-27, it also changes how the burden
is shared.
The Brexit gap can also be addressed by reducing spending. It is, however, important
to stress that the required savings are substantial compared to many EU programmes.
Therefore, large spending categories like CAP are likely to come under pressure
if the EU budget is cut.
There is no default method for adapting the current MFF to the departure of a Member
State.
Policy Department for Structural and Cohesion Policies
12
Brexit and the CAP
We estimate that the British net contribution in the field of CAP amounts to €3 billion
annually. However, spending cuts after Brexit could exceed that sum if other EU programmes
are prioritised. We outline how the CAP can be adjusted to Brexit and what the implications
for Member States are:
Higher contributions affect today’s biggest net contributors the most. If the
current CAP spending levels are maintained after Brexit, Member States’ contributions
to the CAP must increase by €3 billion. We estimate that in this scenario, large net
recipients like Poland and Greece are almost unaffected. Austria, Germany, The
Netherlands and Sweden lose the most in relative and in absolute terms. Generally,
net contributors pay for the lion’s share of the shortfall, which increases imbalances in
the CAP.
Reducing CAP spending puts a higher burden of adjustment on CAP net
recipients. Our estimates suggest that cutting expenditure by a relatively small
amount like €3 billion has a mixed effect. Among the largest losers in this scenario are
CAP net contributors like Germany and The Netherlands, but also net recipients like
Spain and Poland.
If CAP expenditure is cut by €10 billion, net contributors gain. At the same time, the
losses of net recipients are significant in this scenario, not only in absolute terms, but
also compared to government spending in relatively poor countries like Bulgaria.
Conclusions and recommendations
There is no pain-free way of adjusting CAP spending to the Brexit gap.
However, the budgetary impact of the different reform options is in most cases limited
when compared to general government spending.
The EU should be careful about linking the agreement on the Brexit bill to an
agreement on a future and hypothetical transitional period, as proposed by the
UK. Moving to the second phase without any clear agreement on the Brexit bill could
enable the UK to use money as a bargaining chip when negotiating the future
relationship between the EU and the UK.
The EU’s first priority in the Brexit bill negotiations should be to minimise the
adverse financial impact of Brexit on the current and future MFF. If concessions
are needed, they can come from other elements of the deal such as the UK’s
participation in EU bodies and funds, payment for pensions and other employees’
benefits or payment for contingent liabilities.
Bargaining about budget cuts and contribution increases should not be limited
to one spending area, but include the entire system of EU finances. For example, net
contributors might be more willing to accept further increases in their payments if the
overall budget is reformed.
While Brexit can provide the narrative for a profound reform in the architecture of the
CAP, aimed not only at reducing overall CAP spending but at rendering CAP more
effective and sustainable, a major revision of CAP might not be feasible before 2022 or
2023, with implementation starting in 2024 or 2025.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
13
1. INTRODUCTION
KEY FINDINGS
EU expenditure is planned through annual budgets and Multiannual Financial
Frameworks (MFF). MFFs are adopted unanimously by the Council whereas annual
budgets are subjected to qualified majority voting.
Most EU expenditure is entered into the budget through differentiated appropriations.
The stock of unpaid commitments at a given point of time is known as ‘RAL’
or reste-à-liquider.
The EU budget is mostly financed by national governments’ GNI-based
contributions. The UK enjoys a permanent rebate on its contribution, granted in the
Own Resource Decision (ORD). Austria, Germany, the Netherlands and Sweden have
been granted a rebate based on the British rebate.
1.1. Objectives and methodology
This in-depth analysis assesses possible consequences of Brexit for the EU budget and, in
particular, the Common Agricultural Policy (CAP). It provides input for the workshop
‘Implications of Brexit for the EU agri-food sector and the CAP: budgetary, trade and
institutional issues’, organised by the Committee on Agriculture and Rural Development
(COMAGRI) and the Policy Department B of the European Parliament. The note includes:
A discussion of the main issues at stake in the negotiations about the so-called
‘Brexit bill’ and the implications of different outcomes for the current and post-2020
Multiannual Financial Framework (MFF) and for CAP spending in particular.
An analysis how Brexit affects the EU budget structurally and how the EU can
adjust to the expected budget shortfall.
A quantitative assessment of the impact of Brexit on CAP net balances,
including different adjustment scenarios and estimates of their impact on the remaining
Member States.
We define the net balance as a Member State’s VAT- and GNI-based contributions to
the EU budget minus total EU spending in the country. We do not take into account
Traditional Own Resources (TOR) because they are direct EU revenues that are merely
channelled through Member States. Furthermore, unlike the European Commission’s
‘operating budgetary balances’ (which exclude administrative spending), the net balances we
report are not supposed to be a measure of fairness, but rather an indicator of Member States’
material interests.
In accordance with the terms of reference provided by the European Parliament, the analysis
of the impact of Brexit on CAP spending is based on the current CAP budget for 2014-2020
and the institutional framework adopted by the European Institutions concerning the Brexit
negotiations. This note does not take a position on the question what the appropriate level of
CAP spending is and it does not evaluate possible options for reforming CAP.
Policy Department for Structural and Cohesion Policies
14
1.2. Basic features of the EU budgetary system
The EU budget has some particular features that distinguish it from national budgets. A crucial
distinctive aspect is the fact that it is expenditure-led (resources are raised to match what is
needed to cover the agreed level of EU expenditures). This, together with the fact that the EU
budget is mostly financed through Member States’ direct transfers, explains the existence of
various mechanisms and rules aimed at guaranteeing budgetary discipline and ensuring an
orderly development of expenditure over time.
1.2.1. Annual budgets and the Multiannual Financial Frameworks (MFF)
EU expenditure is planned through annual budgets and Multiannual Financial Frameworks
(MFF) covering a period “of at least five years”. MFFs are not multi-annual budgets. They do
not set actual expenditure figures but provide a framework for financial programming and
budgetary discipline that has to be respected by annual budgets. In particular, the MFF sets
the maximum annual amount of resources (‘ceilings’) that the EU can allocate
(‘commitments’) to each category of expenditure (‘heading’). It also set an overall
annual ceiling for payments.
The MFF is a legally binding act agreed unanimously by the Council and approved by
majority in the European Parliament. It can be amended in response to “unforeseen
circumstances” but any revision of the MFF needs to be adopted following the same procedure.
Art 312.4 of the Treaty on the Functioning of the European Union (TFEU) also stipulates that,
if there is no agreement on the next MFF at the end of the previous financial framework, “the
ceilings and other provisions in place for the final year of the expiring MFF shall be extended
until such time as that act is adopted”.
Based on the MFF, the EU adopts annual budgets. They are proposed by the
Commission and adopted by both the Council and the European Parliament through
a procedure which is similar but shorter than the EU´s ordinary legislative
procedure1. In particular, the Council adopts annual budgets with a qualified majority (and
not with unanimity as is required for the MFF). Annual budgets correspond to the calendar
year and must be agreed by the end of the preceding year. If no agreement is reached in
time, the previous annual budget is rolled over on a monthly basis (the Commission is
authorised to continue equivalent spending on a monthly basis through the system of
‘provisional twelfths’)2. Annual budgets can be modified through draft amending budgets,
which are subject to the same procedures for adoption as the annual budget.
1.2.2. Differentiated appropriations: commitments and payments
EU expenditure is usually expressed in two different figures: commitment appropriations
(legal pledges to provide funds, provided that certain conditions are fulfilled) and payment
appropriations (cash or bank transfers to the beneficiaries). Annual commitments and
payments often differ. This is particularly the case for cohesion programmes, as commitments
are entered into the budget during the initial year of implementing the programme and
payments are stretched over various years. Differentiated appropriations give rise to
1 See Article 314 of the Treaty on the Functioning of the European Union (TFEU) for a detailed description of the
annual EU budgetary procedure. 2 Art 315 TFEU, “If, at the beginning of a financial year, the budget has not yet been definitively adopted, a sum
equivalent to not more than one twelfth of the budget appropriations for the preceding financial year may be spent
each month in respect of any chapter of the budget in accordance with the provisions of the Regulations made
pursuant to Article 322; that sum shall not, however, exceed one twelfth of the appropriations provided for in the
same chapter of the draft budget”.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
15
outstanding commitments (also known by its French acronym RAL3), which is the total
amount of appropriations that the EU has committed to pay but not yet paid at a certain point
in time. Outstanding commitments represent a budget liability for the EU.
It is also important to note that there are a few categories of EU expenditures for which this
rule does not apply and commitments and appropriations coincide (non-differentiated
appropriations). This is the case in particular for most spending under the European
Agriculture Guarantee Fund (EAGF)4.
1.2.3. Own Resources, corrections and the balanced-budget rule
The budget of the European Union is financed by so-called ‘Own Resources’, other revenue5
and the surplus carried over from the previous year. Own Resources can be defined as
“revenue allocated irrevocably to the Union to finance its budget and accruing to it
automatically without the need for any subsequent decision by the national authorities”6.
There are three main categories of Own Resources:
Traditional Own Resources (TOR), which comprise customs duties and agricultural
levies collected by Members States on behalf of the EU (13% of total EU revenues in
2015).
Member State’s VAT-based contributions, derived from the application of a
uniform call rate to a notionally harmonized VAT base determined uniformly for the
Member States (12% of total EU revenues).
Member States’ GNI-based contributions, resulting from the application of a
uniform call rate to total EU GNI, to match the total volume of resources to the total
volume of expenditure (69% of total EU revenues).
Own Resources are defined and fixed in a Council Decision (the Own Resources Decision –
ORD)7. This Decision is conceived in principle to cover the same period as the respective MFF.
In practice, however, ORDs do not have an expiration date and continue to be valid
until a new decision enters into force. Since ORDs are approved unanimously by all
Member States and ratified by all Member States’ national Parliaments, a long time can pass
until a new ORD enters into force.
The ORD also includes various provisions granting particular corrections to certain Member
States. The most important one is the correction in favour of the United Kingdom, popularly
known as the UK rebate. This provision allows the UK to be reimbursed 66 % of the difference
between its contribution and what it receives back from the EU budget. The formula to
calculate the UK rebate is complex and it has been amended a number of times8. In particular,
in 2007, it was decided that EU structural and cohesion expenditure allocated to new Member
States - including spending from the European Agriculture Fund for Rural Development
3 Reste à Liquider. 4 Only a tiny part EAGF expenditures, implemented through direct management (e.g. financing of actions to promote
agriculture products and the establishment of agricultural accounting information or survey systems) are entered
as differentiated appropriations. See Art. 169 of Regulation No 966/2012 on the financial rules applicable to the
general budget of the Union (“Financial Regulation”). 5 Other revenue includes contributions from non-EU countries to certain programmes, interest on late payments,
fines, and other diverse items. They represent a minor part of total EU revenues (6.9% in 2015). 6 Monti, Mario et al (2016), Future financing of the EU. Final report and recommendations of the high level group
on own resources, Brussels, p. 20. 7 Council Decision of 26 May 2014 on the System of Own Resources of the European Union (2014/335/EU, Euratom). 8 The subject is discussed in detail in D’Alfonso, Alessandro (2016), The UK 'rebate' on the EU budget. An
explanation of the abatement and other correction mechanisms. European Parliamentary Research Service
Briefing, February 2016.
Policy Department for Structural and Cohesion Policies
16
(EAFRD) - would be excluded from the calculation of the rebate. This adjustment was meant
to ensure that the UK would help finance the costs of EU enlargement.
The UK rebate for year N is financed by higher contributions from the remaining EU Member
States in year N+1. The additional payments are calculated based on the share they contribute
to the EU's GNI-based own resource. However, four countries (Germany, the Netherlands,
Austria and Sweden) pay only 25 % of their normal financing share. This correction is popularly
known as the ‘rebate on the rebate’.
The ORD includes several other corrections which only apply for the period 2014-
2020. In particular, some countries benefit from gross reductions in their GNI-based
contributions in specific years9 and Germany, the Netherlands and Sweden benefit from a
lower VAT call rate, which reduces their VAT-based contribution to the EU budget.
Finally, it should be noted that the GNI-based own resource plays a special role, not only
because of its relative importance (it accounts for almost 70% of the total income) but because
it is the EU’s residual revenue source. A uniform GNI call rate is fixed each year as part of the
budgetary procedure, and it is determined by the additional revenue needed to finance the
expenditure not covered by the other resources (VAT-based payments, TOR and other
revenue). In this way, the GNI resource ensures that Art. 310 TFEU is respected, which
stipulates that “revenue and expenditure shown in the budget shall be in balance”.
1.2.4. Ceilings – maximum amounts to spend
The EU budget is subject to various ceilings. The MFF sets annual ceilings for commitment
appropriations under each heading and overall annual ceilings for commitments and
payments. The ORD establishes an annual own-resource ceiling for payments, which is the
maximum amount of own resources the EU may raise during a year to cover annual
appropriations for payments.
The MFF establishes annual ceilings on payments both in absolute terms and as a percentage
of the EU's estimated GNI. Each year, the Commission recalculates this percentage on the
basis of the latest available GNI forecasts and publishes it in the MFF technical adjustment.
This serves to check that the EU's total estimated level of payments is below the annual Own
Resources ceiling established by the ORD, which is currently fixed at 1.23 % of the EU's GNI.
Since the mid-2000s, Member States’ largest net contributors to the EU budget have insisted
on the need to keep the size of the MFF at 1% of EU GNI. This 1% ‘political ceiling’, which
is usually interpreted as applying to payment appropriations10, has weighed heavily on the
last two MFF negotiations.
9 Art 2.5 Own Resources Decision: “For the period 2014-2020 only, Denmark, the Netherlands and Sweden shall
benefit from gross reductions in their annual GNI-based contribution of EUR 130 million, EUR 695 million and EUR
185 million respectively. Austria shall benefit from a gross reduction in its annual GNI-based contribution of EUR
30 million in 2014, EUR 20 million in 2015 and EUR 10 million in 2016”. 10 During the 2007-2013 MFF negotiations, the 1% GNI position was first interpreted as relating to commitment
appropriations and at a later stage in the negotiation to payment appropriations (see European Commission, EU
Public Finances, 5th edition, p.82). In the latest MFF negotiation, the request from Member States’ net contributors
was to stabilise spending in real terms at the 2013 level, which was in practice equivalent to keep payment
appropriations at 1% of EU GNI (even if, in the end, pressure to lower payments from some Member States led
to the establishment of payment appropriations below the 1% GNI target).
Possible impact of Brexit on the EU budget and, in particular, CAP funding
17
2. THE IMPACT OF BREXIT ON THE EU BUDGET
KEY FINDINGS
Brexit could have a number of different budgetary consequences for the EU.
Apart from leaving a permanent gap in the EU budget, the departure of the UK may
alter the dynamics of budgetary negotiation in the Council. The removal of the UK
rebate can also open the door to a reform of the EU’s financing system.
The implications of the Brexit bill negotiations for CAP spending will depend
not only on the overall size of the bill agreed but on the type of financial
obligation covered. If the UK accepts to pay its annual contribution to the EU
budget until the end of MFF, both EARDF and EAGF spending will be preserved until
2020 but negotiations about the next MFF will become more difficult.
Brexit is likely to leave a structural shortfall (or ‘Brexit gap’) of about €10
billion per year in the EU budget that has to be balanced by higher contributions
or lower spending.
We estimate that an increase in contributions would disproportionally affect
some of the EU’s largest net contributors such as Germany, The Netherlands
and Sweden. In part, this is because they currently benefit from a ‘rebate on the
rebate’ on their contributions that will no longer apply once the UK leaves
The Brexit gap can also be addressed by reducing spending. It is, however,
important to stress that the required savings are substantial compared to many EU
programmes. Therefore, large spending categories like the CAP are likely to
come under pressure if the EU budget is cut.
There is no default method for adapting the current MFF to the departure
of a Member State. Since any modification requires unanimity, it seems possible
that the current MFF remains unchanged and the European Commission covers the
shortfall by increasing GNI-based contributions if needed.
Brexit, if it occurs, affects the EU’s public finances in several ways. First, negotiations about
the so-called ‘Brexit bill’ or ‘financial settlement’ will determine the extent to which the UK
pays its share of all financial obligations jointly undertaken by EU countries while the UK was
member of the EU (see section 2.1). Second, Brexit will leave a permanent shortfall in
the EU budget estimated at €10 billion per year11. This gap will have to be filled either
through increasing Member States’ GNI-based contributions, spending cuts, a combination of
both or the introduction of new Own Resources (section 2.2).
Brexit may have further effects on the upcoming MFF:
The departure of the UK may change the dynamics of negotiation in the Council.
The UK government played a crucial role in the final stage of the last MFF negotiations,
forcing a significant reduction in the overall ceiling for payments.
Brexit will lead to an increase the size of the EU budget in relative terms (as a
% of EU GNI). This is because it reduces EU GNI by approximately 17% (the British
economy’s relative weight in the EU) but the UK’s net contribution is only about 7% of
the EU budget due to the rebate it receives. Under these circumstances, maintaining
11 We already estimated a budget gap of €10 billion per year in Haas, J. and Rubio, E. (2017), Brexit and the EU
budget: Threat or Opportunity, Jacques Delors Institute, Policy Paper 183, January 2017. The paper was based
on 2014-2015 data, but the inclusion of data for 2016 has not changed this estimate.
Policy Department for Structural and Cohesion Policies
18
the EU budget at 1% of EU GNI (which was the Council’s stance in the last two MFF
negotiations) appears difficult.
Brexit will end the UK correction mechanism and the related rebates. This opens
the door for proposals to remove all corrections in the EU financing system12 and abolish
or reform the VAT-based own resource (on which the calculation of the UK rebate is
based)13.
2.1. One-off effects: The ‘Brexit bill’
The ‘Brexit bill’ or ‘financial settlement’ refers to the expected payment the United Kingdom
has to make to the EU to honour its share of the financial commitments jointly undertaken by
EU countries while the UK was member of the EU. It does not refer to any potential future
payment related to a possible transition period between Brexit and a future EU-UK partnership
agreement.
The financial settlement is being discussed in the first phase of Brexit negotiations. Following
the ‘phased approach’ the EU requires the UK to recognise the existence of this obligations
and expects to reach an agreement on general principles concerning the nature and
composition of this payment and the methodology to calculate it. This agreement is one of the
conditions for moving to the second phase of the negotiations, in which the future EU-UK
relationship and transitional arrangements will be discussed, together with the exact amount
of the financial settlement.
At the moment of writing, negotiations about the Brexit bill are in deadlock. The EU
presented its negotiation position on the financial settlement in a paper published in June
201714, While the Commission’s paper does not name a specific figure, the Financial Times
estimates that, based on the EU negotiating position, the bill could amount to
between €91 and €113 billion, corresponding to a net payment of €55-75 billion after
considering the share of EU spending that flows back to the UK15.
The EU position paper lists the different financial obligations and liabilities to take into account
and proposes a methodology to calculate the amounts for the different items and the UK’s
share of these obligations. According to the EU, the financial settlement should include the
payment of financial obligations derived from the EU budget as well as financial obligations
related to the settlement of British participation in EU bodies (the European Investment Band,
the European Central Bank) or specific EU funds and facilities (such as the European
Development Fund, or the Facility for Refugees in Turkey). These latter ones can be technically
tricky and complex to define, but the most contested claims are those related to financial
commitments derived from the EU budget.
Generally, the EU expects the UK to pay for these commitments according to its share in
financing the EU budget after the application of the UK rebate, which is approximately
12.5%16. Taking into account the UK rebate in the calculation of the Brexit bill is logical from
12 European Commission (2017), Reflection paper on the future of EU public finances, COM(2017) 358 of 28 June
2017. 13 Monti, Mario et al (2016), op.cit. 14 European Commission Task Force for the preparation and conduct of the negotiations with the United Kingdom
under Article 50 EU, Position Paper “Essential Principles on Financial Settlement¨, TF50 (2017), 2/2, 12 June 2017 15 Barker, Alex, “Brussels hoists gross Brexit ‘bill’ to €100bn”, Financial Times, 3 May 2017. 16 12.5% is the average of UK’s net contributions during 2014 and 2015.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
19
a legal point of view, as the right to this rebate is granted in the Own Resource Decision, the
same legal act that states the UK’s obligation to contribute to the financing of the EU budget.
The Commission’s paper lists five types of financial commitments derived from the
EU budget:
1. Outstanding budgetary commitments or ‘RAL’ (reste à liquider). The EU expects the
UK to cover part of the spending commitments that have been authorised in past EU annual
budgets but have not yet been executed at the moment of withdrawal. RAL amounted to
€238.3 billion at the end of 201617. Assuming that RAL increases at the end of the MFF, this
implies that at least €29.7 billion would have to be paid by the UK at the moment of
withdrawal.
2. Financial programming for the period between the withdrawal date and the end
of the MFF. The EU also asks the UK to contribute to the payment of EU spending
obligations linked to the 2014-2020 MFF but not yet committed in an annual EU budget at
the moment of withdrawal.
This is the most contested claim according to some experts18. Initially, the Commission’s
Article 50 Task Force proposed to include only some long-term spending obligations linked
to the MFF in the Brexit bill. More specifically, the Commission argued that the UK should
contribute to the financing of those spending commitments recognised as EU liabilities in
the consolidated accounts of the EU. These are commitments derived from the signature of
a contract or grant agreement with a beneficiary, such as a national or regional authority
(e.g. the signature of Operational Programmes) or a private promoter (e.g. GALILEO,
COPERNICUS or long-term infrastructure projects financed by the Connecting Europe
Facility). In 2016, the consolidated accounts of the EU reported €298 billion of such long-
term legal commitments (more than 90% of them related to ESIF spending). Assuming the
same amount at end-2108, this would imply an amount of approximately €37.2 billion to
be paid by the UK.
After exchanges with national capitals, the Commission’s initial position toughened19.
Various Member States insisted on making the UK liable not only for long-term legal
commitments identified in consolidated annual accounts, but for all planned EU spending
under the 2014-2020 MFF. In practice, this implies asking the UK to maintain its
annual net EU budget contribution until the end of MFF (approximately €10 billion
per year in net terms20) and cover its share of the RAL on 2014-2020 commitments
pending in 2020, which is expected to reach €254 billion (British share: €31.7 billion)21.
In total, €51.7 billion would have to be paid by the UK.
There are strong legal and political arguments to support the EU position. By adopting the
MFF in 2013, the UK government committed to financing the EU’s long-term budget for the
whole period. Most 2014-2020 spending commitments constitute legal obligations for the
EU even if they are not part of an annual budget and not included in consolidated accounts,
as they derive from EU legal acts setting out the rules and specific amounts allocated to
each programme. The UK can counter that the MFF regulation obliges Member States to
adjust the MFF in the event of an enlargement (Art. 21) and that thus, 'a contrario’, the
17 European Commission, DG budget (2017), Report on budgetary and financial management. Financial year 2016,
Brussels. 18 Barker, Alex, “FT breakdown: the €100bn Brexit bill”, Financial Times, 3 May 2017 19 Barker, Alex, op.cit. 20 Notice that the UK would continue to benefit from all EU spending programmes until the end of MFF. 21 European Commission (2016), Commission Staff Working Document Accompanying the document:
Communication from the Commission to the European Parliament and the Council, Mid-term review/revision of
the multiannual financial framework 201-2020, An EU budget focused on results, 299 final, Brussels.
Policy Department for Structural and Cohesion Policies
20
remaining EU27 should adjust the MFF ceilings and reform legal acts to reflect the fact that
one of the biggest net contributors is leaving. However, enlargement differs from
withdrawal in that it is a decision taken by unanimity by all EU Member states, not imposed
by one of them to the others.
3. EU liabilities which are not balanced by corresponding assets. The EU also asks the
UK to pay its share of EU liabilities that are recorded in the consolidated accounts and are
not balanced by corresponding assets, such as pensions and other employee benefits,
payables or financial liabilities not derived from EU borrowing. These are relatively minor
amounts. In 2016, liabilities from pensions and other employee benefits amounted to €63.8
billion overall (British share: €7.9 billion) and payables amounted to €40 billion (British
share: €5 billion).
4. Contingent liabilities. Contingent liabilities are potential liabilities that may or may not
fall due depending on the outcome of an uncertain event in the future. They relate mainly
to EU guarantees given to the EIB in the context of EFSI, the EIB external lending mandate
or other financial instruments (€25.5 billion in 2016) and EU borrowing to finance financial
assistance programmes (€54.9 billion 2016). There is a discussion on how to include these
liabilities in the calculation of the financial settlement. The EU prefers a British lump-sum
payment upfront to cover them in case they materialise in the future, and to reimburse the
UK over time if they do not. Another option could be to share the costs from contingent
liabilities as they arise in future.
5. Specific costs related to the withdrawal process. The EU’s paper asks the UK to carry
all the specific costs related to the withdrawal process, such as the costs of moving EU
agencies located in the UK.
As mentioned above, there is still no agreement on the financial settlement. Through different
public speeches, members of the UK government have formally recognised that the UK has
financial obligations to the EU but there has not been a public statement detailing which
obligations it recognises. Recently, Prime Minister Theresa May promised in her ‘Florence
speech’ on September 22 that no EU country will be required to pay more or receive less over
the remainder of the current MFF as a result of Brexit. Ms May has not provided an exact
figure but her words have been interpreted as an offer amounting to €20 billion22,
which roughly corresponds to the payment of UK’s annual net contribution to the EU budget
from the expected date of withdrawal (mid- 2019) until 2020.
The €20 billion offer is seen as insufficient by EU negotiators. It leaves out many of the financial
obligations mentioned above (pensions, contingent liabilities) and it does not recognise the
payment of a share of RAL pending in 2020. It is also worth pointing out that Theresa May’s
offer has been presented as a sort of implementation payment linked to a two-year transitional
period and not as the settlement of past debts. While this is a good strategy to ‘sell’ the bill to
the UK public opinion, the EU should be careful about linking the agreement on the
Brexit bill to an agreement about the transition towards a new EU/UK relationship.
Moving to the second phase without any clear agreement on the Brexit bill would enable the
UK to use money as a bargaining chip.
Finally, from the point of view CAP spending, it is not irrelevant which type of
financial obligation is covered.
If the UK pays its share of the RAL at the moment of withdrawal (in principle, mid-
2019) but does not contribute to the financing of the EU after this date, CAP spending
(both pillar 1 and 2) in 2019 and 2020 may be under threat.
22 Parker, G. and Barker, A. “Theresa May prepares €20bn EU budget offer”, Financial Times, 19 September 2017.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
21
If the UK pays a part of the RAL at the moment of withdrawal as well as a share of
outstanding legal commitments recorded in the consolidated accounts of the EU, EARDF
funding for 2019 and 2020 will be preserved but EAGF spending will be threatened.
Finally, if – as seems to be the intention of May - the UK only recognises its
duty to maintain the annual contribution to the EU budget for the last two
years of the current MFF, both EARDF and EAGF spending will be preserved
until 2020 but negotiations about the next MFF will become more difficult. The
remaining EU27 will have to assume the UK’s roughly €31 billion share of RAL and
share the costs among themselves, on top of having to adjust the EU budget to the
permanent shortfall left by Brexit (see next section).
2.2. Structural effects: The ‘Brexit gap’ and the different scenarios to
adjust to it
While Brexit may or may not threaten planned spending in the current MFF, it is almost certain
that it will have a lasting impact on future MFFs. Since the UK pays more into the EU
budget than the EU spends in the UK, Brexit will leave a structural funding gap in
the finances of the EU27. The outcome of the Brexit bill negotiations, decisions concerning
a possible transitional period and the budgetary arrangements linked to the future EU-UK
partnership will determine the size of the gap, but it seems safe to assume that the British net
contribution post-Brexit will be lower than it is today. Anything else would likely be
unacceptable for the UK.
The exact size of the gap not only depends on the type of Brexit (soft or hard, clean or
transitional), but on several additional factors. For example, the UK’s net contribution to the
EU budget has been volatile in the past and forecasts by the British Office for Budget
Responsibility suggest that it could decrease in 2017, but increase markedly afterwards23. This
would imply a larger budget shortfall. At the same time, Brexit could also lead to new revenue,
e.g., from increased customs duties if tariffs are reinstated between the EU-27 and the UK
(although this would simultaneously depress trade volumes and the overall effect on national
budgets might well be negative)24.
In light of the uncertainties, it seems reasonable to keep matters simple. We assume that the
EU will receive no contributions from the UK after Brexit. Consequently, we estimate the ‘Brexit
gap’ by subtracting the revenue raised in the UK from EU spending in the UK. In order to
account for yearly fluctuations, we use the 2014-16 average. Over this period, the UK has
contributed an average of €17.4 billion annually, around one-eight of the EU’s total
revenue. Revenue raised via the VAT-based and the GNI-based own resource accounts for
80% of the amount. Customs duties (TOR) collected in the UK, which account for the remaining
20%, are not strictly speaking a part of the British national contribution to the EU budget, but
we still include them since they will no longer be collected after Brexit. On the other side of
the ledger, the EU spent €7.2 billion annually on programmes in the UK in 2014 and
2015. According to these figures, Brexit will leave a structural gap of €10.2 billion per
year in the EU budget25. The EU will have to increase revenue or cut spending to adjust to
this gap.
23 Keep, Matthew (2017) : The UK’s contribution to the EU budget, House of Commons Library Briefing Paper No.
CBP 7886, p. 9. 24 Núñez Ferrer, Jorge and Rinaldi, David (2016), The Impact of Brexit on the EU Budget: A non-catastrophic even,
CEPS Policy Brief No. 347. 25 For further details, see Haas/Rubio 2017.
Policy Department for Structural and Cohesion Policies
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We estimate the effect of Brexit on Member States by first calculating each country’s current
net balance (see section 1.1) and then comparing it to the balance that is expected if
contributions increase or EU spending decreases. We use the European Commission’s
‘operating budgetary balances’ dataset that records actual revenue and spending (instead of
projections)26.
2.2.1. Scenario 1: Higher contributions
If spending in the EU-27 is maintained, revenue needs to increase by approximately €10
billion in order to balance the budget. The GNI-based Own Resource is used to raise the
additional funds (see section 1.2.3). As a result, wealthier countries can expect to see a
larger deterioration of their net balances. In relation to their current contributions, most
Member States are evenly affected. They can expect an increase of between five and eight
per cent compared to their current gross national contributions (see figure 1).
However, Brexit not only increases the financing burden on the EU-27, it also changes
how the burden is shared. A disproportionally large increase can be expected for Austria,
Germany, The Netherlands and Sweden. This is because of the way the UK rebate is financed
today. All Member States contribute to financing the rebate, but the aforementioned countries
have secured a ‘rebate on the rebate’ that limits their contribution (see section 1.2.3). After
Brexit, the UK rebate and its associated rebates can no longer apply. A larger portion of
revenue is financed according to countries’ relative wealth (GNI key). This effect alone could
redistribute around €1.7 billion (or €15 per capita) from the four former rebate countries to
the others.
Figure 1: The impact of a €10 billion increase in contributions on Member States’
net balances.
Source: Authors’ calculations based on European Commission data on expenditure and revenue by Member States
(operating budgetary balances), as reported in EU Financial Reports for 2014-16.
Note: A Member State’s national contribution consists of the revenue generated by the VAT- and the GNI-based Own
Resource.
26 For a more detailed description of the data, see section 3.3 and Haas/Rubio 2017.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
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2.2.2. Scenario 2: Lower spending
The Brexit gap can also be addressed by reducing spending. The distributional consequences
are likely to be very different from the scenario described above. If contributions remain
broadly unchanged (except for the rebates) and spending falls, the net balances of those
Member States that receive the most EU funding today deteriorate, while the effect on
net contributors is muted. However, beyond these general considerations, the impact depends
entirely on how the cuts are distributed between the different budget headings.
It is, however, important to stress that the required savings would be substantial
compared to many EU programmes. Figure 2 illustrates this point. Since smaller EU
programmes would be devastated by deep cuts, large spending areas such as Structural
and Investment Funds and the CAP are likely to come under pressure in this
scenario.
Figure 2: Spending cuts in comparison
Source: Authors’ representation based on European Commission data and Haas, J. and Rubio, E. (2017), Brexit and
the EU budget: Threat or Opportunity, Jacques Delors Institute, Policy Paper 183.
Even after deep cuts, Brexit increases the relative size of the EU budget slightly, from currently
1% to 1.05% of EU GNI. The increase reflects the fact that the UK contributes more to EU GNI
than to the EU budget. Maintaining the current ratio (in line with net contributors’ traditional
request to keep the EU budget at 1% of EU GNI) would require spending cuts around €16
billion per year. However, the situation becomes less problematic if the currently strong
economic growth in the EU continues.
Policy Department for Structural and Cohesion Policies
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2.2.3. Scenario 3: No agreement
It is worth noting that there is no default method for adapting the current MFF to the
departure of a Member State. The MFF regulation for 2014-2020 states that the MFF should
be adjusted ‘accordingly’ in case of Treaty change (Art. 20)27 or enlargement (Art. 19)28, but
says nothing about the unprecedented event of a Member State requesting to withdraw. Even
if we assume that Art. 20 is applicable to withdrawals, there is ample room for interpretation
what ‘adjusting’ the MFF means29. Since any modification requires unanimity, it seems possible
that the current MFF remains unchanged and the European Commission covers the shortfall
by increasing contributions via the GNI resource if necessary30.
It may also happen that an ‘ad hoc’ solution is found to fill the gap during the current
MFF (e.g. a two-year UK-EU transitional agreement, involving the payment of UK net
contributions in 2019 and 2020) but that Member States fail to reach an agreement
on the post-2020 MFF. In this case, article 312.4 of the Treaty on the Functioning of the
European Union (TFEU) stipulates that “the ceilings and other provisions in place for the final
year of the expiring MFF shall be extended until such time as that act is adopted”. In practice,
this means that the level of spending for 2020 will be maintained until an agreement on the
new MFF is reached31.
2.2.4. Other possible scenarios
Apart from the scenarios outlined above, there are other ways to adjust to the Brexit gap. For
example, Member States could combine budget cuts and contribution increases. Another
option is the introduction of new Own Resources that make up for the budget
shortfall. Some options, such as a CO2 levy, might generate revenue without adding to
national contributions.
The introduction of new Own Resources could be part of a ‘package deal’ that
includes reforms on the expenditure side, as proposed by the report by the High
Level Group on Own Resources published in December 201632. However, a
comprehensive deal of this sort is difficult to envisage by 2020. Even if the elimination of the
UK rebate opens the door to reforms on the revenue side, the introduction of one or multiple
new revenues requires a lot of political bargaining and the approval of new Own Resource
Decisions usually takes a long time. The current ORD was proposed by the Commission in
September 2011 and was approved almost three years later, in May 2014. Assuming that the
Commission makes a proposal for a new ORD in spring 2018, Member States will only have
one year and a half to negotiate, approve and ratify the new system.
27 Art. 20 of the current MFF regulation: “Should a revision of the Treaties with budgetary implications occur between
2014 and 2020, the MFF shall be revised accordingly.” 28 Art. 21 of the current MFF regulation: “If there is an accession or accessions to the Union between 2014 and 2020,
the MFF shall be revised to take account of the expenditure requirements resulting therefrom”. 29 An interesting precedent concerning the different interpretations on how to adjust the MFF to changes in EU
membership is Croatia’s accession in 2013. Both the Commission and the European Parliament called for an
increase in the overall level of commitments to adapt to the entry of Croatia, but the Council rejected this
interpretation and called for redeployments between ceilings to cover any additional expenditure requirements
from the accession. In the end, the compromise was to keep the overall ceiling for commitment untouched but
increase the annual payment ceilings for 2013 (See European Commission, EU public finance, 5th edition,
Luxembourg: Publications Office of the European Union, 2014, pp. 93-94). 30 To be precise, revenue can only be increase until the level stated in the Own Resources Decision, which is currently
1.23% of EU GNI. In 2016, revenue from Own Resources stood at only 0.89% of GNI (cf. Amending Budget No.
6, 2016, p. 198). 31 Some could argue that this would in principle reinforce the negotiating position of net recipients vis-a-vis those of
net contributors. However, a non-agreement scenario could be also disruptive for net recipients as the stalemate
could result in major legal and financial uncertainty and problems with the disbursement of EU spending (see Haas
and Rubio, 2017). 32 Monti, Mario et al (2016), op.cit.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
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3. THE IMPACT OF BREXIT ON THE CAP BUDGET
KEY FINDINGS
Whereas the weight of CAP in the EU budget has decreased over time, CAP spending
still represents 37.8% of total EU expenditure. Most of it is allocated to direct
payments, which make up approximately 70% of the CAP budget and more than a
quarter of the EU budget.
The CAP in its current form has a large distributional impact. The four largest
net recipients of CAP funds in absolute terms are Poland, Greece, Romania and Spain,
while Germany and the UK are among the largest net contributors.
Brexit will leave a ‘CAP gap’ worth €3 billion annually, but CAP spending could
face larger reductions if other areas of the EU budget are protected from cuts.
Increasing Member State’s contributions by €3 billion predominantly affects
today’s largest net contributors and especially Austria, Germany, The Netherlands and
Sweden. This adds to imbalances in the CAP. However, the sums involved are rather
small compared to government spending.
Reducing CAP spending by €3 billion has mixed effects. Among the largest losers
in absolute terms are CAP net contributors like Germany and The Netherlands, but also
net recipients like Spain and Poland.
Reducing CAP spending by €10 billion favours large net contributors. The losses
of net recipients are significant not only in absolute terms, but also compared to their
government spending in relatively poor countries like Bulgaria, Lithuania and Romania.
3.1. Basic features of the CAP budget
The Common Agricultural Policy (CAP) is one of the EU’s oldest policies. Established in
1962, CAP has undergone significant changes through a series of reforms since 1992, but its
basic 2-pillar architecture remains unchanged.
Pillar 1 includes direct payments for farmers and market measures, and it is delivered through
the European Agricultural Guarantee Fund (EAGF).
Pillar 2 concerns rural development measures under the European Agricultural Fund for Rural
Development (EARDF).
CAP spending has shrunk over the last decades but it still represents 37.8% of total EU
expenditure. Most of it is allocated to direct payments, which make up approximately 70% of
the CAP budget and more than a quarter of the EU budget (see table 1). Pillar 2 spending
accounts for 8.8% of total EU spending.
Policy Department for Structural and Cohesion Policies
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Table 1. Main components and relative size of CAP budget 2014-2020
EUR million
(2011 prices)
As % of MFF
spending
CAP budget 2014-2020 362 827 37.8%
Pillar 1 277 851 28.9%
Of which: direct payments 265 153 27.6%
Pillar 2 84 976 8.8%
Source: Council Regulation No 1311/2013, EU regulation 73/2009. EU regulation 1307/2013 and EU Regulation
1305/2013
Both direct payments (EAGF) and rural development measures (EARDF) are implemented
by national authorities, following the principle of shared management. Direct payments
are 100% financed by the EU whereas rural development measures are subjected to
co-financing, with different co-financing rates applied depending on the type of rural area
for which support is intended and the measures co-financing.
CAP commitments under shared management – that is, spending for direct payments
(EAGF) and for rural development (EARDF) – are pre-allocated to Member States at
the beginning of the MFF. In particular, the European Council’s agreement on the MFF set
the overall CAP budget and indicative annual break-downs per Member State, which are later
on negotiated with the European Parliament and included in the EAGF and EARDF legal acts.
The distribution of CAP spending per Member States takes as basis the amounts received by
Member States in the last year of the expiring MFF (and therefore is strongly path dependent),
but it is also the outcome of a political bargaining which takes into account other criteria as
well as budgetary concessions on other policies.
Figure 3 shows CAP pre-allocations per Member State for the period 2014-2020. If we look at
the distribution of CAP pillar 1 spending by Member State, we can notice that the biggest
beneficiaries are Western European countries (France, Germany Spain, Italy). This is partly
explained by historical differences as regards to the level of generosity of direct payments per
hectare. As part of the MFF agreement, it was convened that Member States’ differences in
direct payments would be gradually reduced between 2015 and 2020 via a process known as
‘external convergence’. Through this process, Member States with average direct payments
per hectare above the EU average will see their allocation progressively reduced in order to
finance the increase in those Member States with an average direct payments below 90 % of
the EU average. While the MFF ‘external convergence’ has entailed a redistribution of EAGF
funding, mostly from Eastern to Western European countries, it has not altered the ranking of
countries in terms of EAGF allocations.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
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Figure 3: CAP pre-allocations per Member State, 2014-2020 (in € million, at
current prices)
Source: European Commission, DG BUDGET website. http://ec.europa.eu/budget/mff/preallocations/index_en.cfm
Note: Allocations before transfers between pillars.
Looking at pillar 2 pre-allocations, the distribution between Member states is more
balanced. Following the Commission’s proposal, the allocation of rural development funds per
Member State was made on the basis of more objective criteria than in the past. There were
however a series of discretionary allocations made to 16 different Member States, particularly
to compensate some of them for lower pillar 1 allocations due to external convergence. Figure
4 shows the relative importance of pillar 1 and pillar 2 allocations per Member State.
It is worth noting that pillar 1 spending tends to be more important in Western European
countries. Having said this, there are also important exceptions. For example, the EAGF
accounts for less than 60% of total CAP spending in Austria and Portugal. As discussed in
section 3, this factor is likely to influence Member States’ positions with regards to adjusting
the CAP to Brexit.
Figure 4: Relative importance of pillar 1 and 2 per Member State
Source: European Commission, DG BUDGET website. http://ec.europa.eu/budget/mff/preallocations/index_en.cfm
Note: Allocations before transfers between pillars.
Policy Department for Structural and Cohesion Policies
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Finally, it should be taken into account that the current MFF allows Member States to
transfer funds between pillars, up to 15% of the original amounts. Those Member
States with average direct payments per hectare below 90 % of the EU average are allowed
to transfer up to 25% of the support they receive for rural development to Pillar I. So far, 11
countries have used this option to move part of their direct payment allocations to the rural
development policy and four Member States (Poland, Hungary, Slovakia and Croatia) have
increased their direct payments allocations using part of their rural development funds. The
net transfer from pillar 1 to pillar 2 over the 2014-2020 period has amounted to around €4
billion33.
3.2. How Brexit can alter debates on post-2020 CAP spending
CAP spending was already under pressure before the UK decided to leave the EU.
During the last MFF negotiations, which took place against the backdrop of budgetary
cutbacks, there was a general expectation that the CAP budget would be cut significantly to
free up resources for new spending priorities. In the end, there was no dramatic reduction in
CAP spending but an agreement to progressively reduce it in real terms34.
During the next round of MFF negotiations, calls for lower CAP spending could become louder.
Depending on the strategy chosen to cover the Brexit gap, two different political dynamics
could threaten the CAP:
If EU spending is reduced to balance the EU budget, the largest spending categories
will be especially likely to be targeted. Cutting the CAP by a fifth would be enough to
fill the Brexit gap, while even deep spending cuts in the small categories would yield
considerably less (see figure 2).
If EU Member States decide to increase contributions in order to make up for the Brexit
budget gap, existing imbalances between net contributors and net recipients will
become further entrenched. Pressure to shift spending to other areas can grow (see
figure 6).
How exactly these dynamics will impact post-2020 CAP spending is unclear at this stage. CAP
could suffer large cuts or be largely spared from the adjustment effort. Importantly, profound
changes to the CAP architecture, be it in form of co-financing or new instruments and allocation
criteria could contribute to reducing costs.
Speculation about introducing co-financing in pillar 1 direct payments has grown after
the Commission’s reflection paper on the future of the EU finance explicitly mentioned this
option35. According to AGRA Europe estimates, switching to such a system could reduce
budgetary expenditure on the CAP by between €7.5 and €13.5 billion a year, depending of the
specific design of co-financing rates. Nuñez Ferrer et al even imagine a co-financing system
that would save up to €29 billion per year36. However, so far, most Member States reject the
idea37.
33 Augère-Granier, Marie-Laure and Sgueo, Gianluca (2016), Common Agricultural Policy – Pillar II, European
Parliamentary Research Service briefing, July 2016. 34 See Henke, Roberto et.al. (2015) Jonathan Little et al (2013) and Matthews, Alan (2017). 35 European Commission (2017), Reflection paper on the future of EU public finances, COM(2017) 358 of 28 June
2017. 36 Nuñez Ferrer, Jorge et al., (2016), Study on the potential and limitations of reforming the financing of the EU
budget, Expertise commissioned by the European Commission on behalf of the High Level Group on Own
Resources, Brussels. 37 Ciaran Moran, “CAP under pressure as most Member States reject co-financing of direct payments”,
Independent.ie, 13 october 2017.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
29
Regarding the timing of a major reform, it is true that historically there has been a strong link
between MFF negotiations and CAP reforms38. This link was clear between the last CAP reform
in 2013 and the negotiation of the current MFF, and it seems reasonable to expect changes in
the CAP design following the adoption of the post-2020 MFF, all the more if the latter decreases
the share of CAP spending in the EU budget.
However, it is also true that the uncertainty about the budgetary implications of Brexit and
the difficult negotiations about the Brexit bill could delay the next MFF compromise.
Furthermore, the election of a new European Parliament will interrupt the EU’s legislative
activity in 2019. Consequently, some experts consider that a major revision of CAP will not be
possible until 2022 or 2023, with implementation starting in 2024 or 202539.
3.3. Estimating the Brexit effect on the CAP: data and methodology
In order to estimate possible effect of Brexit on Member States CAP net balances,
we rely on data provided by the European Commission in its overview of ‘operating
budgetary balances (OBB)40. They record revenue as well as executed expenditure by
member state. Since revenue as well as spending has shown considerable variance in the past,
we use the 2014-16 average for our calculations.
There are no official calculations for Member States’ net balances in specific spending areas
because all EU revenue goes into a unitary budget. However, balances can be estimated by
comparing a country’s share in financing the EU budget to the share of EU funds it receives in
a specific area. Or approach can be outlined as follows:
First, we calculate each Member State’s national contribution (i.e., revenue raised via
the VAT- and the GNI-based resource, including rebates) as a share of all national
contributions. By multiplying the contribution share with EU-28 spending on CAP, we
arrive at an estimated contribution to the CAP.
Second, we subtract the funds a Member State receives via the CAP from its estimated
contribution. This gives us today’s estimated net contribution.
Estimating the impact of Brexit on CAP net balances requires a few additional steps:
We remove the UK rebate and the so-called ‘rebate on the rebate’ that mitigates the
UK rebate’s impact on the contributions of Austria, Germany, the Netherlands and
Sweden41. In order to do so, we estimate a simplified UK rebate based on CAP
expenditure, taking into account that spending in ‘new’ Member States under pillar 2
is excluded from the calculation of the UK rebate42. We then calculate how much each
Member State would have to contribute to financing the rebate under the current rules
and how the burden would be shared if a GNI key was used instead. The difference
between the two gives us the net impact of the discontinued rebates, which can be
negative or positive.
We split up the UK’s net contribution among Member States. Again, we use the GNI-
based resource because it is the EU budget’s marginal revenue source.
38 The 1999 Agenda 2000 reform was closely linked to the negotiations of the 2000-2006 MFF, just like the last CAP
reform in 2013, but this was not the case for the ‘Fischler Reform’ in 2004 and the CAP the 'Health Check' in
2009. 39 Matthews, A.(2017), The budgetary context for the CAP, blog article, CAPreform.eu, September 4 2017. 40 OBB are included as annex in EU annual Financial Reports. 41 How the corrections are calculated is described in great detail in the 2014 Own Resources Decision. 42 For the sake of simplicity, we leave out smaller items in the calculation, such as the United Kingdom’s advantage
and TOR windfall gains.
Policy Department for Structural and Cohesion Policies
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Finally, we sum up the original CAP contribution, the effect of discontinuing the rebates,
and the cost of covering the UK’s net contribution. The result is an updated CAP
contribution that can be subtracted from the (possibly also updated) CAP spending in
a country to arrive at a new net balance.
The approach outlined above simulates an increase in contributions that balances the
budget shortfall after Brexit. To simulate a budget cut instead, we simply lower CAP
spending by the desired amount and compare it to the sum of updated contributions.
If spending is lower than revenue, contributions are decreased according to the GNI
key until the budget is in balance once again.
3.4. Current CAP net balances
Figure 5 shows current CAP net balances. As can be noticed, the CAP has a large distributional
impact. The four largest net beneficiaries in absolute terms, namely Poland, Greece, Romania
and Spain, together receive transfers worth around €9 billion annually, which translates into
positive net balances of between €1.8 and €3.1 billion. On the other side of the spectrum,
Germany is by far the largest net contributor, followed by the UK. Their net annual contribution
to CAP amounts to €5.1 and €3 billion, respectively. Since 2014, there has been some variance
in CAP net balances but no clear trend towards convergence or divergence.
Figure 5: CAP net balances of EU Member States, 2014-2016 average
Source: Authors’ calculations, based on European Commission data.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
31
3.5. Adjusting the CAP to Brexit
In analogy to the Brexit gap, it is possible to estimate the size of the budget shortfall left by
the British departure from the EU. The ‘CAP gap’ is equal to the British net contribution
in the field of CAP, worth around €3 billion annually. However, it does not follow that
Brexit will lead to a reduction of CAP spending by this amount. Expenditure could just as
well be reduced by €10 billion, or not at all. There is no automatism, the decision is up
to the EU institutions and the Member States.
Simulating the impact of different reform options on CAP net balances can give us an idea
where Member States’ material interests lie. The scenarios we outline in the following
are not reform proposals. Rather, they serve to illustrate the dynamics that follow
from the different possible changes to the CAP.
3.5.1. Scenario 1: the impact of higher contributions
If the current CAP spending levels are maintained after Brexit, additional revenue
worth €3 billion must be raised to finance them. Assuming that there is no radical change
to the EU financing system before 2020, this happens via the GNI-based own resource (see
section 1.2.3). As figure 6 shows, adjusting to the ‘CAP gap’ through higher
contributions leads to a worsening net balance in all Member States. However, not
all are equally affected. Austria, Germany, The Netherlands and Sweden lose their benefits
from the ‘rebate on the rebate’ (ibid.). Consequently, in this scenario, a country like The
Netherlands sees its CAP net balance deteriorate by almost the same absolute amount as
Italy, a country whose GNI is three times larger. Whether this represents an unfair additional
burden for the former rebate countries or whether today’s financing system is unfair to most
Member States, is up for debate.
More generally, higher contributions magnify the already existing imbalance between
CAP net contributors and net recipients. We estimate that Germany’s CAP net balance
deteriorates to -€6.1 billion in this scenario and even France ends up with a €1.2 billion CAP
net deficit. At the same time, the Polish CAP net balance remains almost unchanged at €3
billion. Nevertheless, it is worth noting that the amounts involved represent relatively small
shares of government expenditure. Even for the former rebate countries, the change in net
balances is limited to around 0.1% of general government spending.
Policy Department for Structural and Cohesion Policies
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Figure 6: Estimated change in CAP net balances resulting from a €3 billion increase
in national contributions
Source: Authors’ calculations, based on Eurostat and European Commission data.
3.5.2. Scenario 2: the impact of CAP spending cuts
Reducing spending puts a higher burden of adjustment on net CAP recipients. A €3 billion
cut, equivalent to the British CAP net contribution, reduces the Polish and Greek net
gains from the CAP by €230 million and €140 million respectively. Some net
contributors, like Luxembourg and Belgium, see their CAP net balance improve very
slightly, but most are still negatively affected (see figure 7).
The mixed result reflects two conflicting effects of Brexit. On the one hand, the EU’s CAP
expenditure is reduced in all Member States. The higher the amount a country receives at the
moment, the larger the negative effect. On the other hand, money is redistributed from former
rebate countries to all other Member States (see previous section). For example, German CAP
net contributions increase by more than €600 million. In absolute terms, this is especially
beneficial for countries that used to finance the bulk of the UK rebate, such as France and
Italy. In some cases, the reduced CAP contribution more than makes up for the loss in EU
funding.
If the entire Brexit gap of €10 billion is financed by cutting CAP expenditure, the
roles are almost completely reversed compared to the “higher contributions”
scenario (see figure 8). Large net contributors to the CAP benefit from the reform.
For most former rebate countries, the savings from reduced contributions outweigh the loss
of EU funds. In contrast, most net recipients pay only slightly less than before, but receive
substantially reduced payments. The Polish CAP net balance deteriorates by a fifth, or €680
million. Furthermore, some of the poorest Member States are strongly affected by cuts. For
example, in Bulgaria, Lithuania and Romania, the negative impact exceeds 0.7% of
government spending.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
33
Figure 7: Estimated change in CAP net balances resulting from a €3 billion CAP
spending cut
Source: Authors’ calculations, based on Eurostat and European Commission data.
Figure 8: Estimated change in CAP net balances resulting from a €10 billion CAP
spending cut
Source: Authors’ calculations, based on Eurostat and European Commission data.
Policy Department for Structural and Cohesion Policies
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3.5.3. The impact of co-financing and re-balancing the two pillars of the CAP
The decision to cut or to maintain overall CAP expenditure has important distributional
consequences. They can be modified via changes within the CAP. Changing eligibility criteria
or protecting certain elements from cuts can mitigate or exacerbate the consequences of
spending cuts.
One proposal that has much appeal among experts and researchers is to introduce
national co-financing for pillar 1 spending. This is seen as a good measure not only to
reduce overall CAP spending, but to give Member States a greater incentive to improve the
fairness and cost-effectiveness of direct payments43.
Figure 9 shows the estimated impact of a €10 billion spending cut achieved through
the introduction of co-financing rates for direct payments. The results are compared to
the ‘reference’ scenario where the same cut is distributed between pillar 1 and 2. As can be
noticed, there is no clear net recipient/net contributor divide. Several net recipients (e.g.
Poland, Romania) and some net contributors (e.g. Austria, the Netherlands) are less affected
than in the reference scenario. The main losers in this scenario are those countries which are
especially dependent on pillar 1 payments (France, Spain). In contrast, countries such as
Portugal, Romania or Austria, where pillar 2 represents more than 40% of total CAP allocation
(see figure 4) benefit particularly from concentrating cuts on pillar 1.
Figure 9: Estimated change in CAP net balances resulting from a €10 billion
reduction in CAP pillar 1 spending
Source: Authors’ calculations, based on European Commission data.
More sophisticated adjustments could make large reductions in overall CAP expenditure
compatible with protecting economically weaker Member States. One option would be to
introduce a cohesion-based system of direct payments, with different co-financing rates for
applied to Member States according to their levels of per capita GDP44. A more radical option
would be the introduction of co-financing for direct payments only in the old Member States
(EU-15), as suggested in a recent Agra article45. In order to make up for the €10 billion Brexit
gap, the EU-15 would have to finance one third of the direct payments out of their own budget.
Figure 10 compares the estimated effect of this measure to the reference scenario. The main
43 Matthews, Allan (2016); von Cramon-Taubadel, Stephan et. al (2017). 44 Nuñez Ferrer, Jorge et al. (2016), op.cit 45 Horseman , Chris, “Analysis: P1 co-financing could save CAP up to €13.5 billion per year”, Agra Europe, 29 June
2017.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
35
losers in this scenario are big EU-15 CAP gross recipients, particularly Spain, France and
Germany but also Greece and Ireland. The main beneficiaries are Poland, Romania and the
Czech Republic, which see their net balances improve rather than worsen.
Figure 10: Estimated change in CAP net balances resulting from a €10 billion
reduction in CAP pillar 1 spending (only old Member States)
Source: Authors’ calculations, based on European Commission data.
Policy Department for Structural and Cohesion Policies
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Possible impact of Brexit on the EU budget and, in particular, CAP funding
37
4. CONCLUSIONS AND RECOMMENDATIONS
Brexit has far-reaching consequences for the EU’s finances. The departure of the UK may alter
the dynamics of budgetary negotiations in the European Council. The end of the UK rebate
can also open the door to a more profound reform of the system of Own Resources. The most
immediate consequences, however, are those related to the impact of the ongoing
‘Brexit bill’ negotiations on the current MFF and the expected permanent shortfall
that the UK will leave in the EU budget at the moment of withdrawal.
How exactly these two factors will affect the current and future MFF – and by
extension current and future CAP spending – depends to large extent on politics. We
do not know what the final outcome of the Brexit bill negotiations will be, but it seems clear
that they will depend as much on legal as on political arguments. Likewise, Member States
and the European Parliament can take different decisions on how to adjust the EU budget to
the Brexit gap. Depending on the decisions taken, Brexit can offer an opportunity to reform
the spending and the revenue side of the EU’s finances or, on the contrary, entrench and
deepen existing divides between Member States and further complicate the EU budget with
the establishment of additional corrections.
In this note, we have summarised the possible financial consequences of Brexit for the EU
budget and CAP in particular.
The size and nature of the ‘Brexit bill’ determines whether there will be a gap in
the EU’s finances before the end of the current MFF and whether the negotiations about
the next MFF will be complicated by an unexpectedly large amount of RAL.
The loss of the British net contribution to the EU budget leaves a yearly gap that
must be filled by cutting expenditure, increasing contributions or finding new revenue
sources. We assume that by 2020, no new revenue will come from the introduction of
additional own resources or a Single Market membership fee. Consequently, we
estimate an overall ‘Brexit gap’ of €10 billion and a ‘CAP gap’ of €3 billion.
We have outlined two scenarios to adjust to Brexit at the level of the overall EU budget. Both
suggest that CAP spending will be affected.
Scenario 1: Filling the Brexit gap by increasing Member States’ national
contributions. This especially affects countries that already have a large negative net
balance. Some of them, including Germany and The Netherlands, are hit by further
contribution increases because rebates related to the British EU membership run out.
Consequently, they are likely to push for a restructuring of EU spending.
Scenario 2: Reducing expenditure. The precise consequences of this option depend
on the distribution of the budget cuts, but €10 billion in savings cannot be achieved by
reducing spending on small EU programmes. Attention is therefore likely to turn to the
Structural and Investment Funds and the CAP.
Furthermore, we have estimated what impact the different options to adjust CAP to Brexit
might have on Member States’ CAP net balances.
If the current CAP spending levels are to be maintained after Brexit, an
increase of GNI-based contributions worth €3 billion (the equivalent to the
British net contribution in the field of CAP) is needed to finance them. This leads
to a deterioration of CAP net balances in all Member States, and widens the already
existing imbalance between CAP net contributors and net recipients.
Policy Department for Structural and Cohesion Policies
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Reducing the CAP budget by €3 billion has moderate consequences for
Member States’ CAP net balances. However, it seems likely that there will be
pressure for deeper cuts if other EU programmes are protected.
Adjusting to the Brexit gap only through CAP spending cuts (that is, cutting CAP
by €10 billion) benefits CAP net contributors and shifts the burden of
adjustment to net recipients. As a result, CAP imbalances shrink, but the cuts are
significant, especially for some of the poorer Member States.
Concentrating spending cuts on pillar 1 while protecting pillar 2 has been
suggested as a way of reducing the costs of the CAP and improving the quality of CAP
spending. Our estimates suggest that such a strategy spreads the burden of
adjustment between net contributors and net recipients. However, it requires some
large gross recipients of CAP funds (particularly France and Spain) to accept
a sizable deterioration in their net balances.
Our research shows that there is no pain-free path to adjustment. However, it also shows that
the financial impact of the different reform options is in most cases limited when
compared to general government spending. The challenge for governments mainly
consists in communicating to their constituents that a slightly higher net contribution or a
lower net benefit helps make the EU budget more efficient and ultimately benefits all EU
members. Their case might be more convincing if they simultaneously simplify the EU’s
revenue system and refocus spending instead of devoting energy on creating new rebate
mechanisms.
On a more general note, the following recommendations could contribute to mitigating the
impact of Brexit on the EU budget and on the CAP:
The EU should be careful in linking the agreement on the Brexit bill to an
agreement on a future and hypothetical transitional period, as proposed by the
UK. Moving to the second phase without any clear agreement on the Brexit bill can
offer to the UK the opportunity to use money as a bargaining chip when negotiating
the transition to and future EU/UK relation.
The EU’s priority in the Brexit bill negotiations should be to minimise the
adverse financial impact of Brexit in current and future MFF. If concessions are
needed, they can come from other elements of the deal such as the UK’s participation
in EU bodies and funds, payment for pensions and other employees’ benefits or
payment for contingent liabilities.
Bargaining about budget cuts and contribution increases should not be
limited to one spending area, but include the entire system of EU finances. For
example, net contributors might be more willing to accept further increases in their
payments if the overall budget was reformed.
It is important to start debating contested key concepts (like ‘EU added
value’) and potential compromises soon, even if the actual budgetary impact of
Brexit could become clear only at a very late stage of the Brexit negotiations. If the
preparations for the post-2020 MFF start only in March 2018, there might not be
enough time for an ambitious reform and the EU might end up with a system that is
barely less complicated than the current one. A unique opportunity to improve the EU’s
public finances would be wasted.
Brexit can provide the narrative for a profound reform in the architecture of
CAP, aimed not only at reducing overall CAP spending but at rendering CAP more
effective and sustainable. However, a major revision of CAP seems unlikely before
2022 or 2023, with implementation starting in 2024 or 2025.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
39
REFERENCES
Augère-Granier, Marie-Laure and Sgueo, Gianluca (2016), Common Agricultural Policy
– Pillar II, European Parliamentary Research Service briefing
Barker, Alex (2017), The €60 billion Brexit bill: How to disentangle Britain from the EU
budget, Centre for European Reform, February 2017
Buckwell, A. et al (2017), CAP: Thinking Out of the box: Further modernisation of the
CAP – why, what and how? The RISE Foundation, Brussels
Chomicz, Ewa (2017), EU budget post-Brexit: Confronting reality, exploring viable
solutions, European Policy Centre, Discussion Paper
D’Alfonso, Alessandro (2016), The UK 'rebate' on the EU budget. An explanation of the
abatement and other correction mechanisms, European Parliamentary Research
Service Briefing, February 2016
Darvas, Zsolt et al (2017) Divorce settlement or leaving the club? A breakdown of the
Brexit Bill, Bruegel Working Paper, Issue 03
European Commission (2014), EU Public Finances, 5th edition, Brussels
European Commission (2015), EU budget 2014 Financial Report, Luxembourg
European Commission (2016), Commission Staff Working Document accompanying the
communication from the Commission on the mid-term review/revision of the
Multiannual Financial Framework 2014-2020, 299 final, Brussels
European Commission (2016), EU budget 2015 Financial Report, Luxembourg
European Commission (2017), 10th Financial Report from the Commission to the
European Parliament and the Council on the European Agricultural Guarantee Fund
2016 Financial Year, COM(2017) 456 final, Brussels
European Commission (2017), 10th Financial Report from the Commission to the
European Parliament and the Council on the European Agricultural Fund for
Development 2016 Financial Year, COM(2017) 554 final, Brussels
European Commission (2017), Reflection paper on the future of EU public finances,
COM(2017) 358 of 28 June 2017
European Commission Task Force for the preparation and conduct of the negotiations
with the United Kingdom under Article 50 EU, (2017) Position Paper “Essential
Principles on Financial Settlement¨, TF50 (2017), 2/2
European Commission, DG budget (2017), Report on budgetary and financial
management, financial year 2016, Brussels
Haas, J. and Rubio, E. (2017), Brexit and the EU budget: Threat or Opportunity,
Jacques Delors Institute, Policy Paper 183
Policy Department for Structural and Cohesion Policies
40
Henke, Roberto et. al. (2015), Implementation of the first pillar of the CAP 2014-2020
in the EU Member States, study requested by the European Parliament's Committee on
Agriculture and Rural Development
Keep, Matthew (2017), Brexit: the exit bill, House of Commons Library Briefing Paper
No. 8039.
Keep, Matthew (2017), The UK’s contribution to the EU budget, House of Commons
Library Briefing Paper No. CBP 7886
Little, Jonathan et al (2013), European Council Conclusions on the Multi-Annual
Financial Framework and the CAP, note from the European Parliament, July 2013
Matthews, Alan (2014), The impact of the simultaneous MFF negotiations on the
European Parliament’s influence on the 2013 CAP reform, European Parliament project
“The First Cap Reform Under The Ordinary Legislative Procedure: A Political Economy
Perspective”, Brussels
Matthews, Alan (2016), The Future of Direct Payments, Paper Prepared for Workshop
on ‘Reflections on the Agricultural Challenges Post 2020 in the EU: Preparing the next
CAP Reform’. Brussels: European Parliament, Directorate General for Internal Policies
Matthews, Alan (2017), The budgetary context for the CAP, blog article, CAPreform.eu
Monti, Mario et al (2016), Future financing of the EU. Final report and recommendations
of the high level group on own resources, Brussels, December 2016
Núñez Ferrer, Jorge and Rinaldi, David (2016), The Impact of Brexit on the EU Budget:
A non-catastrophic even, CEPS Policy Brief No. 347
Núñez Ferrer, Jorge and Rinaldi, David (2016), The Impact of Brexit on the EU Budget:
A non-catastrophic even, CEPS Policy Brief No. 347
Roberto Henke et. al. (2015), Implementation of the first pillar of the CAP 2014-2020
in the EU Member States, study requested by the European Parliament's Committee on
Agriculture and Rural Development
Von Cramon-Taubadel, S., and Heinemann, F. (2017), The EU’s Common Agricultural
Policy. Why reform is overdue, Bertelsmann Stiftung, Policy Brief
DIRECTORATE-GENERAL FOR INTERNAL POLICIES
Policy Department for Structural and Cohesion Policies
AGRICULTURE AND RURAL DEVELOPMENT
Research for AGRI Committee -
EU - UK agricultural trade: state of play
and possible impacts of Brexit
STUDY
Abstract
This report analyzes current UK-EU27 agri-food trade, and quantifies the
impacts of a return to WTO rules after Brexit. Agri-food trade is likely to
decrease steeply, especially for meat and dairy sectors. However, there
might be an opportunity for an increase in production in a reduced number
of European sectors, such as red meat, cattle or wheat, to replace imports
from the UK. More generally, Ireland is likely to be the most negatively
impacted country and deserves particular attention during the Brexit
process.
IP/B/AGRI/IC/2017-087 October 2017
PE 602.008 EN
This document was requested by the European Parliament's Committee on Agriculture and
Rural Development.
AUTHORS
Centre d’Études Prospectives et d’Informations Internationales (CEPII): Cecilia BELLORA,
Charlotte EMLINGER, Jean FOURÉ, Houssein GUIMBARD
Research manager: Albert Massot
Project and publication assistance: Virginija Kelmelytė
Policy Department for Structural and Cohesion Policies, European Parliament
LINGUISTIC VERSIONS
Original: EN
ABOUT THE PUBLISHER
To contact the Policy Department or to subscribe to updates on our work for the AGRI
Committee please write to: [email protected]
Manuscript completed in October 2017
© European Union, 2017
Additional materials are available on the website of the CEPII:
http://www.cepii.fr/IPOL_STU_2017_602008_EN
Please use the following reference to cite this study:
Bellora, C., Emlinger, C., Fouré, J. And Guimbard, H. (2017), Research for AGRI Committee,
EU – UK agricultural trade: state of play and possible impacts of Brexit, European Parliament,
Policy Department for Structural and Cohesion Policies, Brussels
Please use the following reference for in-text citations:
Bellora et al. (2017)
DISCLAIMER
The opinions expressed in this document are the sole responsibility of the author and do not
necessarily represent the official position of the European Parliament.
Reproduction and translation for non-commercial purposes are authorized, provided the
source is acknowledged and the publisher is given prior notice and sent a copy.
EU - UK agricultural trade: state of play and possible impacts of Brexit
43
BRIEF PROFESSIONAL DESCRIPTION
The authors of this document are economists at the CEPII (Centre d’Études
Prospectives et Informations Internationales, a French research center on
international economics).
Cecilia BELLORA currently works on international trade policies and on the
links between international trade and the environment. She holds a PhD
in economics (University of Cergy-Pontoise, France). She previously
worked for a think-tank in the field of agricultural development and then
at the French National Institute for Agronomic Research (INRA).
Charlotte EMLINGER is working on trade analysis with a special focus on
agricultural trade and policies. Her main research topics concern quality
specialization, the role of intermediaries in trade, and the impact of trade
agreements. She's also in charge of the CEPII trade database. She holds
a PhD in economics on Montpellier SupAgro-University of Montpellier 1
(France).
Jean FOURÉ works on the computable general equilibrium (CGE) model
MIRAGE (trade and environment policy analysis) and develops the long-
term growth model MaGE (EconMap database). Jean Fouré graduated from
the École Polytechnique and the École Nationale de Statistique et de
l'Administration Économique (ENSAE) in 2010.
Houssein GUIMBARD holds an MPhil in environmental economics and
natural resources (AgroParisTech, Paris, France). He works on CGE models
and their application to international trade. His fields of interest are
regionalism and trade policies.
Policy Department for Structural and Cohesion Policies
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EU - UK agricultural trade: state of play and possible impacts of Brexit
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CONTENTS
LIST OF ABBREVIATIONS 47
LIST OF TABLES 49
LIST OF FIGURES 50
EXECUTIVE SUMMARY 51
INTRODUCTION 53
1. IMPACT ASSESSMENTS OF EXIT FROM EUROPE 55
2. EUROPEAN UNION AND UNITED KINGDOM BILATERAL TRADE:
STATISTICAL OVERVIEW 57
2.1. Macro-economic indicators: a marked dissymmetry 57
2.2. Trade protection 58
2.2.1. Tariffs: increase to their MFN level 58
2.2.2. Non-tariff measures (NTMs): increase in their trade-restrictiveness 58
2.3. Trade flows 59
2.3.1. Main trading sectors potentially impacted: processed food, dairy and
meat. 60
2.3.2. Main European trading countries: France, Netherlands and the
particular case of Ireland 63
2.3.3. High integration of agri-food value chains through trade 65
3. MODEL AND SCENARIOS 69
3.1. Modelling framework 69
3.2. Scenarios 69
3.2.1. The WTO scenario 69
3.2.2. Alternative specifications and sensitivity analysis 70
4. IMPACTS OF A WTO SCENARIO ON THE AGRI-FOOD SECTOR IN
THE EUROPEAN UNION 71
4.1. A large decrease in EU27-UK agri-food trade flows unevenly distributed
across sectors and EU27 countries 71
4.1.1. Strong decrease in EU27 exports to UK, compensated by exports to
other countries only in a few sectors 71
4.1.2. EU27 agri-food imports from the UK: same mechanisms as for
imports 73
4.1.3. Most impacted EU27 exporters: the Netherlands, France and Ireland 74
4.2. Agri-food value-added decreases within the EU27, though exposure of
countries is heterogeneous 75
4.2.1. Agri-food value-added in the EU27: large negative impact in Ireland,
very limited in other EU27 countries 76
4.2.2. Decomposition of the impacts on value-added in the EU27: losses
from the Brexit are only partly compensated by exports to other
countries 77
Policy Department for Structural and Cohesion Policies
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4.3. At the macroeconomic level, the impact on EU27 countries is marginal,
except for Ireland 79
5. CONCLUDING REMARKS 81
REFERENCES 83
ANNEX A: DATA 87
ANNEX B: MODEL DESCRIPTION 89
ANNEX C: ADDITIONAL TABLES 95
ANNEX D: ADDITIONAL TABLES – HS6 DETAILS 101
EU - UK agricultural trade: state of play and possible impacts of Brexit
47
LIST OF ABBREVIATIONS
AVE Ad Valorem Equivalent
BAU Business-as-usual, the reference scenario without trade policy
shock
CAP Common Agricultural Policy
CES Constant Elasticity of Substitution
EU European Union
EU27 European Union, with 27 Member States
(Austria, Belgium, Bulgaria, Coratia, Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden)
GDP Gross Domestic Product
GTAP Global Trade Analysis Project
HS6 United Nations’ Harmonized System 6-digits classification
MAcMap-HS6 Market Access Map HS6 database
MIRAGE Modelling International Relationships in Applied General
Equilibrium
NEC Not Elsewhere Classified
NES Not Elsewhere Specified
NTM Non-tariff measure
SAM Social Accounting Matrix
UK United Kingdom
WTO World Trade Organization
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EU - UK agricultural trade: state of play and possible impacts of Brexit
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LIST OF TABLES
TABLE 1
Market size, EU27 (and its first ten Member States, by GDP value) and UK (2016) 58
TABLE 2
Trade flows and protection, EU27 – UK 59
TABLE 3
Main export destinations, of the EU27 and the UK, total trade 60
TABLE 4
EU27 exports to the UK in agri-food sectors and faced protection 62
TABLE 5
EU27 imports from the UK in agri-food sectors and faced protection 63
TABLE 6
EU27 exports to the UK in agri-food sectors and faced protection, by country (top ten,
by protection revenue) 64
TABLE 7
EU27 imports from the UK in agri-food sectors and faced protection, by country (top
ten, by protection revenue) 65
TABLE 8
UK value-added in EU27 exports (% of gross export of EU27 countries) 66
TABLE 9
Breakdown of the value-added contained in exports of UK, by origin 67
TABLE 10
Variations in consumption and production price indexes for agri-food goods and all
goods in the WTO scenario, 2030 79
TABLE B. 1
Aggregation of regions 90
TABLE B. 2
Aggregation of sectors 92
TABLE B. 3
Reduction in intra-EU trade restrictiveness of NTMs 93
TABLE C. 1
EU sector exports by destination and ranked by largest decrease in exports towards
the world, WTO scenario, 2030 95
TABLE C. 2
EU subregions export to UK in Agri-food sectors: aggregate and three sectors with
the largest variations, 2030 96
TABLE C. 3
Agri-food value-added in EU regions, in the WTO scenario: aggregate, five most
impacted sectors and decomposition of variation, 2030 98
TABLE C. 4
Gross Domestic Product (volume) and variation in 2030 100
Policy Department for Structural and Cohesion Policies
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TABLE D.1
Number of HS6 products, by GTAP sector 101
TABLE D.2
EU27 imports, HS6 level (1/2) 102
TABLE D.3
EU27 imports, HS6 level (2/2) 103
TABLE D.4
EU27 exports, HS6 level (1/2) 104
TABLE D.5
EU27 exports, HS6 level (2/2) 105
LIST OF FIGURES
FIGURE 1
Variations in EU27 export volume to the UK, by sector, 2030 72
FIGURE 2
Variations in aggregate EU27 imports volume from the UK, by sector, 2030 74
FIGURE 3
Variations in EU27 agri-food exports to the UK, by country, 2030 75
FIGURE 4
Variations in total agri-food value-added by EU27 country and UK, 2030 77
FIGURE 5
Variations in agri-food value-added volume and decomposition by source in the WTO
scenario, 2030 78
EU - UK agricultural trade: state of play and possible impacts of Brexit
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EXECUTIVE SUMMARY
This document first presents the current state of the trade relationship between the European
Union (EU27) and the United Kingdom (UK). It then produces a quantitative impact
assessment of the UK’s withdrawal from the EU27, with a specific focus on agri-food sectors.
The main scenario assumes that (i) MFN tariffs will be imposed on bilateral trade in goods
between the EU27 and the UK and (ii) the trade-restrictiveness of non-tariff measures will
increase. In the absence of a consensual scenario regarding public policies other than those
concerning the trade policy mentioned above, the status quo is assumed. In other terms,
redistributive policies that could mitigate Brexit’s negative impacts are not contemplated in
our scenarios and no change in the Common Agricultural Policy is assumed. Results are given
by the computable general equilibrium model developed by the CEPII, MIRAGE, and are
expressed as a deviation from a baseline, in 2030.
The key-findings are the following:
The relationship between the UK and the EU27 is characterized by a marked
dissymmetry. The EU27, as a whole, is a large market (more than 445 million
inhabitants and a GDP of USD 13.8 thousand billion in 2016), while the UK is relatively
smaller (a population of 65.6 million people and a GDP of USD 2.6 thousand billion).
Thus, the EU27 represents a large market and outlet for UK exporters, while the UK is,
in comparison, a small market for EU27 (even if it represents the main export
destination of some agri-food sectors in given EU27 countries). For these reasons,
macroeconomic impacts on the UK are significantly larger (e.g. -2.3% in GDP) than for
EU27 (-0.3%). Nevertheless, the UK is currently the second largest EU28 country and
is highly integrated with the EU27 in terms of trade and value chains. As a result, all
the EU27 countries will be negatively affected by Brexit, the magnitude of the impact
increasing with economic proximity to the UK. Ireland in particular (-3.4% in GDP, USD
-63.4 billion), and to a much lesser extent Belgium and Luxembourg (-0.7%) and the
Netherlands (-0.5%), are the most affected countries.
Agri-food products are less traded than manufactured ones and contribute less in total
GDP. They will face however the largest increases in trade protection, both in terms of
tariffs and non-tariff measures. Agri-food exports of the EU27 to the UK will decrease
by USD 34 billion (62%) and imports by USD 19 billion (with the same relative
decrease, 62%).
Trade diversion will take place; part of the decrease in exports to the UK will be
compensated by an increase in intra-EU27 trade (+1%) as well as in exports to third
countries (+0.9%). This is partly explained by a loss of UK’s competitiveness, due to
higher prices of imported intermediary consumptions. In the end, agri-food exports of
the EU27 to the world will decrease by 4.1% (USD -27 billion). The most affected
sectors (in value terms) are processed food (USD -10.5 billion, -4.7%),46 which is also
the most exported (33% of EU27 agri-food exports), white meat (USD -5.2 billion, -
10.5%) and dairy (USD -4.6 billion, -7%). The Netherlands (USD -6.7 billion, -66%),
Ireland (USD -6.5 billion, -71%) and France (USD -4.7 billion, -51%) undergo the
largest drops in exports.
Agri-food production and value added are also affected by trade with other countries
as well as domestic demand. The relative magnitude of each of these effects (bilateral
trade with the UK, trade with third countries and domestic demand) varies across
countries and sectors and determines Brexit’s impact heterogeneity. In the UK, agri-
food value-added increases (+2%), mainly because local production partially
46 These numbers correspond to the impacts on the most affected sector producing processed food, identified as
“Other food” in the simulation results.
Policy Department for Structural and Cohesion Policies
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substitutes imports from the EU27. This takes place at consumers expense since
consumption prices increase by 4%. In the EU27 as a whole, agri-food value-added
decreases by 0.8%; the increase in exports to third countries and in intra-EU trade do
not compensate for the loss of exports to UK. Even if in all EU27 countries, overall agri-
food value-added decreases, some sectors like Red meat (+2.1%) and Cattle (+1.3%)
in France gain thanks to their capacity to fulfill the domestic demand, replacing imports
from the UK. The wheat sector in France is one of the few where value added increases
(+1.7%) thanks to an increase in exports to other EU countries. The fall in agri-food
value-added is particularly large in Ireland (-16%, with a collapse in white meat, -
58%), because of the decrease in exports to UK but also to general equilibrium effects
leading to a strong decrease in domestic demand.
Because of its tight relationship with the UK, of all EU27 countries, Ireland is affected
the most by Brexit, and not only in agri-food sectors. In relative terms, its GDP
decreases even more than UK's GDP (-3.4% vs -2.4%). This is explained by a drop in
Irish agri-food exports to the UK and to the rest of the World, including EU27 countries
as Irish production relies heavily on imported intermediates from the UK.
EU - UK agricultural trade: state of play and possible impacts of Brexit
53
INTRODUCTION
In March 2017, the United Kingdom (UK) Government notified the European Council of its
intention to withdraw from the European Union (EU). Negotiations on the modalities of Brexit
have started and should not exceed two years, after which the withdrawal should be effective,
as stipulated by the Treaty on European Union.
Agri-food sectors do not contribute much to national GDPs or bilateral trade flows (11% of
EU27 exports to the UK in value), but the stakes are nevertheless high. The UK is an important
destination for EU27 exports with a highly favorable agricultural trade balance with the UK
(USD 29 billion).47 Trade protection that could apply on agri-food goods in the absence of a
free trade agreement is particularly high (64%, to be compared with 26% before Brexit, taking
into accounts both tariffs and NTMs). Furthermore, agricultural production is managed at the
European level by the Common Agricultural Policy, which benefits from one of the largest
European budgets (€ 59 billion per year). This common policy relies partly on UK contributions
and constitutes a significant support to farmers’ revenues. In other words, agriculture and the
food industry are an offensive interest for EU27 and an important subject for the UK, which
depends on imports from the EU27. The UK negotiating position will therefore depend on the
weight it will give to farmers or consumers’ interests (Grant et al., 2015; Lang, 2016; Potton
and Webb, 2017).
For the time being, the specific modalities of the post-Brexit EU27-UK relationship are
unknown. The future of agricultural policies in the UK is naturally one of the main uncertainties.
In terms of agri-food trade, which is our main focus, the issues are manifold. We briefly
summarize below the main ones:
Tariffs: Tariffs between the EU27 and the UK have to be determined during Brexit
negotiations. The future of preferential access to third markets is also uncertain for the
UK. Molinuevo (2017) suggests that trade agreements signed by the EU that concern
only goods will not be binding anymore for the UK. This implies that the UK will have
to negotiate its own preferential tariffs. Among these agreements, the EU- Turkey is
the most important. The situation of other (mixed) trade agreements signed by the EU
is more complex and uncertain. The UK could also negotiate trade agreements with
new partners, the United States, for instance. These negotiations could have an impact
on EU27 exports to the UK and to third countries, due to trade diversion effects.
Tariff Rate Quotas (TRQs): What will happen to European TRQs after Brexit is crucial
in relation to agricultural products. The EU27 and the UK have already agreed to divide
existing (import) commitments within the WTO based on historical trade flows, since
TRQs were negotiated by the European Commission on behalf of all EU member states.
The agreement is however likely to be challenged by EU and UK partners. The
uncertainty concerns also EU preferential (export) TRQs in third countries that are part
of preferential agreements. Since TRQs are not currently allocated by member states
(they are allocated on a first-come, first-served basis), the partition of the quotas could
be particularly complex (Revells, 2017; Downes, 2017). The size of these TRQs is a
major concern both for UK and EU27 farmers, especially in the livestock sector.
Non Tariff Measures (NTMs): Currently, the trade restrictiveness of NTMs (e.g.
sanitary and phytosanitary standards, technical barriers, certification procedures, etc.)
within the EU is fairly limited, since many of these measures are common to all member
states. After Brexit, any new NTM adopted without coordination between the EU27 and
the UK will probably have a negative impact on bilateral trade. Furthermore, UK’s exit
from the EU will involve more border and custom controls, increasing in consequence
prices of EU exports to the UK and of EU imports from the UK.
47 Average year value over the period 2013 – 2015.
Policy Department for Structural and Cohesion Policies
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Geographical Indications (GIs): In some sectors (in particular animal productions,
wine and spirits, and fruit and vegetables), maintaining protection for food names is
an important stake. Exit from the EU could potentially result in loss of protection for
food names (or GIs) in the UK, the European48 and third countries’ markets that
recognize GIs (Roussel and Doherty, 2016). The UK will need to establish its own
national approval scheme in order to protect these GIs.
In addition to these elements that both the EU27 and the UK will have to manage, issues on
rules of origin (RoO) and bargaining power after Brexit will also influence the UK negotiating
position:
The question of bargaining power is posed both when we consider UK access to EU27
and third countries markets. The UK will not be involved anymore in the negotiations
over the definition of new European norms and regulations. However, to lower the
trade restrictiveness of future European NTMs, the UK could decide to continue
following European standards, loosing part of the benefits of its independence. The UK,
a relatively small country, would also lose bargaining power in trade negotiations with
third countries, which could potentially take a long time.
Rules of Origin: The rules of origin determine where (in which country) a product and
its components have to be produced to benefit from preferential tariffs. Even if the
EU27 and the UK reach a trade agreement, many products the UK exports to EU27
would not be eligible anymore to preferential access (if value chains remain
unchanged), not enough value added being produced in the UK. More generally,
compliance with European RoO requirements potentially could entail additional
administrative costs for exporting to the EU in general, and particularly in the case of
agri-food sectors, which are closely integrated in EU supply chains (Baker and Swales
, 2016; UK House of Lords, 2016). The same problem could arise for the EU27, but
most likely to a lesser extent.
Future negotiations between the EU27 and the UK encompass several different aspects, not
exclusively trade related. In order to evaluate possible outcomes, the European Parliament
Committee on Agriculture and Rural Development commissioned to the CEPII/CIREM an
analysis of the current state of UK - EU27 agri-food trade and the possible impacts of Brexit.
Given the high uncertainty on the outcome of trade negotiations, the application of Most
Favoured Nation (MFN) tariffs to bilateral trade between the UK and the EU27, as well as an
increase in the trade restrictiveness of bilateral NTMs is the scenario retained to evaluate
Brexit's impacts. Considering that a sector-by-sector negotiation is excluded, the impact
assessment is conducted with a computable general equilibrium model, that accounts for direct
trade impacts of the increased trade protection (not only on agri-food sectors but on all goods
and services). The model also takes into consideration indirect trade impacts, due, for
instance, to trade diversion brought about by changes in relative prices, and for general
equilibrium effects triggered by changes in total revenues at the global level.
In the following, we first depict the current state of agri-food trade between the UK and the
EU27, relative to trade in manufactured goods and to total European trade. Differences across
European member states and sectors are stressed. Then, the impacts on trade and value-
added of a scenario in which no trade deal would be reached by the EU27 and the UK are
simulated and analyzed, as well as its macroeconomic consequences, taking into account the
limitations of the model and the scenario adopted. Finally, a number of policy
recommendations are drawn.
48 Products of UK presently enjoying protection in the UE27 include Melton Mowbray pork pies, Cornish pasties,
Yorkshire Wensleydale cheese, Welsh beef, Welsh lamb, Armagh bramley apples and Scotch whisky.
EU - UK agricultural trade: state of play and possible impacts of Brexit
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1. IMPACT ASSESSMENTS OF EXIT FROM EUROPE
Several studies were conducted before and after the referendum, to evaluate the potential
economic impact of Brexit. Ex ante analyses include both academic and non-academic works,
and use different approaches. Ottaviano et al. (2014) and Aichele and Felbermayr (2015) use
standard quantitative static general equilibrium trade models à la Arkolakis, Costinot and
Rodriguez-Clare (2012) based on a gravity model, to estimate the effect on the UK economy
of leaving the EU. Ebell et al. (2016) evaluate the long-run macroeconomic impact of Brexit
by employing a large scale structural global econometric model (NiGEM), while Brakman et al.
(2017), HM Treasury (2016) and Connell et al. (2017) use gravity models to assess the effects
on trade of Brexit. Computable general equilibrium models are the most commonly approaches
used to predict the effect of Brexit on trade, value added and real income (see, e.g., Booth et
al., 2015; Ciuriak et al., 2015; PwC, 2016; Rojas-Romagosa, 2016; Boulanger and Philippidis,
2015), while Davies and Studnicka (2017) and Hosoe (2016) discuss the potential impact of
Brexit, employing general equilibrium models accounting for firm heterogeneity à la Melitz
(2013).
These works vary in their methodological approaches and in terms of scenarios and focus,
which makes it difficult to compare their output. Almost all these studies evaluate and compare
the impacts of a “hard” and a “soft” Brexit (corresponding to a WTO scenario, and a UK-EU
FTA in various balances); some focus on the impact of non-tariff measures and dynamic effects
(Aichele and Felbermayr, 2015), others focus more on the post-Brexit trade policy that the UK
should adopt (Ciuriak et al., 2015), or the role of global value chains (Connell et al., 2017).49
It is important to note that overall, in the available studies, the main focus is the impact of
Brexit on the UK economy, with little attention paid to the effects on EU members. The
exceptions are Bergin et al. (2016), Barett et al. (2015) and Rojas-Romagosa (2016) which
analyze the impact of Brexit on the Netherlands and Ireland. Lawless and Morgenroth (2016)
compare trade and tariffs data to discuss the effect of Brexit on EU trade, and using sector
level elasticity estimates they compute the tariff-induced price increases and trade reductions
that might result from Brexit.
In almost all these works, Brexit is shown to have substantial negative impacts, for both the
UK and the EU. The impact on British GDP ranges from -7% to -0.1%, depending on the
assumptions made and the scenarios considered (see Bush and Matthes, 2016, for a review
and a meta-analysis of the macroeconomic impacts of Brexit). All of these studies find that
the most negative outcome would result from failure of the UK and the EU27 to negotiate the
terms of the UK’s exit, i.e., if they are unable to strike a trade agreement and apply WTO
tariffs to their bilateral trade.
Studies focusing on the agricultural sector are relatively scarce, and essentially, evaluate the
impact of Brexit on British agriculture, using descriptive evidence on trade, production and
tariffs (Buckwell, 2016; Potton, 2017; Grant et al., 2015; Lang, 2015), or partial equilibrium
modeling frameworks as in Davis et al. (2017) and Van Berkum et al. (2016). Davis et al.
(2017) illustrate the heterogeneous impacts that Brexit could have on the UK’s agricultural
sectors. They combine two partial equilibrium models, FAPRI-UK and FAPRI-EU, to examine
different trade arrangements and show that imposing WTO tariffs on UK–EU bilateral trade
would have a significant impact on the UK domestic market, with the magnitude of this impact
across sectors depending on the trade balance in each sector. Imposing tariffs on those
products that are mostly imported, e.g. dairy, pig and poultry products, by reducing import
volumes, would have a positive impact on UK domestic prices, and a resulting positive effect
49 Connell et al. (2017) show that including sector-level input-output linkages in production using WIOD data in
gravity estimates increases the losses to the UK induced by Brexit.
Policy Department for Structural and Cohesion Policies
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on production. Van Berkum et al. (2016), in their study, focus more on the public policies that
the UK might adopt to cope with Brexit. Using the AGMEMOD partial equilibrium model, they
conduct a sector analysis and assess the impacts on trade and farm incomes according to
different UK agricultural policy scenarios. Donnellan and Hanrahan (2016) use the FAPRI-
Ireland model to evaluate the potential impact of Brexit. Although their main focus is Ireland,
they find notable negative impacts for the EU agri-food sector overall, and in some sectors
and member states in particular (beef, dairy and lamb for Ireland, pig and dairy for Denmark,
vegetables for the Netherlands and wine for France, Spain and Italy). Baker et al. (2017) also
use partial equilibrium model to assess the impact of Brexit on farmers’ income. They show
that farm business income benefits from the Brexit, through higher prices, in the dairy and
pig sector. On the other hand, producers of cereals and sheep meat will experience income
reduction due to rising costs of trade to export to the EU. This result is consistent with, Freund
et al. (2017) who show with the MAGNET CGE model that the impacts of Brexit is negative for
UK, with the most pronounced effects in the meat and livestock sectors. Using general
Equilibrium models to assess the impact of the Brexit on Agriculture allows to take the budget
question into account. This issue is particularly crucial as the exit of UK from the EU will also
entail a withdrawal from the ‘CAP’ that would results in budget saving for UK. Thus, Boulanger
and Philippidis (2015) show that these gains exceed trade facilitation costs on agrifood trade.
EU - UK agricultural trade: state of play and possible impacts of Brexit
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2. EUROPEAN UNION AND UNITED KINGDOM BILATERAL
TRADE: STATISTICAL OVERVIEW
KEY FINDINGS
The relationship between the EU27 and the UK is marked by dissymmetry: the EU27
is a large market (445 million inhabitants, GDP of USD 13,800 billion), while the UK is
a relatively small country (65.6 million people, GDP of USD 2,600billion).
In the absence of any trade agreement stating otherwise, MFN tariffs will apply to
bilateral trade flows between the EU27 and the UK, and NTMs will increase in the
long term. Protection faced by EU27 exports to UK will be slightly higher than protection
faced by UK exports to EU27: MFN of 18.3% and NTMs of 45.4% for EU27 agri-food
exports and MFN of 14.2% and NTMs of 39.9% for UK agri-food exports.
Agri-food goods represent 11% of bilateral trade flows between the UK and the
EU27. The EU27’s trade balance with the UK is positive: USD 47 billion worth of
agricultural goods are exported to the UK, compared to USD 18 billion worth of
agricultural imports.
We rank sectors and countries by trade value weighted by potential protection, to
highlight those potentially most impacted by Brexit. The three main EU27 agri-food
sectors are processed food, dairy and meat (for both exports to and imports from
UK). The EU27 countries that trade the most with the UK and will face the highest
protection are France, Netherlands and Ireland.
The situation of Ireland deserves particular attention. Its trade with the UK plays
an important role, especially imports: 27% of Ireland’s European imports are from the
UK, and represent 46% of total Irish agri-food imports (compared to 4% on average
for other European countries). Disruptions caused by Brexit may have particularly
negative impacts on this country because of the large integration of UK products in
Ireland’s exports.
2.1. Macro-economic indicators: a marked dissymmetry
The relationship between the UK and the EU27 is characterized by a marked dissymmetry.
The EU27, as a whole, is a large market with more than 445 million inhabitants and GDP of
USD 13.8 thousand billion, while the UK is a relatively small country, with a population of 65.6
million people and a GDP of USD 2.6 thousand billion (see Table 1). Thus, the EU represents
a very large market and outlet for UK exporters, while the UK, even though integrated with
the EU in terms of trade and value chains, and with a large GDP per capita, is a relatively
small market for European exporters in comparison.50 However, among the EU28, the UK is
a large country: it is ranked third after Germany and France for number of inhabitants and
second after Germany for GDP. Its GDP per capita is among the highest in this group, 33%
higher than the EU27 average. This foreshadows large redistributions of economic activity
across the EU27.
50 Sector and country specificities are discussed later but note that UK is nevertheless an important export market
for some sectors. For instance, 12% of French exports of vegetables and fruits go to UK (10% for Spanish exports)
as well as 14% of French vegetables oils and fats.
Policy Department for Structural and Cohesion Policies
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Table 2: Market size, EU27 (and its first ten Member States, by GDP value) and UK
(2016)
Country GDP (USD bn) GDP per capita (USD)
Population
(mn people)
United Kingdom 2,619 39,899 65.6
EU27 13,779 30,905 445.9
Germany 3,467 41,936 82.7
France 2,465 36,855 66.9
Italy 1,850 30,527 60.6
Spain 1,232 26,528 46.4
Netherlands 771 45,295 17
Sweden 511 51,600 9.9
Poland 470 12,372 37.9
Belgium 466 41,096 11.3
Austria 386 44,177 8.7
Denmark 306 53,418 5.7
Source: World Development Indicators, The World Bank, Authors’ calculations.
2.2. Trade protection
2.2.1. Tariffs: increase to their MFN level
Once the UK leaves the EU, if no relevant trade agreement has been signed to the contrary,
the MFN tariff will apply to bilateral trade between the UK and the EU27.
Although MFN tariffs are the same across all EU countries, faced protection will depend on the
trade patterns of each individual trade partner. For instance, a very high tariff imposed on a
product that is not traded at all is less restrictive than a lower tariff on a much more traded
good. The way applied protection is computed is detailed in Bouët et al. (2008). As a result,
the average MFN duty that EU27 could apply to imports from the UK is 18.3% and
3.2% for agricultural and manufactured goods respectively, while EU exports could
face respective average tariffs of 14.2% and 2.6% (Table 2). Agricultural products
benefits from a higher MFN protection. This reflects the importance of sensitive sectors such
as sugar, bovine products (meat and dairy) and animal products more generally (see Tables
4 and 5).
2.2.2. Non-tariff measures (NTMs): increase in their trade-restrictiveness
NTMs arguably play a dominant role in restraining imports. Table 2 shows that NTMs follow
the same general pattern as protection used by European countries, being more restrictive in
the case of agricultural goods compared to manufactured products. Thus, EU27 agriculture
exports to the UK face average NTMs trade restrictiveness of 26.01% (14.37% for
industrial goods), slightly higher than those imposed by the EU27 on UK exports
(22.78% and 13.37%, for agriculture and manufactured goods, respectively).
EU - UK agricultural trade: state of play and possible impacts of Brexit
59
In the absence of any agreement between the EU27 and the UK after Brexit, new technical
and non-technical measures applied by the two regions will probably diverge in the mid-term,
accounting for different consumer preferences and trade policies. In the short term,
certification procedures will be more complex with the end of the common market and anti-
dumping procedures (or other temporary measures) could be applied to bilateral trade flows.
This will result in NTMs whose trade restrictiveness will increase over time. It is difficult to
quantify the extent of this increase but it is important to take it into account since NTMs
represent the main trade protection. Table 2 reports the values used in the simulation
exercises for present and 2030 projected trade restrictiveness of NTMs. These values for NTMs
trade restrictiveness are documented in Annex B (pre-Brexit NTMs) and Section 4.2 (post-
Brexit NTMs).
Table 3: Trade flows and protection, EU27 – UK
Trade flows Protection
Value (USD
million)
%of EU
trade
%of
world
trade
NTMs
pre
Brexit (%)
MFN (%)
NTMs
post
Brexit (%)
EU exports
Non Agric. goods 305,864 6.67 1.86 14.37 3.22 26.15
Agric. goods 47,306 8.81 3.25 26.01 18.29 45.40
Total 353,170 6.90 1.97 15.62 4.85 28.23
EU imports
Non Agric. goods 196,122 4.35 1.19 13.37 2.59 24.17
Agric. goods 17,954 3.79 1.23 22.78 14.20 39.89
Total 214,076 4.29 1.2 14.07 3.45 25.34
Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from BACI
(see Annex A for details on data sources).
Note: Trade flows are mean values for the period 2013–2015. Current tariff protection is not reported since it does
not apply. The AVEs of the MFN tariffs refer to 2013. Two NTM values are reported, present AVE and projected AVE
in the absence of a specific trade agreement when the UK leaves the EU.
2.3. Trade flows
The UK is the second largest (after the USA) EU export market (worth USD 353 billion, and
6.9% of EU exports, annual trade flow, average over the period 2013-2015, see Table 3) in
trade value; EU trade is mainly among members. At the same time, the EU27 is the UK’s
largest export market (USD 214 billion and 46% of UK exports).
Trade consists mostly of non-agricultural goods (i.e., goods that are not covered by the WTO
Agreement on Agriculture51), agri-food representing only 11% of trade flows. This structure
of more manufactured goods than agricultural goods is not a specificity of the trade
relationship with the UK but reflects a pattern that is common to most developed countries.
51 The exact product coverage is provided in Annex I of the Agreement on Agriculture:
https://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm#annI
Policy Department for Structural and Cohesion Policies
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The EU27’s trade balance with the UK is positive for both manufactured and agricultural
goods.52 USD 47 billion worth of agricultural goods are exported to the UK, compared to USD
18 billion worth of agricultural imports. Additionally, the share of exports to the UK in total EU
exports is larger than the share of imports, and especially in the case of agricultural goods
(8.8% vs. 3.8%); also, the protection applied to exports (44.3% for agriculture) is higher than
that imposed on imports (37% for agriculture). The combination of these three elements
(positive trade balance, larger trade share, and protection), means that larger impacts can
be expected on European exports (producers) compared to European imports
(consumers).
Table 4: Main export destinations of EU27 and UK, total trade
EXPORTER: EU27 EXPORTER: UK
IMPORTER VALUE
(USD mn)
% TOT
EXPORTS IMPORTER
VALUE
(USD mn)
% TOT
EXPORTS
EU27 2,789,746 54.49 EU27 214,076 46.45
UK 353,170 6.9 USA 52,038 11.29
USA 341,399 6.67 Switzerland 25,353 5.5
China 184,246 3.6 China 24,551 5.33
Switzerland 145,317 2.84
Un. Arab
Emirates 12,066 2.62
Russia 116,929 2.28 Hong Kong 10,009 2.17
Turkey 86,429 1.69 Canada 7,805 1.69
Japan 67,452 1.32 Saudi Arabia 7,062 1.53
Rep. of Korea 53,041 1.04 Rep. of Korea 6,923 1.5
Norway 52,045 1.02 Japan 6,588 1.43
Source: Authors’ calculations, using BACI.
Note: Trade flows are mean values over the period 2013–2015, for all goods (agri-food and manufacture).
2.3.1. Main trading sectors potentially impacted: processed food, dairy and meat.
In the context of agriculture, the most traded products between the EU27 and the UK, by
value, are processed food products53, beverages and meat and dairy products. However, to
estimate the impact of Brexit, it is relevant to also consider the protection faced by trade
flows. Therefore, we sort sectors by trade flow value multiplied by potential ad
valorem protection, were MFN and more restrictive NTMs to be applied, resulting in what
we describe in what follows as “Protection Revenue”. We also investigate trade patterns in
more depth using information available at the HS6 level (the statistics at HS6 level are
presented in Appendix D, see Annex A.4 for details on data sources).
52 For the sake of comparison, total UK trade imbalance amounts to € 29 billion per year on average over the period
2013 – 2015 (source: Eurostat) 53 The “Other food” sector discussed here is unfortunately a residual sector in the original GTAP database, gathering
all processed food not classified elsewhere (i.e. different from vegetal oils, processed rice and sugar or dairy
products).
EU - UK agricultural trade: state of play and possible impacts of Brexit
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Processed food products represent the main export flow to the UK and the most
heavily protected – amounting to almost USD 17 billion, representing 10% of European food
exports (see Table 4). At the HS6 level, the most protected goods which would generate the
highest revenue within the processed food sectors are dog and cat food, France is the biggest
exporter to the UK (25%) in these sectors, followed by various animal feed preparations
(France, 20%). Imports of communion wafers, rice paper and baking materials from Germany
(23%) have an export value of over USD 1.5 billion but attract a fairly low MFN tariff of 5.5%.
The next export sectors after processed food ranked by protection revenue are Dairy
products and Meat products n.e.c. Despite their smaller flows in terms of value, these
two sectors are ranked second and third since they would face very high levels of
protection, with MFN duty of around 40% and NTMs increasing from 42% to 74% for dairy,
and MFN of 22% and NTMs of 43% for meat products. In each of these sectors, exports to UK
represent around 10% of total EU exports. In relation to dairy products, Ireland and France
are the main exporters of what are likely to be most heavily affected HS6 products, such as
cheese, fresh cheese, butter, buttermilk and some processed cheese. The GTAP category Meat
Products is a residual category which includes all meat products not included in other GTAP
sectors. It thus includes a variety of different products, some of which account for a significant
part of European exports, e.g. swine meat, poultry, cuts and offal (frozen and fresh), swine
cuts, sausages, meat offal and blood. The main exporters to the UK of these products are
Denmark, the Netherlands and Germany.
Beverages and tobacco, and Vegetables and fruit are ranked respectively fourth and fifth
for the most affected export products. Czech Republic exports one-third of the first HS6
product (cigarettes containing tobacco) in the Beverages and tobacco category. France ranks
second accounting for almost 50% of exports of grape wines n.e.s. Netherlands is another
important exporter, ranking first for non-alcoholic beverages (excluding vegetable and fruit
juices), denatured ethyl alcohol and cigarette-pipe tobacco. Finally, the European trade flows
at the HS6 level that will suffer the most in the Vegetables and fruit sector are tomatoes,
cucumbers and gherkins, mushrooms, mandarins, clementines and citrus hybrids, cauliflowers
and headed broccoli. The Netherlands is an important exporter to the UK of the first two
products (48% and 55% of European exports), Ireland is the main exporter of mushrooms
(55%) and Spain’s exports to the UK of cauliflowers and broccoli amount to 88% and 79% of
the total.
EU imports from UK follow a similar pattern (see Table 5). The main imported products, by
value, are food products and beverages; however, if value is weighted by protection, dairy
products, bovine meat and other meat products are among the most heavily affected products,
because of the high level of protection they attract. For instance, the AVE protection would be
of more than 130% for dairy products if both MFN and NTMs are considered. As already
mentioned, the EU27’s reliance on UK imports is less significant than their reliance on exports
to the UK: for the first five sectors in Table 5, imports from the UK represent between 8% and
3% of total European imports in the sector considered. Table 7 shows that Ireland will be the
most heavily affected country, as discussed more in details in the following section, since it is
the main importer of HS6 products within the beverages and tobacco, the dairy and the bovine
meat categories.54
54 In particular, Ireland is the main importer of cigarettes containing tobacco, water and non-alcoholic beverages
n.e.s. (beverages and tobacco sector), milk not concentrated, cheese, fresh cheese and powdered milk and cream
(dairy sector). In the bovine meat sector, Ireland import almost one-third of UK exports of boneless, fresh or
chilled bovine cuts, and France imports 65% of fresh and chilled lamb carcasses and half carcasses.
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Table 5: EU27 exports to the UK in agri-food sectors and faced protection
SECTOR
TRADE PROTECTION
TRADE VALUE
% of EU
TRADE
NTMs
(%, pre Brexit)
MFN (%)
NTMs
(%, post
Brexit)
PROT. REV.
Food products nec 16,917 9.76 35.32 13.64 61.87 12,773
Dairy products 4,095 7.59 42.32 41.05 74.14 4,717
Meat products nec 5,849 12.92 24.61 22 43.1 3,808
Beverages and tobacco
products 7,186 9.18 14.28 13.24 25.02 2,749
Vegetables fruit nuts 5,147 11.03 18.13 11.81 31.76 2,243
Bovine meat products 1,520 8.64 24.09 55.76 42.2 1,489
Vegetable oils and fats 1,688 5.85 21.68 15.23 37.98 898
Crops nec 1,933 8.41 16.58 6 29.05 678
Processed rice 172 13.18 93.11 23.42 163.11 320
Bovine cattle, sheep and
goats, horses 488 2.55 24.59 7.48 43.08 247
Sugar 490 8.7 10.98 29.67 19.24 240
Animal products nec 300 6.44 6.67 57.63 11.69 208
Cereal grains nec 419 3.7 15.67 13.27 27.45 171
Fishing 636 8.35 9.92 8.35 17.38 164
Wheat 178 2.33 32.33 0 56.63 101
Oil seeds 477 2.85 0.01 16.91 0.02 81
Forestry 155 2.95 8.41 0.38 14.73 23
Paddy Rice 50 14.51 7.57 17.44 13.26 15
Sugar cane sugar beet 7 12.48 0.21 170.45 0.36 12
Wool silk worm cocoons 21 8.18 0.21 0.43 0.37 0
Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from
BACI.
Note: Trade flows are mean values for the period 2013–2015. Current tariff protection is not reported since it does
not apply. The AVEs of the MFN tariffs refer to 2013. Two NTM values are reported, present AVE and projected AVE
in the absence of a specific trade agreement when the UK leaves the EU.
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Table 6: EU27 imports from the UK in agri-food sectors and faced protection
SECTOR
TRADE PROTECTION
TRADE VALUE
% of EU TRADE
NTMs (%, pre Brexit)
MFN (%)
NTMs (%, post Brexit)
PROT. REV.
Food products nec 6,806 4.37 34.73 11.8 60.84 4,944
Dairy products 1,564 4.08 47.78 42.53 83.7 1,974
Bovine meat products 1,165 6.86 26.41 50.54 46.27 1,127
Meat products nec 1,234 3.63 32.94 21.09 57.7 972
Beverages and tobacco
products 4,176 8.86 9.2 4.22 16.12 849
Sugar 303 4.69 28.88 66.88 50.58 355
Vegetable oils and fats 487 1.18 27.89 7.8 48.86 276
Vegetables fruit nuts 600 1.09 16.48 8.44 28.88 224
Fishing 848 7.53 9.78 6.85 17.13 203
Bovine cattle sheep and
goats horses 348 9.19 28.24 5.74 49.47 192
Animal products nec 503 3.00 15.78 2.98 27.65 154
Crops nec 374 2.05 19.12 32.48 33.49 143
Cereal grains nec 214 1.04 11.41 4.8 19.99 112
Processed rice 41 2.44 94.63 23.89 165.77 77
Oil seeds 256 1.52 16.45 0 28.81 74
Wheat 179 2.14 0.98 18.61 1.72 36
Forestry 89 1.45 13.21 0.12 23.14 21
Paddy Rice 9 1.42 21.42 38.35 37.52 7
Sugar cane sugar beet 2 4.52 4.03 128.61 7.06 3
Wool silk worm cocoons 19 2.74 9.18 0.28 16.08 3
Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from BACI.
Note: Trade flows are mean values for the period 2013–2015. Current tariff protection is not reported since it does
not apply. The AVEs of the MFN tariffs refer to 2013. Two NTM values are reported, present AVE and projected AVE
in the absence of a specific trade agreement when the UK leaves the EU.
2.3.2. Main European trading countries: France, Netherlands and the particular
case of Ireland
If we consider total trade rather than just agri-food, the European countries that trade the
most with the UK, and which will be most affected by Brexit, are Germany, the Netherlands
and France. These countries’ bilateral trade with the UK represents 50% of total EU27 bilateral
exchanges. This ranking is unchanged if we consider exports and imports separately.
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Ireland is in a particular position as noted above. Ireland is ranked fifth behind Belgium,
as a European trading partner of the UK. Ireland’s exports to the UK represent some USD 19
billion a year, and it is the seventh European exporter to UK by value, representing around
5% of European exports. In terms of imports, Ireland is more important: it is the fourth most
important importer by value (USD 23.4 bn.) and its weight in European imports is larger (11%)
than for exports. What is striking is the share of these flows in Ireland’s total trade flows: Irish
exports to the UK represents 13% of Ireland’s total exports (compared to around 4% for the
main European exporters to the UK), and 31% of Irish imports come from the UK. In the light
of the important role of the UK as a destination market and as a source of imports, the impact
of Brexit on Irish trade and the Irish economy will likely be very large.
When considering only agri-food trade (see Table 6 and Table 7), France and the
Netherlands are the main UK partners, and Ireland replaces Germany in the top three
by bilateral trade value. The three main partners account for half of UK imports and exports
in the agri-food sectors. Again, trade with the UK is highly important for Ireland, especially
imports: 27% of Ireland’s European imports are from the UK, and represent 46% of total Irish
agri-food imports (compared to 4% on average for other European countries). However,
although Irish exports represent 15% of European agri-food exports to UK, they account for
less than 5% of total Irish agri-food imports which, nevertheless, is higher than other
European countries.
Combining country and sector details does not introduce different sectors in the list of top
traded goods: the main importers and exporters trade mainly in processed food, dairy and
meat products, and beverages and tobacco. The pattern at country level is in line with the
pattern in Table 5: trade in dairy and meat products frequently follows trade in beverages for
value although the former are likely to be more affected by high protection.
Table 7: EU27 exports to the UK in agri-food sectors and faced protection, by
country (top ten, by protection revenue)
COUNTRY
TRADE PROTECTION
TRADE VALUE
% of EU TRADE % of total
agri. exports of the country
NTMs (%,
pre Brexit) MFN
NTMs (%,
after Brexit)
Netherlands 9,519 20.12 1.89 26.54 17.84 46.5
Ireland 6,903 14.59 4.58 28.2 20.6 49.41
France 6,971 14.74 1.23 23.91 17.3 41.89
Germany 5,860 12.39 0.43 28.75 19.33 50.37
Belgium 3,602 7.62 0.95 32 16.97 56.06
Italy 3,807 8.05 0.77 28.27 16.63 49.53
Spain 4,051 8.56 1.35 19 18.08 33.28
Poland 1,801 3.81 0.89 28.19 21.33 49.38
Denmark 1,843 3.9 1.85 22.3 20.53 39.06
Portugal 437 0.92 0.69 23.6 18.48 41.35
Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from BACI.
Note: Trade flows are mean values for the period 2013–2015. Current tariff protection is not reported since it does
not apply. The AVEs of the MFN tariffs refer to 2013. Two NTM values are reported, present AVE and projected AVE
in the absence of a specific trade agreement when the UK leaves the EU.
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Table 8: EU27 imports from the UK in agri-food sectors and faced protection, by
country (top ten, by protection revenue)
COUNTRY
TRADE PROTECTION
TRADE VALUE
% of EU TRADE % of total
agri. exports of the country
NTMs (%,
pre Brexit) MFN
NTMs (%,
after Brexit)
Ireland 4796 26.71 46.01 23.68 14.2 41.47
France 2578 14.36 4.59 25.81 14.2 45.22
Netherlands 2462 13.72 3.81 21.57 14.2 37.78
Germany 1878 10.46 2.03 23.83 14.2 41.75
Spain 1236 6.89 3.82 21.93 14.2 38.42
Belgium 1086 6.05 2.68 21.68 14.2 37.98
Italy 745 4.15 1.57 24.44 14.2 42.81
Sweden 519 2.89 3.99 19.38 14.2 33.94
Denmark 470 2.62 3.82 20.79 14.2 36.42
Poland 478 2.66 2.64 17.17 14.2 30.08
Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from BACI.
Note: Trade flows are mean values for the period 2013–2015. Current tariff protection is not reported since it does
not apply. The AVEs of the MFN tariffs refer to 2013. Two NTM values are reported, present AVE and projected AVE
in the absence of a specific trade agreement when the UK leaves the EU.
2.3.3. High integration of agri-food value chains through trade
The value chains of UK and EU27 agri-food sectors are highly integrated; for instance,
almost half of the value-added in UK’s food exports that is generated outside the UK, is
produced in the EU27, amounting to 12.58% of total exported value-added (Table 9). Due to
the difference in the size of the UK and the EU27, the UK’s share in European agricultural and
agri-food exported value added is lower (1.45% for agriculture, and 2.11% for food in 2011,
see Table 8) than the EU27 in the UK’s exported value added (10.53% for agriculture and
12.58% for food, see Table 9).
The UK’s share of value added is slightly higher in European exports of food, beverages and
tobacco than of agricultural products since agricultural production is less dependent on inputs
than manufacturing.
The intensity of the linkages with UK varies across EU countries (Table 8). The UK accounts
for a high share of Ireland’s export value-added (particularly in relation to the agricultural
sector – 11.58%), followed by the Netherlands (2.37%), Denmark (2.24%) and Belgium
(2.06%). Ireland is also a particular case when considering the evolution in time of the share
of value added generated by the UK which is included in its exports: during 2000-2011,
Ireland’s dependence on imports from the UK’s agricultural sector increased (its dependence
on agri-food sector decreased slightly) from 8% to 12%, while the dependence of other EU27
countries remained almost constant.
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The share of EU27 value added in UK exports is large and increased significantly between
2000 and 2011, evidence of further integration of UK agricultural and agri-food production
with EU members (Table 9). These linkages are particularly important with Germany, France
and Netherlands, in the case of both agriculture and food products
Table 9: UK value-added in EU27 exports (% of gross export of EU27 countries)
EXPORTING COUNTRY
AGRICULTURE, HUNTING, FORESTRY AND FISHING
FOOD PRODUCTS, BEVERAGES AND TOBACCO
2000 2011 2000 2011
EU 27 1.42% 1.45% 2.09% 2.11%
Netherlands 2.13% 2.37% 2.65% 2.44%
France 1.34% 1.16% 1.47% 1.36%
Spain 1.07% 1.19% 1.76% 1.90%
Germany 1.09% 1.42% 1.16% 1.41%
Ireland 7.97% 11.58% 9.33% 8.81%
Denmark 1.39% 2.24% 1.71% 2.70%
Belgium 2.30% 2.06% 2.80% 2.10%
Italy 0.49% 0.58% 0.94% 0.82%
Hungary 0.75% 0.92% 0.61% 0.98%
Sweden 1.49% 1.20% 1.92% 1.65%
Source: OECD-WTO, Trade in Value Added database (2016).
Note: EU27 countries are ranked by the value of their imports from UK, in 2011.
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Table 10: Breakdown of the value-added contained in exports of the UK, by origin
AGRICULTURE, HUNTING, FORESTRY AND FISHING
FOOD PRODUCTS, BEVERAGES AND TOBACCO
2000 2011 2000 2011
Domestic 85.32% 75.98% 83.05% 73.70%
Foreign 14.68% 24.02% 16.95% 26.30%
EU27 7.33% 10.53% 8.73% 12.58%
Germany 1.42% 2.09% 1.61% 2.52%
Netherlands 1.01% 1.51% 1.25% 1.65%
France 1.44% 1.48% 1.63% 1.75%
Spain 0.58% 1.02% 0.75% 1.25%
Ireland 0.54% 0.87% 0.61% 1.11%
Italy 0.68% 0.83% 0.83% 1.07%
Belgium 0.44% 0.51% 0.49% 0.57%
Sweden 0.30% 0.46% 0.36% 0.46%
Denmark 0.21% 0.39% 0.30% 0.47%
Poland 0.06% 0.36% 0.07% 0.46%
rest of EU 0.64% 1.01% 0.84% 1.27%
Source: OECD-WTO, Trade in Value Added database (2016).
Note: EU27 countries are ranked by the value of their exports to UK, in 2011.
Policy Department for Structural and Cohesion Policies
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EU - UK agricultural trade: state of play and possible impacts of Brexit
69
3. MODEL AND SCENARIOS
SUMMARY OF SCENARIOS FOR BREXIT
Return to WTO rules and sensitivity analysis
The scenarios in this report include:
“WTO”: Tariffs between the UK and the EU, and between the UK and Turkey, are increased
up to their MFN levels. Trade restrictiveness of NTMs is increased at these borders.
“WTO (Ireland NTM)”: In addition to “WTO” assumptions, this scenario considers that trade
between Ireland and the EU is subject to additional friction, in particular because of the
disruption caused by transport routes passing through the UK.
“WTO (Tariff only)”: This scenario considers only the increase in bilateral tariffs (and not
the trade restrictiveness of NTMs) up to the MFN level between the UK and EU, and
between the UK and Turkey.
3.1. Modelling framework
The results presented in this impact assessment are based on the MIRAGE model55, a
recursive-dynamic computable general equilibrium model designed for trade policy analysis
(Bchir et al., 2002; Decreux and Valin, 2007; Fontagné et al., 2013). The model is shortly
described in Annex B and a more thorough documentation is available online.56
The MIRAGE model is flexible and can be tailored to different policy questions. In the present
case, we model the agricultural sectors in as much detail as possible. We include 31
distinct sectors (19 agri-food industries, 14 manufacturing sectors and 8 services sectors) and
35 geographical areas. The EU is split into 11 countries or country groups (Belgium and
Luxembourg, France, Germany, Ireland, Italy, Netherlands, Poland, Portugal, Spain, Sweden,
Rest of EU27), the UK and Turkey are treated as separate, and the rest of the world is
aggregated on a regional basis. Details are provided in Annex B.
3.2. Scenarios
3.2.1. The WTO scenario
A return to WTO rules for EU-UK trade means a return to the MFN tariff rate but is likely also
to influence the trade restrictiveness of NTMs. Therefore, for the WTO scenario we assume:
Tariff rates between the UK and EU, and between the UK and Turkey, are set at their
MFN values (see Appendix A for details on data).57
Trade restrictiveness of NTMs increases for EU-UK and Turkey-UK trade with the
result that the UK loses two-thirds of its preferential access to the single market.58
55 The version used in this study is MIRAGE-e version 1.0.4. Environment and energy specific features are not
considered in this exercise. 56 http://www.mirage-model.eu 57 Molinuevo (2017) analyzes the legal implications of the UK’s withdrawal from the EU for third countries. The
consequences for bilateral trade agreements are highly uncertain, in many cases requiring amendments to
continue to cover trade with the UK. However, there is more certainty in the case of the few bilateral agreements
referring only to goods: since they fall within EU exclusive competences, they were negotiated only by the EU,
and will cease to apply to the UK on its withdrawal from the EU. The most significant such agreement, on the basis
of which we make our assumption for the scenarios, is the agreement with Turkey. In this case, we consider a
return to MFN tariffs. Bilateral investment treaties fall into a different category and probably will remain valid also
for UK. 58 This assumption is sourced from the literature, e.g. in Ottaviano et al. (2014) or Dhingra et al. (2016a, 2016b).
Our approach however differs from these studies in the way we calibrate initial NTMs trade restrictiveness, as
detailed in Annex B.
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In agri-food sectors, this could result, for instance, from the introduction of different
conformity procedures on both sides of the Channel, or divergence in the regulations
on substances authorized for inclusion in food products.
While tariffs could be increased in the year that Brexit comes into effect (2019 in our
simulations), the increase in the trade restrictiveness of NTMs is likely to be gradual: on day
1 after Brexit, all rules in the UK will remain the same as in the EU, and divergences will
emerge only in succeeding years as Great Britain and EU27 implement new regulations. A
time frame for this is difficult to predict. As a consequence, we introduce tariffs and NTM
shocks in 2021, and observe their outcome in 2030. The results for the final year of the
analysis should be interpreted as long-term outcomes, after all adjustments have taken
place, independent of the time horizon, and with no adjustment cost other than the slow
adaptation of capital location. In particular, displacement of workers from one sector to the
other happens at zero cost.
As already mentioned, the only two changes we consider after Brexit are related to tariffs and
NTMs. First, this implies that trade policy elements other than tariffs and NTMs are not
modified in our scenarios. In particular, we make no assumptions about tariff rate quotas,
meaning that there is no reallocation of import or export quotas presently allocated to UK
among other EU members, for example. 59 The evolution of these TRQs is important for
exporters, particularly in the agri-food sectors but is highly uncertain and may require
negotiations with trade partners other than the UK. We do not consider any agreement that
the UK or the EU might negotiate between them, or with third parties. Second, the Common
Agricultural Policy and other public policies apart from trade policy, are assumed to remain
constant at their present level in the UK and the EU.60 Again, we do not consider any policy
that might mitigate the negative impacts we identify (Section 1 refers to analyses available in
the literature on possible mitigating policies).
3.2.2. Alternative specifications and sensitivity analysis
NTMs and the amount they might increase by as a consequence of Brexit, are taken from the
literature and are subject to discussion. To cope with this uncertainty, we implemented two
sensitivity scenarios. The outcome of these scenarios is not discussed in detail here. However,
the results which differ from those from the central scenario are useful to highlight the
implications of some of the assumptions we make. The two sensitivity analyses are:
WTO (Tariff Only): In this scenario, only the tariffs increase, up to their MFN level
taken from the MAcMap-HS6 database (see Tables in Section 2.3). The NTMs do not
change compared to the BAU case. This scenario depicts the role played by NTMs (and
the value of their estimated trade restrictiveness).
WTO (Ireland NTM): As mentioned above, Ireland’s trade with the UK follows a
specific pattern for several reasons which include geographical proximity. Matthews
(2017) suggests that a decrease in trade with the UK would imply higher transport
costs for Ireland, with cargoes not fully loaded in both directions, for instance. To
account for these specificities, we consider an additional simple scenario similar to the
WTO scenario but where Ireland is assumed to face higher AVE for NTMs when trading
with the EU. That is, the increase in NTMs will be equal to half of the increase incurred
by the UK.
59 More specifically, we assume that TRQs that were not binding in 2013 remain non-binding for both the EU and
UK, and binding TRQs remain binding for both the UK and EU. 60 In other words, we assume that after Brexit, the UK (and the EU27) will continue to grant the same subsidies and
impose the same constraints as currently.
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4. IMPACTS OF A WTO SCENARIO ON THE AGRI-FOOD
SECTOR IN THE EUROPEAN UNION
KEY FINDINGS
A return to WTO rules would imply significantly less agri-food trade between the
EU and UK in both directions (around -62%). Some EU exports almost completely
collapse, like those of Rice, White meat, Sugar, Dairy and Red meat (more than -90%
in trade).
Ireland, the Netherlands and France are the EU27 countries that lose the most in
terms of trade.
Brexit also implies more room for EU27 products on their domestic markets and
other EU27 markets – replacing UK products. Nevertheless, this effect fails to
compensate the incurred losses in value-added (see footnote 16 for details on value-
added), with the exception of a few sectors, such as Red meat and Cattle in France,
or Sugar and Wheat in Spain, in which value-added increases.
Brexit could be an opportunity for the UK’s agri-food sectors as a whole.
Excepted in Ireland, consumers are hardly affected by changes in overall
consumption prices or economic activity.
To present and discuss the simulation results, this report focuses first on the most direct
impacts of Brexit, namely the changes to bilateral trade between the EU27 and the UK, and
then studies the more aggregate or indirect impacts (e.g., on total EU27 agri-food value added
or gross domestic product). The following tables and figures may include the results of the
three scenarios described above but only the WTO scenario is discussed in detail in the text;
the other two are cited when highlighting original elements. Most results are presented in
percentage deviation from the BAU scenario, in 2030, both in percentage change and in
volumes. The variations in volume are actually measured in constant 2011 USD, i.e. at the
prices of the initial year.
4.1. A large decrease in EU27-UK agri-food trade flows unevenly
distributed across sectors and EU27 countries
4.1.1. Strong decrease in EU27 exports to UK, compensated by exports to other
countries only in a few sectors
As expected, the direct effect of applying WTO rules to European agri-food exports to the
UK is large and negative, as shown in Figure 1. These exports decrease by -62% (which
corresponds to USD -33.7 billion - see Table C.1 in Annex C). Depending on the value of MFN
and trade restrictiveness of NTMs, impacts vary widely across sectors, from almost unaffected
sectors (Fiber crops, Wool, Forestry) to the near complete collapse of trade flows for
Rice, White meat, Sugar, Dairy and Red meat, which decrease by more than 90%. The
most affected sectors are also the most traded in the BAU, leading to a loss of trade in volume
by USD -470 million for White meat, Dairy, Red meat, Sugar and Rice taken together.
The least traded sectors before Brexit are the least affected, and their decrease represents a
loss in volume more than ten times smaller at USD -34 million for Fiber crops, Wool and
Forestry combined. This result is in line with Lawless and Morgenroth (2016) who find similar
decreases in EU27 exports to the UK for Sugar, Meat and Dairy. Finally, the largest decrease
in volume concerns Other foods (which consists mainly of dog and cat food, Pastry and Orange
juice).
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In terms of magnitude, it is important to note that if only tariffs increase (WTO (Tariff only)
scenario), the impacts of Brexit on EU27-UK trade will be almost halved but the ranking
of the sectors at risk remains similar to the ranking in the WTO scenario. A notable exception
is Red meat (and to a lesser extent Sugar and Dairy products), for which a tariff-only scenario
has almost the same impact as the WTO scenario. This underlines that in these compared to
other sectors, protection comes mainly from the MFN tariff, not NTMs.
These direct impacts on European agri-food exports to UK are mitigated by increased
exports towards all other trade partners (see Table C.1 in Annex C). EU27 products tend
to replace former UK exports to the EU27 and to the rest of the World. Indeed, Great Britain
will suffer a loss of competitiveness since its imported inputs, which for the most part
come from the EU27, become more expensive (UK production prices increase, as already
mentioned in Donnellan and Hanrahan, 2016 and depicted in Table 10) ; while at the same
time the decreasing UK demand for EU27 goods make some of their prices decrease. However,
increased exports to countries other than the UK are not of the same order of magnitude
as EU27-UK trade flows, and fail to compensate for the export losses incurred by the
EU27 after Brexit.
At the sector level, two effects will compete, especially in relation to intra-EU27 trade. On
the one hand, as noted above, EU27 exports become more competitive than UK goods,
and EU27 countries tend to gain market shares in destination countries (other than the UK).
On the other hand, a general equilibrium effect is at play: as described below, on average,
EU27 countries become slightly poorer after Brexit, resulting in decreased overall
consumption including in intra-EU27 goods. While the first effect dominates in the majority of
sectors (i.e., exports to the EU27 and to the rest of the world increase), for Animal products,
Cereals, Forestry, the second effect is larger (intra-EU27 exports decrease). This reverse
tendency can be explained by the conjunction of two factors: these goods are at the same
time not much exported by the UK and less substitutable between origins, leaving no room
for trade deviations to the benefit of EU27 countries.
At the global level, trade decreases in the majority of sectors, with only a few increasing
their exports (Wheat, Forestry, Fiber crops, Wool). Finally, recall that agri-food sectors
represent only a small share of EU27 exports. Thus, the impacts are greater on manufacturing
and services, especially in terms of volume.
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Figure 11: Variations in EU27 export volume to the UK, by sector, 2030
Source: Authors’ calculations using MIRAGE-e. Percentage changes indicated in boxes relate to the WTO scenario
only.
4.1.2. EU27 agri-food imports from the UK: same mechanisms as for imports
The mechanisms at play on EU27 imports from the UK are about the same as for exports. The
level of the MFN tariff is the same for both sides at the HS-6 level, and the trade-restrictiveness
of NTMs varies very little. In value, the impacts are smaller, as shown in Figure 2, because
the UK is not a major exporter of agri-food products. However, the percentage change in
trade is comparable, as are the sector rankings. It should be stressed that the UK is more
specialized in Red meat exports than the rest of the EU27, and this sector is one of those that
faces the largest percentage decrease due to large MFN tariffs and NTMs, hence making the
UK proportionally more vulnerable.
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Figure 12: Variations in aggregate EU27 imports volume from the UK, by sector,
2030
Source: Authors calculations using MIRAGE-e. Variations with respect to the BAU scenario. Percentage changes
indicated in boxes refer to the WTO scenario.
4.1.3. Most impacted EU27 exporters: the Netherlands, France and Ireland
Country and region-level impacts, depicted in Figure 3, are driven by the level of initial trade
and the export specialization of EU27 countries in their agri-food trade with the UK. The most
affected countries by volume are the Netherlands, Ireland and France; the least
impacted are Sweden and Portugal. This ranking corresponds to the initial trade integration
with the UK: unsurprisingly, the most (resp. least) impacted countries are those with the
closest (resp. loosest) ties with the UK in the agri-food sectors. In terms of volume, the largest
decreases in exports are experienced by the largest exporters to the UK. The variation in
relative impacts (percentage) is more heterogeneous across countries: EU27 countries having
exports concentrated in sectors with the largest tariff and NTM increases, such as Ireland or
Poland (see Table 6), face a very significant decrease in their exports (around 70%). On
the contrary, countries like Spain or France face lower additional barriers on the UK
market due to their specialization, their trade flows decrease by around 50%. This result
echoes the findings in Lawless and Morgenroth (2016) and Davis et al. (2017); these authors
show that the significant concentration of Irish exports to and imports from the UK in a small
number of products with potentially high protection, makes Ireland the most affected country
in terms of trade.
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75
The most affected sectors in each EU27 region, i.e., those with the largest variations in export
volume, are presented in Table C.2 in Annex C. Similar to the EU27 aggregation, each and
every trade flow towards the UK decreases with Brexit. The biggest impacts are observed
either because the sector was heavily traded so that even a small percentage decrease
leads to high losses in volume, for instance, Beverages and Tobacco from France (only
16% decrease in exports but corresponding to USD 0.5 billion); or because the sector was not
heavily traded but the trade flow almost disappears, e.g., in the case of White meat
exports from Germany which were worth USD 0.5 billion and decrease by 91%.
Figure 13: Variations in EU27 agri-food exports to the UK, by country, 2030
Source: Authors calculations using MIRAGE-e. Variations with respect to the BAU scenario. Percentage changes
indicated in boxes refer to the WTO scenario.
4.2. Agri-food value-added decreases within the EU27, though
exposure of countries is heterogeneous
The economic situation in the agri-food sectors is determined only partially by trade.
Domestic demand plays a significant role, in particular because domestic production is
often consumed mostly locally with only a small share traded. This section examines agri-food
value-added and the sources of its variation. 61
61 Formally, value-added gathers payments to production factors, in the agri-food sectors in our case. In our
modeling framework it is equivalent to consider value-added or production because they are proportional.
However, magnitude in value-added represents more the contribution of each sector to GDP and the potential
impacts on consumers’ revenues.
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4.2.1. Agri-food value-added in the EU27: large negative impact in Ireland, very
limited in other EU27 countries
In terms of value-added in the agri-food sectors, Ireland is the most negatively affected
European country by Brexit, with a decrease of 16.3% in value added (see Figure 4). This can
be explained by the large share of Ireland’s production that is exported to the UK, and
the high level of dependence of Ireland on intermediates imported from the UK (see
Table 8) which is highlighted also in Matthews (2015, 2017). In contrast, the agri-food sectors
in the Netherlands and France are less integrated with UK production; thus, despite the large
variations in agri-food exports depicted in Figure 3 (-66% and -51.4% respectively), value-
added in agri-food sectors decreases by a lower order of magnitude, i.e., by 2.7% and 0.3%
respectively for these countries.
The case of the UK is worthy of mention because Brexit would cause British agri-food
value-added to increase by 2.1%. The UK’s imports from the EU27 will be replaced by
domestic production more than by imports from other countries, anyway at the expense of
consumers who face higher prices in both cases (domestic or imported), as discussed below.
These results hide large heterogeneity among the sectors within each country. Table C.3 in
Annex C summarizes the variations in value-added for each country for overall agri-food
production, and for the five most affected (positive or negative impact on volume) sectors.
Other food seems systematically to be the most negatively affected sector with other
sectors at risk varying from one EU27 country to another. In Ireland, Dairy and Cattle are
the sectors most at risk (after Other food), and the reduction in their value-added is highly
significant compared to the initial size of these sectors (-45% and -26% respectively).62 In
other countries, the magnitude of the impacts is lower compared to the sector size: White
meat and Other crops are the most affected sectors in the Netherlands, as are White
meat and Dairy for the rest of the EU27, Vegetables and fruits and Dairy in Italy, and
Dairy in France.
However, a return to WTO rules with Great Britain could represent an opportunity for
those sectors where production replaces former imports from the UK, in their domestic
markets and/or in other EU27 markets. This applies particularly to Red meat, Wheat and
Cattle in France, and Wheat and Sugar in Spain. These results are to be discussed in more
detail below.
62 Although taken from a global model not focused specifically on Ireland, this result is in line with the conclusions
in Donnellan and Hanrahan (2016) which specifically estimates the impact of Brexit on Irish agriculture.
EU - UK agricultural trade: state of play and possible impacts of Brexit
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Figure 14: Variations in total agri-food value-added by EU27 country and UK, 2030
Source: Authors calculations using MIRAGE-e.
4.2.2. Decomposition of the impacts on value-added in the EU27: losses from
the Brexit are only partly compensated by exports to other countries
There are three sources of variation in sector value-added within the EU27: first, the volume
of exports lost on the UK market; the volume of exports gained on other EU27 markets
and other foreign markets, but more marginally, (see above); and more significantly the
ability of a given sector, in a given country, to replace UK imports with domestic supply.
Figure 5 presents an accounting decomposition of the variation in value-added by source of
variation, separating out the value-added used to satisfy domestic demand, and exports to
the UK, EU27 and the rest of the world, and other sources.63
For every country, value-added losses are driven by the direct effect of decreased
exports to the UK. Ireland and the Netherlands are the countries where agricultural value
added will decrease the most, respectively by 16.3% and 2.7%. In addition, these two
countries experience also a pattern which is different from other EU27 countries. Ireland is
the only country where WTO rules would imply loss of exports to both the EU27 and the
rest of the world and this is due to Ireland’s dependency on intermediates from the UK,
which implies loss of competitiveness in all export markets. In the Netherlands, exports to the
EU27 increase on average although not supply to the domestic market. For other EU27
members, exports to non-UK partners will help to mitigate the losses from the direct
63 In our case, trade restrictiveness of NTMs is represented as an iceberg cost. Iceberg costs imply that part of the
production is lost in the trade process. Therefore, increasing trade protection has some particular impacts on
production, since new trade barriers are partially paid by production. This effect is added to the more classical
price increase due to tariffs.
Policy Department for Structural and Cohesion Policies
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effect of Brexit but will not compensate for it completely. Interestingly, France, Spain and
Germany are the countries where losses in exports to the UK are compensated the most by
exports to other EU27 markets and domestic demand.
Figure 15: Variations in agri-food value-added volume and decomposition by source
in the WTO scenario, 2030
Source: Authors calculations using MIRAGE-e.
These results for EU27 agri-food value-added are in fact the aggregation of the different
sectors. The last five columns in Table C.3 in Annex C present the same decomposition of
value-added variation for the five most impacted sectors (in terms of absolute variation in
volume). For almost every sector in every country, the interpretation is similar to the
aggregate level: results are driven by the loss of exports to the UK. In some sectors
however, a return to WTO rules could represent an opportunity, when domestic
demand replaces UK imports in an amount greater than the losses suffered on the UK
market, as it is the case for Red meat and Cattle in France or Wheat in Spain. Regarding
Red meat and Cattle, this exception can be explained by the high initial specialization of UK in
these sectors, leaving room for trade deviation after Brexit. Wheat production increases may
also be a consequence of such UK specialization: while beef production increase in many EU27
countries to replace UK products, Wheat is demanded to feed cattle. Besides, Wheat
production in France benefits more from opportunities in other EU27 markets than those
related to the domestic market.
EU - UK agricultural trade: state of play and possible impacts of Brexit
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4.3. At the macroeconomic level, the impact on EU27 countries is
marginal, except for Ireland
The evolution of European production prices is driven by different forces. On the one hand,
increased prices for intermediate inputs from the UK (due to tariff and NTM increases)
tend to increase production prices. On the other hand, the decrease in UK imports reduces
demand for EU27 goods, and drives prices down. Table 10 shows that, on average, this
second effect dominates in all European countries except Ireland, and production prices
decrease. Because of the agri-food production sector in Ireland’s high dependence on UK
intermediates, the first effect mentioned above prevails and results in increased production
prices.
Table 11: Variations in consumption and production price indexes for agri-food
goods and all goods in the WTO scenario, 2030
CONSUMPTION PRODUCTION
REGION AGRI-FOOD TOTAL AGRI-FOOD TOTAL
Ireland + 5.4 -0.4 + 2.0 -0.4
Sweden + 0.0 -0.3 -0.4 -0.3
France + 0.0 -0.2 -0.2 -0.3
Portugal + 0.0 -0.2 -0.2 -0.2
Belgium and Luxembourg + 0.0 -0.4 -0.4 -0.5
Netherlands + 0.0 -0.5 -0.4 -0.5
Spain + 0.0 -0.3 -0.2 -0.3
Rest of EU27 -0.1 -0.1 -0.2 -0.2
Germany -0.1 -0.2 -0.2 -0.2
Italy -0.1 -0.2 -0.2 -0.2
Poland -0.2 -0.2 -0.3 -0.3
UK + 4.0 -0.9 + 0.2 -1.6
Source: Authors calculations using MIRAGE-e.
Note: Variations are given in percentage with respect to the BAU scenario.
The two opposite forces described above also affect consumption prices. Increases in tariffs
and trade restrictiveness of NTMs lead directly to an increase in consumption prices,
through the prices of imported goods. On the other hand, consumption prices will follow
possible decreases in production prices. The overall effect on consumption prices is shown
in Table 10. These results contrast with the results for production prices. First, note that the
total consumption price index (including non-agri-food goods) decreases in all EU27
countries, Ireland included. Indeed, in the manufacture sectors, EU27 MFN tariffs and NTMs
levels are lower, hence, the “market effect” of decreased overall demand dominates. For four
EU27 countries or regions (Poland, Italy, Germany, Rest of EU27) the same mechanism is in
operation in agri-food sectors too because none of them is very dependent on imports from
the UK.
On the contrary, in other EU27 regions, the “tariff effect” dominates although the impacts are
very small (less than 0.1%). However, the high dependency of Ireland on goods from the UK
makes consumption prices increase much more (by 5.4%).
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Finally, although this report focuses on agri-food issues, a detour to overall GDP impacts –
that could be better evaluated if the industry and services, which represents the majority of
economic activity, were represented with more detail – is useful to understand general
equilibrium effects: Brexit means a small decrease in EU27 purchasing power in
general, and this is one of the reasons why domestic and intra-EU27 demand fail to
compensate losses suffered on the UK market by EU27 producers. Indeed, Table C.4 in Annex
C shows that WTO rules would have a moderate impact on EU27 GDP (-0.3%), and this
is the case for most EU27 members (less than a 0.7% decrease). This result is in line with
results in the literature, in particular Booth et al. (2015) which finds a 0.33% decrease in GDP
in 2030.
In contrast, Ireland is strongly affected by Brexit, and its GDP decreases by 3.4% and
might even reach 9.4% if Brexit affects Ireland’s access to EU27 market as in the “WTO
(Ireland NTM)” scenario. Finally, if only tariffs are at stake, all impacts on the EU27 and on
the UK will be marginal.
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5. CONCLUDING REMARKS
The UK is the second largest EU27 export market (worth USD 353 billion, and 6.9% of EU27
total exports) in trade value; at the same time, the EU27 is the UK’s largest export market
(USD 214 billion and 46% of the UK exports). Agri-food sectors represent 11% of the bilateral
trade and their trade balance is favorable to the EU27. The first three EU27 agri-food sectors,
ranked by the traded value weighted by the protection that could be imposed in a WTO
scenario, are processed food, dairy and meat (both exports to and imports from UK). The
EU27 countries that trade the most with the UK and that will face the highest protection are
France, the Netherlands and Ireland. The large market shares and possible protection,
combined with specialization patterns, foreshadows heterogeneous impacts across countries
and sectors, as well as the redistribution of production across the EU27.
Considering the present situation as a starting point, we simulated the impact of the
application of MFN tariffs on bilateral trade between the UK and the EU27 combined with a
decrease by 2/3s in preferential access of the UK to the EU27 market. These are two crucial
traits of the scenario that could occur after Brexit, in the absence of a trade agreement stating
otherwise. We do not consider any other change in public policies: the CAP remains unchanged
(meaning that EU27 and UK farmers continue to receive the same payments), no policies are
implemented to cope with the possible impacts of Brexit and the UK does not sign any new
trade agreements.
The result of this scenario is a decrease in bilateral EU27-UK trade: in 2030, as compared to
a situation in which UK remains an EU member state, EU27 agri-food exports to the UK will
decrease by USD 34 billion as will imports by USD 19 billion. The increase in trade among
EU27 countries (+1%) and with other regions (+0.9%) does not compensate for the decrease
between the EU27 and the UK, and EU27 total exports diminish by 4.1% (USD -28 billion).
Despite the sizeable impacts on trade flows, overall agri-food production and value-added fall
by a relatively small 0.8%, which corresponds to USD 5.6 billion. Indeed, domestic demand
plays a predominant role in agri-food production. Overall impacts on agri-food exports and
value added are negative in every EU27 country, but their magnitude varies among them.
Ireland, the Netherlands and France loose the largest trade volumes. Impacts are also
heterogeneous across sectors: as far as value added is considered at the EU27 level, the most
negatively affected sectors (by volume) are processed food (USD -10.5 billion, -4.7%), white
meat (USD -5.2 billion, -10.5%) and dairy (USD -4.6 billion, -7%). Nevertheless, Brexit is an
opportunity for a few sectors: for instance, French Red Meat and Cattle respectively increase
their value added by 2.1% and 1.3%, replacing former imports from the UK. It is interesting
to note that agri-food value added increases in the UK (+2%), domestic production replacing
imports from EU27. This is made at the expense of consumers, prices increasing by 4%.
Overall GDP, to which agri-food sectors contribute less than manufacture, is slightly negatively
affected in all countries apart from Ireland and the UK, where GDP significantly decreases by
3.4% and 2.4%, respectively.
The increase in both NTMs and tariffs contribute to these results: impacts are much smaller if
only tariffs increase. In the majority of sectors, the increase in NTMs is nearly twice the one
in tariffs and drives the impacts on trade. Nevertheless, this is not the case for Red Meat, and
to a lesser extent Sugar and Dairy, which are mainly protected by tariffs. Since Red Meat and
Dairy are among the most impacted sectors, the decrease in overall EU27 agri-food value
added is not much different between our main scenario and a scenario considering only an
increase in tariffs (-0.8% vs -0.6%).
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It is important to note that all the impacts considered here do not account for adjustment
costs. For instance, the reallocation of production factors, with the exception of capital stocks,
is made without frictions. Furthermore, the results have to be interpreted as long-term ones,
once reallocations are completely done.
Expected impacts on Ireland are particularly concerning: Irish GDP loss exceeds the British
one. Indeed, Irish agri-food sectors (and more generally the economy as a whole) are highly
dependent on trade with the UK, especially on intermediate consumptions’ imports. As a
consequence, Ireland deserves particular attention when considering redistributive policies to
mitigate Brexit's negative impacts. More generally, trade policy options to alleviate the
negative impacts we report may consist in limiting the increase in protection on EU27-UK
bilateral trade for sectors at risk, and addressing trade impacts of NTMs in a potential trade
agreement.
EU - UK agricultural trade: state of play and possible impacts of Brexit
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ANNEX A: DATA
This annex briefly describes the databases used for the descriptive analysis and the
quantitative assessment in this report.
A.1. The BACI database
BACI (Gaulier et al. 2010) is a world trade database developed by CEPII.64 Original data are
provided by the United Nations Statistical Division (available from the COMTRADE database).
BACI is constructed using an original procedure which for each bilateral trade flow which
ensures the consistency between the exporters’ and importers’ declarations. This
harmonization procedure increases the number of countries for which trade data are available
compared to the original data. BACI provides trade bilateral values and quantities for each
product as defined in the 6-digit United Nations Harmonized System (hereafter HS6), for more
than 200 countries since 1995. In this report, we use BACI data from the 1996 revision of the
HS6 classification. In what follows, we examine average trade flows during the period 2013–
2015 (the three most recent years for which BACI data are available) in order to consider a
stable reference situation that does not reflect the particular economic situation in a given
year. This choice is also motivated by our interest in the long term effects of Brexit.
A.2. The MAcMap-HS6 database
The MAcMap-HS6 database (Bouët et al. 2008, Guimbard et al. 2012) provides ad valorem
equivalents (percentage, AVE) of the tariffs applied by 190 importing countries to 220
exporting countries on 5,113 HS6 products, in 2011 and 2013. The database also contains
MFN (most favored nation) and bounds tariffs (upper bound tariff for each country, negotiated
at WTO ministerial meetings). This database allows detailed tariff scenarios to be calculated.
For this purpose, reference groups’ weighting schemes are used to preserve the heterogeneity
of tariffs and to limit the endogeneity bias between trade flows and customs duties.
A.3. Non-Tariff Measures
Trade protection involves both tariffs and other measures that can limit market access. Non-
tariff measures (NTMs) are a heterogeneous set of ”policy measures other than ordinary
customs tariffs that can potentially have an economic effect on international trade in goods,
changing quantities traded, or prices or both.”65 This is a broad definition, and it is not
uncommon for the more detailed classification provided by the MAST group66 to be considered
in order to distinguish among technical measures, non-technical measures and measures
applied to exports (the first two categories concern only imports). For instance, some
frequently used technical measures include sanitary and phytosanitary measures (e.g.,
tolerance limits for pesticide residues, or labeling requirements), and pre-shipment inspection
obligations. Non-technical measures can include other traditional trade policy instruments
such as rules of origin, quotas, price controls etc., and behind-the-border measures such as
public procurement and trade-related investment measures.
To account for the impact of these three categories of NTMs on goods, in the following we
consider their AVE, based on the estimations in Kee et al. (2009). Kee et al. employ a two-
step approach: first, they estimate the impact of NTMs on trade flows; second, they calculate
the AVE of these impacts (i.e., the duty that would have the same effect on trade flows) using
import demand elasticities taken from Kee et al. (2008). They propose AVEs for NTMs imposed
by 78 countries on 4,575 products in the HS6 nomenclature.
64 See also http://www.cepii.fr/CEPII/fr/bdd_modele/presentation.asp?id=1 65 UNCTAD/DITC/TAB/2009/3, 66 http://unctad.org/en/Pages/DITC/Trade-Analysis/Non-Tariff-Measures/MAST-Group-on-NTMs.aspx,
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Although the focus in this report is on the agri-food sectors, we account also for the possible
broader consequences of Brexit on trade policies. In particular, our scenarios consider changes
in the non-tariff measures applied to services. We use the MIRAGE model which relies on
Fontagné et al.’s (2016) data on trade restrictiveness in the services sectors which provide
AVEs of restrictions on cross-border trade in services for 118 countries and 9 sectors, using
the GTAP database of trade in services for 2011.
A.4. The GTAP database
GTAP 967 brings together the social accounting matrices (SAMs) of 140 countries (or groups
of countries) covering the world economy, in a 57 sector nomenclature, for the year 2011. A
SAM is an extension of the input-output tables in national accounts, merged with a trade
matrix that links countries. In order to reduce the calculation dimension to a manageable level,
the GTAP database is aggregated on its two dimensions (country-sectors). Aggregations are
specific to each study; the one used here is presented above in Table B.1 and B.2.
The 21 traded GTAP agricultural sectors (raw milk is a non-traded sector) can also be mapped
to the HS6 international trade classifications. To maintain consistency between the descriptive
analysis of the actual trade statistics (Section 3) and the Brexit impact assessment (Section
5), the report presents trade statistics for GTAP sectors.68 These statistics are based on
aggregating BACI data using the available correspondence tables69 between GTAP sectors and
HS6 products. Table D.1 shows that some sectors contain only a few products (e.g., Processed
Rice includes only two HS6 lines, 100630 and 100640) others contain numerous HS6 lines
(e.g., among others, Meat products n.e.c. – 43, Vegetable, oils and fats – 47), while Food
products n.e.c. sectors include nearly 250 products. We take advantage of the HS6 dimension
of our trade data by identifying the most traded HS6 products in the sectors that will be most
affected by the negative impacts of Brexit on trade. Thus, we retain the first five GTAP sectors
in Table 4 (exports) and 5 (imports). For each of these sectors, we rank the first five HS6
products in order of importance, based on trade flows weighted by future trade protection. We
also identify the countries with the highest level of trade in each of these five HS6 products.
Tables D.2 and D.3 report imports and Tables D.4 and D.5 report exports. We comment on
the figures wherever necessary.
67 See https://www.gtap.agecon.purdue.edu. 68 Complete trade statistics at the HS6 product level are also provided, in the Annex. 69 See: http://wits.worldbank.org/product_concordance.html
EU - UK agricultural trade: state of play and possible impacts of Brexit
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ANNEX B: MODEL DESCRIPTION
B.1. The MIRAGE model
The MIRAGE model70 is a recursive-dynamic computable general equilibrium model designed
for trade policy analysis (Bchir et al., 2002; Decreux and Valin, 2007; Fontagné et al., 2013).
It relies on the GTAP9 database for social accounting matrices; tariff protection is taken from
MAcMap-HS6 database (Guimbard et al., 2012), trade restrictiveness of non-tariff measures
is sourced from Kee et al. (2009) for goods, and from Fontagné et al. (2016) for services.
Finally, the trade costs related to time delays and delivery uncertainties due to infrastructure
and administration problems are from Minor (2013).71
Supply side
On the supply side, each sector in MIRAGE is modeled as a representative firm, whose
production function combines value-added and intermediate consumption in fixed shares.
Value-added is a bundle of imperfectly substitutable primary factors (capital, skilled and
unskilled labor, land and natural resources); intermediates are represented by a bundle of
imperfectly substitutable goods.
MIRAGE-e assumes full employment of primary factors. Skilled and unskilled labor is perfectly
mobile across sectors but immobile across countries while natural resources are sector
specific, and land is only (imperfectly) mobile between agricultural sectors. Installed capital is
assumed to be immobile (sector-specific) while investments are allocated across sectors
according to their rates of return. The overall stock of capital evolves through a combination
of capital formation and a 6% constant rate of capital depreciation. Gross investment is
determined by combining the saving and current accounts. Finally, while total investment is
savings-driven, its allocation is determined by the rate of return from the various activities.
Consumers
On the demand side, the representative consumer from each country/region maximizes
instantaneous utility under a budget constraint. Expenditure is allocated to commodities and
services according to a LES-CES (linear expenditure system – constant elasticity of
substitution) function. This implies that above a minimum consumption of the goods produced
by each sector, consumption choices among the goods produced by different sectors are made
according to a CES utility function.
Trade
Within each sector, total demand for each good (final, intermediate and investment) is
differentiated by origin. A nested CES function assigns a particular status for domestic
products according to the usual Armington hypothesis: consumers’ and firms’ choices are
biased towards domestic production, and therefore, domestic and foreign goods are
imperfectly substitutable according to a CES specification.
Business-as-usual (BAU) scenario
Before considering counterfactual scenarios, a business-as-usual growth path for the world
economy, referred to as the “reference” simulation (or “BAU”), is simulated up to 2030 in our
case. In this BAU scenario, the MIRAGE model is calibrated to match the trajectories obtained
from the EconMap baseline database (Fouré et al., 2013). More precisely, in the MIRAGE
model, total factor productivity is computed in order to allow GDP to match the growth path
70 The version used in this study is MIRAGE-e version 1.0.4. Environment and energy specific features are not
considered in this exercise. 71 Minor (2013) follows the methodology in Hummels and Schaur (2013).
Policy Department for Structural and Cohesion Policies
90
derived from EconMap, under constraints on population, skilled and unskilled labor, savings
and current account evolutions. The model is calibrated on 2011 data, therefore, we update
the tariff levels for 2013 to match most recent MAcMap-HS6 data.
B.2. Aggregation of regions and sectors for the present study
Table B.1: Aggregation of regions
MIRAGE
region GTAP region
Africa
Middle East
Bahrain (BHR), Iran Islamic Republic of (IRN), Israel (ISR), Jordan (JOR), Kuwait
(KWT), Oman (OMN), Qatar (QAT), Saudi Arabia (SAU), United Arab Emirates (ARE),
Rest of Western Asia (XWS)
North Africa Egypt (EGY), Morocco (MAR), Tunisia (TUN), Rest of North Africa (XNF)
SACU Botswana (BWA), Namibia (NAM), South Africa (ZAF), Rest of South African Customs
Union (XSC)
Sub-saharan
Africa
Benin (BEN), Burkina Faso (BFA), Cameroon (CMR), Cote d'Ivoire (CIV), Ghana
(GHA), Guinea (GIN), Nigeria (NGA), Senegal (SEN), Togo (TGO), Rest of Western
Africa (XWF), Central Africa (XCF), South Central Africa (XAC), Ethiopia (ETH), Kenya
(KEN), Madagascar (MDG), Malawi (MWI), Mauritius (MUS), Mozambique (MOZ),
Rwanda (RWA), Tanzania United Republic of (TZA), Uganda (UGA), Zambia (ZMB),
Zimbabwe (ZWE), Rest of Eastern Africa (XEC)
Turkey Turkey (TUR)
Asia
ASEAN
Cambodia (KHM), Indonesia (IDN), Lao People's Democratic Republic (LAO), Malaysia
(MYS), Philippines (PHL), Singapore (SGP), Thailand (THA), Viet Nam (VNM), Rest of
Southeast Asia (XSE)
China and
Hong-Kong China (CHN), Hong Kong (HKG)
India India (IND)
Japan Japan (JPN)
Korea Korea Republic of (KOR)
Rest of Asia
Mongolia (MNG), Taiwan (TWN), Rest of East Asia (XEA), Brunei Darussalam (BRN),
Bangladesh (BGD), Nepal (NPL), Pakistan (PAK), Sri Lanka (LKA), Rest of South Asia
(XSA)
EU27
Belgium and
Luxembourg Belgium (BEL), Luxembourg (LUX)
France France (FRA)
Germany Germany (DEU)
Ireland Ireland (IRL)
Italy Italy (ITA)
Netherlands Netherlands (NLD)
Poland Poland (POL)
Portugal Portugal (PRT)
Rest of EU27
Austria (AUT), Cyprus (CYP), Czech Republic (CZE), Denmark (DNK), Estonia (EST),
Finland (FIN), Greece (GRC), Hungary (HUN), Latvia (LVA), Lithuania (LTU), Malta
(MLT), Slovakia (SVK), Slovenia (SVN), Bulgaria (BGR), Croatia (HRV), Romania
(ROU)
EU - UK agricultural trade: state of play and possible impacts of Brexit
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MIRAGE
region GTAP region
Spain Spain (ESP)
Sweden Sweden (SWE)
North America
Canada Canada (CAN)
Mexico Mexico (MEX)
USA United States of America (USA)
Oceania
Australia and
New Zealand Australia (AUS), New Zealand (NZL)
Oceania Rest of Oceania (XOC)
Rest of Europe
CIS countries
Belarus (BLR), Ukraine (UKR), Rest of Eastern Europe (XEE), Kazakhstan (KAZ),
Tajikistan (TJK), Kyrgyzstan (KGZ), Rest of Former Soviet Union (XSU), Armenia
(ARM), Azerbaijan (AZE), Georgia (GEO)
EFTA Switzerland (CHE), Norway (NOR), Rest of EFTA (XEF)
Russia Russian Federation (RUS)
Rest of the World
Rest of the
World
Rest of North America (XNA), Albania (ALB), Rest of Europe (XER), Rest of the World
(XTW)
South America
Brazil Brazil (BRA)
Rest of Latin
America
Bolivia, Plurinational Republic of (BOL), Chile (CHL), Colombia (COL), Ecuador (ECU),
Peru (PER), Venezuela (VEN), Rest of South America (XSM), Costa Rica (CRI),
Guatemala (GTM), Honduras (HND), Nicaragua (NIC), Panama (PAN), El Salvador
(SLV), Rest of Central America (XCA), Dominican Republic (DOM), Jamaica (JAM),
Puerto Rico (PRI), Trinidad and Tobago (TTO), Caribbean (XCB)
Rest of
Mercosur Argentina (ARG), Paraguay (PRY), Uruguay (URY)
United Kingdom
UK United Kingdom (GBR)
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Table B.2: Aggregation of sectors
MIRAGE sector GTAP sector MIRAGE sector GTAP sector
Agriculture Industry
Animal products Animal products nec (oap) Chemistry Chemical.rubber.plastic prods (crp)
Beverages and Tobacco
Beverages and tobacco products (b_t)
Electronic Electronic equipment (ele)
Cattle Cattle.sheep.goats.horses (ctl) Energy
Coal (coa), Oil (oil), Gas (gas), Petroleum. coal products (p_c), Electricity (ely), Gas manufacture. distribution (gdt)
Cereals Cereal grains nec (gro) Ferrous Metals Ferrous metals (i_s)
Dairy Dairy products (mil) Machinery Machinery and equipment nec (ome)
Fiber crops Plant-based fibers (pfb) Metal products Metal products (fmp)
Fishing Fishing (fsh) Metals n.e.c. Metals nec (nfm)
Forestry Forestry (frs) Minerals Minerals nec (omn), Mineral products nec (nmm)
Oil seeds Oil seeds (osd) Other Manufacturing Manufactures nec (omf)
Other Crops Crops nec (ocr) Paper Paper products. publishing (ppp)
Other food Raw milk (rmk), Food products nec (ofd)
Textile Textiles (tex), Wearing apparel (wap), Leather products (lea)
Red Meat Meat: cattle.sheep.goats.horse
(cmt)
Transport equipment
n.e.c. Transport equipment nec (otn)
Rice Paddy rice (pdr), Processed rice (pcr)
Vehicles and parts Motor vehicles and parts (mvh)
Sugar Sugar cane. sugar beet (c_b), Sugar (sgr)
Wood Wood products (lum)
Vegetable oils and fats
Vegetable oils and fats (vol)
Vegetables and fruits
Vegetables. fruit. nuts (v_f)
Wheat Wheat (wht)
White Meat Meat products nec (omt)
Wool Wool. silk-worm cocoons (wol)
Services
Business Services Business services nec (obs)
Communication Communication (cmn)
Finance Financial services nec (ofi)
Insurance Insurance (isr)
Other Services Water (wtr), Construction (cns), Recreation and other services (ros), Dwellings (dwe)
Public Services PubAdmin/Defence/Health/Educat (osg)
Trade Trade (trd)
Transport Transport nec (otp), Sea transport (wtp), Air transport (atp)
Note: a Raw milk (rmk) is not aggregated with Dairy Products (mil) because this product is not traded at all and an
aggregation would lead to difficulties in interpreting the results.
EU - UK agricultural trade: state of play and possible impacts of Brexit
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B.3. Non-tariff measures in the MIRAGE model
Estimations of the trade restrictiveness of non-tariff measures for goods are taken from Kee
et al (2009). However, rather than being bilateral, these measures are only importer-specific,
and cannot represent the preferential access enjoyed by EU countries. To deal with this
limitation we adopt a dual strategy. First, we introduce exporter-importer variation during
aggregation of NTM trade restrictiveness indices as in Disdier et al. (2016), using reference
group weights to aggregate from the HS-6 level to the sector level considered in this study.
Second, we adjust the level of trade restrictiveness within the EU: we assume that between
EU countries, all the restrictiveness that could have been withdrawn in a potential EU-US trade
agreement (“actionable” measures) has already been removed, based on the estimates in
Berden et al. (2009). The resulting reduction in NTMs trade restrictiveness within the EU,
compared to NTMs related to extra-EU trade partners, is presented in Table B.3. In particular,
this approach results in NTMs in the agri-food sectors that are, on average, 53% less restrictive
within the EU than between EU and non-EU countries.
Table B.3: Reduction in intra-EU trade restrictiveness of NTMs
MIRAGE sector Sector from Berden et
al. (2009)
Reduction
(%)
Agriculture
Animal products, Beverages and Tobacco, Cattle, Cereals,
Dairy, Fiber crops, Fishing, Forestry, Oil seeds, Other Crops,
Other food, Red Meat, Rice, Sugar, Vegetable oils and fats,
Vegetables and fruits, Wheat, White Meat, Wool
Food & beverages 53.0
Industry
Energy, Minerals, Other Manufacturing All Industry 52.0
Transport equipment n.e.c., Vehicles and parts Automobile 48.0
Chemistry Chemicals 63.0
Electronic Electronics 41.0
Machinery Machinery 55.0
Paper Office equipment 52.0
Ferrous Metals, Metal products, Metals n.e.c. Steel 62.0
Textile Textiles 50.0
Wood Wood 60.0
Services
Public Services All Services 47.6
Communication Communication 70.0
Finance Financial 49.0
Insurance Insurance 52.0
Business Services, Trade Other business services 51.0
Other Services Personal, recreational
services,Construction 37.5
Transport Travel services 40.0
Source: Berden et al. (2009)
Policy Department for Structural and Cohesion Policies
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EU - UK agricultural trade: state of play and possible impacts of Brexit
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ANNEX C: ADDITIONAL TABLES
Table C.1: EU27 sector exports by destination and ranked by largest decrease in
exports towards the world, WTO scenario, 2030
Total World European Union (27) United Kingdom Rest of the World
Sector BAU
(USD mn) Var.
(USD mn) Var. (%)
BAU (USD mn)
Var. (USD mn)
Var. (%)
BAU (USD mn)
Var. (USD mn)
Var. (%)
BAU (USD mn)
Var. (USD mn)
Var. (%)
Total Agri-food
672,808 (8%)
-27,786 -4.1 395,860
(9%) + 3,878 + 1.0
54,389 (10%)
-33,714 -62.0 222,558
(6%) + 2,051 + 0.9
Other food 222,952
(33%) -10,529 -4.7
129,501 (33%)
+ 1,139 + 0.9 19,019 (35%)
-12,110 -63.7 74,433 (33%)
+ 442 + 0.6
White Meat 50,286
(7%) -5,276 -10.5
32,588 (8%)
+ 698 + 2.1 6,676 (12%)
-6,203 -92.9 11,022
(5%) + 229 + 2.1
Dairy 65,878 (10%)
-4,641 -7.0 41,954 (11%)
+ 430 + 1.0 5,207 (10%)
-4,921 -94.5 18,718
(8%) -150 -0.8
Beverages and Tobacco
104,631 (16%)
-1,975 -1.9 48,550 (12%)
+ 183 + 0.4 8,931 (16%)
-2,421 -27.1 47,149 (21%)
+ 263 + 0.6
Vegetables and fruits
46,832 (7%)
-1,590 -3.4 31,961
(8%) + 336 + 1.1
4,768 (9%)
-2,128 -44.6 10,103
(5%) + 202 + 2.0
Red Meat 19,966
(3%) -1,249 -6.3
14,322 (4%)
+ 338 + 2.4 1,658 (3%)
-1,636 -98.7 3,986 (2%)
+ 49 + 1.2
Other Crops 39,425
(6%) -843 -2.1
21,867 (6%)
+ 351 + 1.6 3,137 (6%)
-1,586 -50.6 14,420
(6%) + 392 + 2.7
Vegetable oils and fats
26,082 (4%)
-740 -2.8 17,186
(4%) + 136 + 0.8
1,380 (3%)
-985 -71.4 7,516 (3%)
+ 110 + 1.5
Cattle 5,961 (1%)
-350 -5.9 3,331 (1%)
+ 4 + 0.1 679
(1%) -355 -52.3
1,951 (1%)
+ 1 + 0.1
Animal products
20,072 (3%)
-341 -1.7 10,856
(3%) -125 -1.2
707 (1%)
-286 -40.4 8,510 (4%)
+ 70 + 0.8
Sugar 8,169 (1%)
-189 -2.3 5,827 (1%)
+ 145 + 2.5 391
(1%) -364 -92.9
1,950 (1%)
+ 30 + 1.5
Rice 1,594 (0%)
-157 -9.9 1,153 (0%)
+ 15 + 1.3 195
(0%) -177 -90.9
245 (0%)
+ 5 + 2.1
Cereals 12,265
(2%) -131 -1.1
8,590 (2%)
-10 -0.1 389
(1%) -148 -38.1
3,285 (1%)
+ 27 + 0.8
Fishing 9,419 (1%)
-39 -0.4 7,374 (2%)
+ 64 + 0.9 561
(1%) -121 -21.6
1,484 (1%)
+ 17 + 1.2
Oil seeds 8,926 (1%)
-18 -0.2 7,180 (2%)
+ 29 + 0.4 139
(0%) -65 -46.9
1,607 (1%)
+ 18 + 1.1
Wool 751
(0%) + 5 + 0.7
70 (0%)
+ 1 + 1.3 51
(0%) -8 -15.1
631 (0%)
+ 12 + 1.9
Fiber crops 574
(0%) + 6 + 1.1
142 (0%)
+ 0 + 0.2 13
(0%) 0 -3.1
419 (0%)
+ 7 + 1.6
Forestry 14,154
(2%) + 120 + 0.8
6,255 (2%)
-19 -0.3 274
(1%) -43 -15.8
7,625 (3%)
+ 182 + 2.4
Wheat 14,871
(2%) + 151 + 1.0
7,155 (2%)
+ 162 + 2.3 213
(0%) -157 -73.5
7,503 (3%)
+ 145 + 1.9
Total Industry
5,970,967 (71%)
-122,484 -2.1 3,145,487
(74%) +58,182 + 1.8
378,051 (71%)
-207,897 -55.0 2,447,428
(69%) +27,231 + 1.1
Total Services
1,718,543 (21%)
-4,086 -0.2 719,211
(17%) + 2,873 + 0.4
97,946 (18%)
-20,093 -20.5 901,386
(25%) +13,134 + 1.5
Notes: Sectors are ranked by decreasing loss (in value) of total exports to the World. Levels are given in 2011 USD million and
percentages. For instance, Other food represents 33% of EU agri-food exports to the world, while EU agri-food exports to the world
represent 8% of total EU exports to the world. Variations in USD million and percentage points with respect to the BAU scenario.
Source: Authors calculations using MIRAGE-e.
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Table C.2: EU27 subregions export to UK in Agri-food sectors: aggregate and three
sectors with the largest variations, 2030 BAU WTO WTO (Tariff only) WTO (Ireland NTM)
Country/Sector Level Var.
(USD mn.)
Var.
(%)
Var.
(USD mn.)
Var.
(%)
Var.
(USD mn.)
Var.
(%)
Netherlands
Total Agri-food 10,104 (23%)
-6,666 -66.0 -4,154 -41.1 -6,667 -66.0
White Meat 2,289 (23%)
-2,148 -93.9 -1,718 -75.1 -2,149 -93.9
Other food 2,854 (28%)
-1,832 -64.2 -919 -32.2 -1,832 -64.2
Other Crops 2,339 (23%)
-1,207 -51.6 -527 -22.5 -1,207 -51.6
Ireland
Total Agri-food 9,145 (22%)
-6,476 -70.8 -4,497 -49.2 -6,436 -70.4
Other food 2,377 (26%)
-1,462 -61.5 -423 -17.8 -1,465 -61.6
Dairy 1,529 (17%)
-1,455 -95.2 -1,271 -83.1 -1,460 -95.5
Red Meat 1,271 (14%)
-1,255 -98.8 -1,235 -97.2 -1,254 -98.7
France
Total Agri-food 9,180 (12%)
-4,717 -51.4 -2,913 -31.7 -4,720 -51.4
Other food 2,694 (29%)
-1,860 -69.0 -978 -36.3 -1,860 -69.1
Dairy 1,169 (13%)
-1,102 -94.2 -924 -79.0 -1,102 -94.2
Beverages and Tobacco 3,430 (37%)
-553 -16.1 -257 -7.5 -555 -16.2
Rest of EU27
Total Agri-food 4,685 (7%)
-3,322 -70.9 -2,319 -49.5 -3,323 -70.9
Other food 1,716 (37%)
-1,082 -63.0 -557 -32.5 -1,082 -63.1
White Meat 1,071 (23%)
-979 -91.5 -798 -74.6 -979 -91.5
Dairy 817
(17%) -772 -94.5 -666 -81.6 -772 -94.5
Germany
Total Agri-food 5,239 (5%)
-3,297 -62.9 -1,846 -35.2 -3,299 -63.0
Other food 2,840 (54%)
-1,702 -59.9 -709 -25.0 -1,703 -60.0
White Meat 533
(10%) -486 -91.1 -393 -73.7 -486 -91.1
Beverages and Tobacco 802
(15%) -378 -47.0 -248 -31.0 -378 -47.1
Italy
Total Agri-food 4,708 (13%)
-2,633 -55.9 -1,532 -32.5 -2,635 -56.0
Other food 1,800 (38%)
-1,250 -69.4 -589 -32.7 -1,251 -69.5
Dairy 349
(7%) -329 -94.2 -275 -78.8 -329 -94.2
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BAU WTO WTO (Tariff only) WTO (Ireland NTM)
Country/Sector Level Var.
(USD mn.) Var. (%)
Var.
(USD mn.) Var. (%)
Var.
(USD mn.) Var. (%)
White Meat 319
(7%) -293 -91.9 -233 -73.1 -293 -91.9
Belgium and Luxembourg
Total Agri-food 3,957 (8%)
-2,619 -66.2 -1,417 -35.8 -2,619 -66.2
Other food 2,182 (55%)
-1,371 -62.8 -616 -28.2 -1,372 -62.9
Dairy 361
(9%) -339 -94.1 -288 -79.9 -340 -94.1
White Meat 282
(7%) -255 -90.3 -192 -68.1 -255 -90.3
Spain
Total Agri-food 4,336 (10%)
-2,216 -51.1 -1,475 -34.0 -2,218 -51.2
Vegetables and fruits 1,664 (38%)
-742 -44.6 -459 -27.6 -742 -44.6
Other food 1,155 (27%)
-702 -60.8 -388 -33.6 -702 -60.8
Vegetable oils and fats 230
(5%) -214 -92.9 -198 -86.1 -214 -92.9
Poland
Total Agri-food 1,747 (8%)
-1,200 -68.7 -733 -42.0 -1,200 -68.7
Other food 960
(55%) -590 -61.5 -270 -28.1 -591 -61.5
White Meat 353
(20%) -332 -94.1 -256 -72.7 -332 -94.1
Dairy 111
(6%) -105 -94.8 -90 -81.1 -105 -94.8
Sweden
Total Agri-food 793
(4%) -288 -36.3 -135 -17.0 -288 -36.4
Other food 259
(33%) -145 -56.0 -55 -21.4 -145 -56.0
Beverages and Tobacco 175
(22%) -54 -30.8 -22 -12.5 -54 -30.8
Fishing 239
(30%) -24 -10.0 -13 -5.5 -24 -10.1
Portugal
Total Agri-food 498
(8%) -281 -56.5 -167 -33.5 -281 -56.5
Other food 182
(37%) -114 -62.6 -54 -29.5 -114 -62.6
White Meat 63
(13%) -59 -93.3 -44 -70.1 -59 -93.3
Beverages and Tobacco 147
(29%) -52 -35.4 -37 -25.0 -52 -35.5
Note: Levels are given in million 2011 USD, Variations in percentage points. BAU percentages for Total Agri-food
are percentages of total exports to the UK, while for sectors it represents the percentage within agri-food exports.
Source: Authors’ calculations using MIRAGE-e.
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Table C.3: Agri-food value-added in EU27 regions, in the WTO scenario: aggregate,
five most impacted sectors and decomposition of variation, 2030
BAU WTO VA decomposition
Country/Sector Level Var (USD
mn.) Var (%)
Dom. demand
Exp. to UK
Exp. to EU
Exp. to Row
Iceberg cost
European Union (27)
Total Agri-food 736,581 -5,597 -0.8 + 295 -6,795 + 908 +616 -621
Other food 254,129 -2,536 -1.0 + 213 -2,586 + 236 + 77 -475
Vegetables and fruits
67,669 -750 -1.1 + 75 -1,157 + 179 + 85 + 67
White Meat 34,393 -705 -2.0 + 92 -755 + 90 + 32 -164
Dairy 42,993 -552 -1.3 + 32 -501 + 71 + 7 -159
Animal products 48,103 -379 -0.8 -315 -56 -36 + 25 + 3
Ireland
Total Agri-food 10,596 -1,724 -16.3 -376 -851 -101 -100 -296
Other food 5,550 -732 -13.2 -133 -319 -49 -61 -170
Dairy 478 -216 -45.3 -2 -95 -30 -24 -65
Cattle 720 -184 -25.6 -133 -45 -2 -2 -3
White Meat 273 -159 -58.1 + 3 -110 -5 -6 -40
Red Meat 385 -141 -36.6 + 9 -111 -17 -2 -21
Netherlands
Total Agri-food 46,458 -1,269 -2.7 -189 -1,374 + 250 +121 -77
Other food 17,980 -456 -2.5 -90 -384 + 49 + 19 -51
White Meat 1,710 -270 -15.8 + 1 -234 + 24 + 2 -62
Other Crops 8,925 -223 -2.5 + 4 -405 + 94 + 66 + 18
Vegetables and fruits
4,133 -131 -3.2 + 1 -195 + 35 + 15 + 13
Beverages and Tobacco
5,527 -89 -1.6 -19 -85 + 10 + 4 + 1
Rest of EU27
Total Agri-food 156,621 -557 -0.4 -28 -709 + 117 +117 -55
Other food 42,551 -149 -0.4 + 78 -270 + 44 + 20 -22
White Meat 7,772 -143 -1.8 + 15 -161 + 17 + 12 -25
Dairy 10,122 -141 -1.4 -13 -119 + 17 + 7 -33
Animal products 13,106 -87 -0.7 -101 -3 -6 + 16 + 7
Forestry 15,109 -36 -0.2 -56 -4 -9 + 30 + 4
Italy
Total Agri-food 86,429 -509 -0.6 -17 -561 + 61 + 65 -57
Other food 26,009 -226 -0.9 + 0 -206 + 18 + 12 -50
Vegetables and
fruits 16,563 -143 -0.9 + 4 -175 + 11 + 13 + 3
Dairy 4,621 -40 -0.9 -1 -38 + 8 + 2 -11
White Meat 2,966 -35 -1.2 -2 -32 + 4 + 1 -6
Animal products 4,961 -27 -0.5 -26 -1 -2 + 1 + 0
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BAU WTO VA decomposition
Country/Sector Level Var (USD
mn.) Var (%)
Dom. demand
Exp. to UK
Exp. to EU
Exp. to Row
Iceberg cost
France
Total Agri-food 149,002 -406 -0.3 + 453 -1,103 + 149 +179 -84
Other food 61,387 -371 -0.6 + 129 -483 + 46 + 33 -97
Dairy 9,421 -108 -1.1 + 18 -122 + 23 + 8 -35
Cattle 5,960 + 79 + 1.3 + 87 -11 + 2 + 1 + 0
Wheat 4,768 + 79 + 1.7 + 11 -14 + 30 + 51 + 1
Red Meat 6,168 + 129 + 2.1 + 123 -8 + 11 + 1 + 2
Germany
Total Agri-food 94,838 -372 -0.4 + 149 -674 + 104 + 88 -39
Other food 42,124 -270 -0.6 + 101 -411 + 54 + 23 -38
Animal products 6,484 -49 -0.8 -24 -10 -15 + 3 -3
Beverages and Tobacco
9,578 -43 -0.5 + 3 -55 + 4 + 4 + 1
Vegetables and fruits
4,012 -27 -0.7 + 3 -44 + 7 + 3 + 4
White Meat 3,690 -26 -0.7 + 18 -55 + 14 + 4 -7
Spain
Total Agri-food 81,067 -336 -0.4 + 203 -744 + 134 + 57 + 14
Vegetables and fruits
11,313 -320 -2.8 + 29 -483 + 87 + 23 + 24
Other food 22,135 -68 -0.3 + 42 -123 + 12 + 9 -9
Rice 521 -23 -4.3 -1 -16 + 1 + 0 -6
Sugar 593 + 28 + 4.8 + 27 -1 + 3 -1 -0
Wheat 1,485 + 45 + 3.0 + 40 -3 + 7 + 1 + 0
Belgium and Luxembourg
Total Agri-food 21,746 -230 -1.1 + 34 -383 + 101 + 37 -19
Other food 7,891 -172 -2.2 + 7 -185 + 25 + 7 -25
Beverages and Tobacco
4,856 -38 -0.8 -4 -48 + 7 + 4 + 3
Animal products 998 -18 -1.8 -11 -4 -3 + 1 -1
White Meat 675 -17 -2.5 + 2 -28 + 11 + 2 -3
Red Meat 491 + 20 + 4.1 + 14 -3 + 8 + 0 + 1
Poland
Total Agri-food 55,551 -147 -0.3 + 33 -256 + 62 + 28 -14
Other food 18,474 -90 -0.5 + 28 -142 + 27 + 8 -11
White Meat 4,021 -21 -0.5 + 25 -45 + 8 + 3 -11
Vegetables and
fruits 4,963 -14 -0.3 -1 -22 -0 + 5 + 5
Animal products 5,205 -13 -0.2 -11 -1 -2 + 1 + 0
Forestry 2,721 -12 -0.4 -14 -0 + 2 + 0 + 0
Portugal
Total Agri-food 13,011 -31 -0.2 + 18 -69 + 11 + 9 -0
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BAU WTO VA decomposition
Country/Sector Level Var (USD
mn.) Var (%)
Dom. demand
Exp. to UK
Exp. to EU
Exp. to Row
Iceberg cost
Other food 3,934 -11 -0.3 + 13 -26 + 3 + 2 -3
White Meat 494 -10 -2.0 + 0 -9 + 1 + 0 -2
Vegetables and fruits
1,610 -10 -0.6 + 1 -15 + 2 + 1 + 1
Beverages and Tobacco
2,137 -6 -0.3 + 3 -14 + 2 + 1 + 2
Animal products 672 -6 -0.9 -6 -0 -0 + 0 + 0
Sweden
Total Agri-food 21,262 -16 -0.1 + 14 -71 + 21 + 14 + 7
Forestry 7,589 -34 -0.5 -44 -2 + 4 + 6 + 2
Beverages and Tobacco
1,774 -4 -0.2 + 5 -15 + 1 + 2 + 3
Dairy 831 -2 -0.3 + 1 -3 + 0 + 0 -1
Red Meat 501 + 6 + 1.2 + 5 -0 + 0 + 0 + 0
Other food 6,094 + 12 + 0.2 + 36 -36 + 7 + 4 + 0
Note: Levels and decomposition are given in million USD, Variations in percentage points.
Source: Authors’ calculations using MIRAGE-e.
Table C.4: Gross Domestic Product (volume) and variation in 2030
BAU WTO WTO (Tariff
only)
WTO (Ireland
NTM)
Region Level Var. ($
bn.)
Var.
(%)
Var. ($
bn.)
Var.
(%)
Var. ($
bn.)
Var.
(%)
EU27 20,009 -63.4 -0.3 -3.0 -0.0 -87.7 -0.4
Germany 4,168 -11.4 -0.3 -0.8 -0.0 -12.0 -0.3
France 3,821 -9.1 -0.2 -0.5 -0.0 -9.7 -0.3
Rest of EU27 3,539 -7.4 -0.2 -0.1 -0.0 -8.1 -0.2
Italy 2,367 -3.7 -0.2 -0.1 -0.0 -3.9 -0.2
Spain 1,897 -3.4 -0.2 + 0 + 0.0 -3.6 -0.2
Netherlands 1,055 -5.7 -0.5 -0.8 -0.1 -6.0 -0.6
Poland 1,004 -2.1 -0.2 -0.1 -0.0 -2.2 -0.2
Sweden 762 -2.8 -0.4 -0.2 -0.0 -3.0 -0.4
Belgium and
Luxembourg 746 -5.1 -0.7 -0.2 -0.0 -5.5 -0.7
Ireland 349 -12.0 -3.4 -0.3 -0.1 -32.8 -9.4
Portugal 300 -0.8 -0.3 0.0 -0.0 -0.9 -0.3
UK 3,627 -87.7 -2.4 -11.5 -0.3 -87.6 -2.4
Rest of the World 102,474 + 14 + 0.0 + 3 + 0.0 + 17 + 0.0
Note: Levels are given in billion 2011 USD, Variations in billion 2011 USD and percentage points.
Source: Authors calculations using MIRAGE-e.
EU - UK agricultural trade: state of play and possible impacts of Brexit
101
ANNEX D: ADDITIONAL TABLES – HS6 DETAILS
Table D.1: Number of HS6 products, by GTAP sector
GTAP sectors Number of HS6
products
Animal products n.e.c. (oap) 48
Beverages and tobacco products (b_t) 31
Bovine, cattle, sheep, and goats horses (ctl) 8
Bovine meat products (cmt) 30
Cereal grains n.e.c. (gro) 10
Crops n.e.c. (ocr) 63
Dairy products (mil) 24
Fishing (fsh) 41
Food products n.e.c. (ofd) 248
Forestry (frs) 25
Meat products n.e.c .(omt) 43
Oil seeds (osd) 16
Paddy Rice (pdr) 2
Plant based fibers (pfb) 8
Processed rice (pcr) 2
Sugar (sgr) 7
Sugar cane and sugar beet (c_b) 2
Vegetable oils and fats (vol) 47
Vegetables, fruit and nuts (v_f) 89
Wheat (wht) 2
Wool, silk, worm cocoons (wol) 6
Sources: GTAP, United Nations’ HS6 classification (revision 1996), Authors’ calculations.
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Table D.2: EU27 imports, HS6 level (1/2)
GTAP HS6 LABEL MFN IMPORTS FROM UK
(1)
IMPORTS FROM
ROW (2) %
MAIN IMPORTER FROM UK
VALUE OF
IMPORTS
Food
products
n.e.c.
230910 Dog or cat food (retail)
37.9 364 5,593 7 Germany 78
230990
Animal feed
preparations n.e.s.
34.3 370 5,563 7 Ireland 163
190410
Cereal foods obtained by
swelling,
roasting of cereal
19.2 384 1,695 23 Ireland 132
110100 Wheat or meslin flour
44.9 104 983 11 Ireland 78
190590
Communion wafers, rice paper, bakers wares n.e.s.
5.5 524 7,814 7 Ireland 283
Dairy products
040120
Milk not concentrated
nor sweetened 1-6% fat
47.6 244 3,868 6 Ireland 228
040690
Cheese except fresh, grated, processed or blue-veined
36.7 298 11,291 3 Ireland 86
040610
Fresh cheese, unfermented whey cheese, curd
63.4 147 3,385 4 Ireland 63
040510 Butter 49.1 98 2,818 3 France 26
040221
Milk and cream powder unsweetened >
1.5% fat
48.9 92 836 11 Belgium 61
Bovine meat
products
020130 Bovine cuts boneless, fresh or chilled
68.6 311 5,681 5 Ireland 90
020410
Lamb carcasses and half carcasses, fresh or chilled
48.0 342 620 55 France 222
020230
Bovine cuts
boneless, frozen
84.6 66 1,823 4 Ireland 16
020110 Bovine carcasses and
59.9 77 1,771 4 Netherlands 40
Possible impact of Brexit on the EU budget and, in particular, CAP funding
103
half carcasses,
fresh or chilled
020120 Bovine cuts bone in, fresh or chilled
60.6 72 3,238 2 Netherlands 30
Source: MAcMap-HS6 (2013) and BACI (Average flow 2013-2014-2015), Trade data expresses in millions of USD,
MFN tariffs are expressed in percentage and aggregated MAcMap-HS6’s weighting schemes. Authors’ calculations.
Table D.3: EU27 imports, HS6 level (2/2)
GTAP HS6 LABEL MFN IMPORTS FROM UK
(1)
IMPORTS FROM
ROW (2)
% MAIN
IMPORTER
FROM UK
VALUE
OF
IMPORTS
Meat products n.e.c.
020714 Fowls, cuts &
offal, frozen 44.9 155 2,147 7 Ireland 37
020319 Swine cuts, fresh or chilled, n.e.s.
26.8 151 5,614 3 Poland 77
020713 Fowls, cuts & offal, fresh or chilled
20.7 129 2,556 5 Ireland 61
021019
Swine meat,
salted/dried/smo
ked not ham/shoulder/belly
23.6 48 1,246 4 Ireland 43
160250
Bovine meat, offal n.e.s., not livers, prepared/preserved
34.8 31 668 5 Ireland 19
Beverages and
tobacco products
240310
Cigarette or pipe tobacco and tobacco substitute mixes
74.9 111 1,920 6 Germany 18
240220 Cigarettes containing tobacco
33.8 162 8,568 2 Ireland 31
220710 Undenatured ethyl alcohol >
80% by volume
21.2 223 2,568 9 Netherlands 67
220210
Beverage waters, sweetened or
flavoured
9.6 297 3,267 9 Ireland 210
220290
Non-alcoholic
beverages n.e.s., except fruit, vegetable
juices
14.4 101 2,784 4 Ireland 32
Source: MAcMap-HS6 (2013) and BACI (Average flow 2013-2014-2015), Trade data expresses in millions of USD,
MFN tariffs are expressed in percentage and aggregated MAcMap-HS6’s weighting schemes. Authors’ calculations.
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Table D.4: EU27 exports, HS6 level (1/2)
GTAP HS6 LABEL MFN EXPORTS
TO UK (1)
EXPORTS TO ROW
(2) %
MAIN EXPORTER
TO UK
VALUE OF
EXPORTS
Food products
n.e.c.
230910 Dog or cat food (retail)
37.9 760 6,457 12 France 190
230990 Animal feed preparations n.e.s.
34.3 388 7,718 5 France 71
190590 Communion wafers, rice paper, bakers
wares n.e.s.
5.5 1,597 10,381 15 Germany 374
200919 Orange juice, not fermented, spirited, or frozen
24.9 351 1,650 21 Belgium 194
170230 Glucose, glucose syrup < 20% fructose
64.0 119 1,381 9 Belgium 54
Dairy products
040690
Cheese except fresh, grated, processed or blue-veined
36.7 1,150 14,745 8 Ireland 426
040610 Fresh cheese, unfermented whey cheese, curd
63.4 592 4,386 13 France 167
040510 Butter 49.1 311 3,578 9 Ireland 163
040390 Buttermilk, curdled milk, cream, kephir, etc.
45.3 334 1,338 25 France 164
040630 Cheese processed, not grated or powdered
41.0 329 1,869 18 Ireland 143
Meat products n.e.c.
021019
Swine meat,
salted/dried/smoked not ham/shoulder/belly
23.6 855 2,371 36 Denmark 320
020714 Fowls, cuts & offal, frozen
44.9 430 2,816 15 Netherlands 238
020319 Swine cuts, fresh or chilled, n.e.s.
26.8 655 6,419 10 Germany 214
020713 Fowls, cuts & offal, fresh or chilled
20.7 756 3,247 23 Netherlands 455
160100 Sausages, similar products of meat,
meat offal & blood
26.3 556 3,281 17 Germany 173
Source: MAcMap-HS6 (2013) and BACI (Average flow 2013-2014-2015), Trade data expresses in millions of USD,
MFN tariffs are expressed in percentage and aggregated MAcMap-HS6’s weighting schemes. Authors’ calculations.
Possible impact of Brexit on the EU budget and, in particular, CAP funding
105
Table D.5: EU27 exports, HS6 level (2/2)
GTAP HS6 LABEL MFN EXPORTS
TO UK (1)
EXPORTS TO ROW
(2) %
MAIN EXPORTER
TO UK
VALUE OF
EXPORTS
Beverages and
tobacco products
240220 Cigarettes containing tobacco
33.8 302 11,840 3 Czech
Republic 100
220421
Grape wines
n.e.s., fortified wine or must, pack < 2l
4.3 2,310 16,317 14 France 1,038
220290
Non-alcoholic beverages n.e.s., except fruit, vegetable juices
14.4 624 3,957 16 Netherlands 256
220710
Undenatured ethyl alcohol > 80% by volume
21.2 340 2,326 15 Netherlands 145
240310
Cigarette or pipe tobacco and tobacco substitute mixes
74.9 88 2,473 4 Netherlands 53
Vegetables, fruit and nuts
070200 Tomatoes, fresh or chilled
21.2 572 4,261 13 Netherlands 274
070700
Cucumbers and gherkins, fresh or chilled
28.1 178 1,351 13 Netherlands 98
070951 Mushrooms, fresh or chilled
10.4 336 1,256 27 Ireland 186
080520
Mandarin, clementine & citrus hybrids, fresh or dried
16.0 199 2,147 9 Spain 176
070410
Cauliflowers and headed
broccoli, fresh or chilled
13.6 188 695 27 Spain 149
Source: MAcMap-HS6 (2013) and BACI (Average flow 2013-2014-2015), Trade data expresses in millions of USD,
MFN tariffs are expressed in percentage and aggregated MAcMap-HS6’s weighting schemes. Authors’ calculations.
Policy Department for Structural and Cohesion Policies
106
DIRECTORATE-GENERAL FOR INTERNAL POLICIES
Policy Department for Structural and Cohesion Policies
AGRICULTURE AND RURAL DEVELOPMENT
Research for AGRI Committee -
Possible transitional arrangements
related to agriculture in the light of the
future EU - UK relationship:
institutional issues
STUDY
Abstract
There is the potential for severe disruption of agri-food trade between the
UK and the EU27 as the UK prepares to leave the EU. This study reviews
the additional trade costs that might arise and how they might be avoided
under alternative future trade arrangements. The role of a transitional
period in order to avoid a ‘cliff-edge’ for trade is examined. Options under
the Common Agricultural Policy to address the negative consequences of
Brexit for agricultural markets are discussed.
IP/B/AGRI/CEI/2015-070/C5/SC2 October 2017
PE 602.009 EN
This document was requested by the European Parliament's Committee on Agriculture and
Rural Development.
AUTHOR
Alan Matthews
Research manager: Albert Massot
Project and publication assistance: Virginija Kelmelytė
Policy Department for Structural and Cohesion Policies, European Parliament
LINGUISTIC VERSIONS
Original: EN
ABOUT THE PUBLISHER
To contact the Policy Department or to subscribe to updates on our work for the AGRI
Committee please write to: [email protected]
Manuscript completed in October 2017
© European Union, 2017
Please use the following reference to cite this study:
Matthews, A., 2017, Research for AGRI Committee – Possible transitional arrangements
related to agriculture in the light of the future EU - UK relationship: institutional issues,
European Parliament, Policy Department for Structural and Cohesion Policies, Brussels
Please use the following reference for in-text citations:
Matthews, A. (2017)
DISCLAIMER
The opinions expressed in this document are the sole responsibility of the author and do not
necessarily represent the official position of the European Parliament.
Reproduction and translation for non-commercial purposes are authorized, provided the
source is acknowledged and the publisher is given prior notice and sent a copy.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
109
BRIEF PROFESSIONAL DESCRIPTION
Alan Matthews is Professor Emeritus of European Agricultural Policy at
Trinity College, Dublin, Ireland. His research interests include the areas of
agricultural policy and modelling, applied trade policy and WTO rules
affecting agriculture and food security. He has published widely and has
undertaken commissioned studies for the European Commission, the
European Parliament, the Food and Agricultural Organisation of the United
Nations and the OECD in these areas. He is a past-President of the
European Association of Agricultural Economists and is currently a
member of Ireland’s Climate Change Advisory Council. He is a regular
contributor to the blog capreform.eu on issues relating to the EU’s
Common Agricultural Policy.
Policy Department for Structural and Cohesion Policies
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Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
111
CONTENTS
LIST OF ABBREVIATIONS 113
LIST OF TABLES 115
LIST OF FIGURES 115
EXECUTIVE SUMMARY 117
1. INTRODUCTION 121
1.1. Purpose of the study 121
1.2. Article 50 124
1.3. The UK position on the long-term trade relationship 124
1.4. The EU27 position on the long-term trade relationship 127
2. THE ISSUES AT STAKE FOR AGRI-FOOD TRADE 131
2.1. Trade terms in the ‘no deal’ scenario 132
2.2. Specific issues facing Ireland 140
2.3. Trade arrangements to avoid or mitigate trade costs 141
2.4. Models of the future relationship 151
2.5. The WTO dimension of UK withdrawal 158
3. AVOIDING A ‘CLIFF EDGE’ FOR AGRI-FOOD TRADE 163
3.1. The need for transition arrangements 164
3.2. Views of the parties on transition 167
3.3. Extending the date for Brexit beyond 29 March 2019 174
3.4. Extending the EU acquis to a non-member 175
3.5. EFTA/EEA membership as an interim arrangement 177
3.6. A temporary customs union as an interim arrangement 179
3.7. A free trade agreement as an interim arrangement 181
3.8. Rescheduling the phasing of Article 50 negotiations 181
4. PROTECTING AGRICULTURAL INTERESTS FOLLOWING BREXIT 185
4.1. Support in the case of market disturbance 186
4.2. Support for adjustment 188
4.3. Strengthened promotion policy 189
4.4. Improved access to third country markets 191
4.5. TRQs for UK-EU27 trade 192
REFERENCES 195
ANNEX 1. EXAMPLES OF CUSTOMS CLEARANCE COSTS 197
Policy Department for Structural and Cohesion Policies
112
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
113
LIST OF ABBREVIATIONS
ACAA Agreement on Conformity Assessment and Acceptance of Industrial
Products
AEO Authorised Economic Operator
AEOC Authorised Economic Operator for customs simplification
AEOS Authorised Economic Operator for security and safety
AGRI Agriculture and Rural Development Committee
AGRIFISH Agricultural and Fisheries Council
AVE Ad Valorem Equivalent
BCP Border Control Point
BIP Border Inspection Point
BTAMS Bound Total Aggregate Measurement of Support
CAP Common Agricultural Policy
CDS Customs Declaration Service
CET Common External Tariff
CFP Common Fisheries Policy
CHED Common Health Entry Document
CITES Convention on International Trade in Endangered Species of Wild
Fauna and Flora
CJEU Court of Justice of the European Union
DPE Designated Point of Entry
CETA EU-Canada Comprehensive Economic and Trade Agreement
CVED Common Veterinary Entry Document
DCFTA Deep and Comprehensive Free Trade Area
EAFRD European Fund for Rural Development
ECMT European Conference of Ministers for Transport
EEA European Economic Area
EGF European Globalisation Fund
EIB European Investment Bank
EU European Union
FTA Free Trade Area
GATT General Agreement on Tariffs and Trade
HACCP Hazard Analysis and Critical Control Point
HGV Heavy Goods Vehicle
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114
HMRC Her Majesty’s Revenue and Customs
IMSOC Integrated Management System for Official Controls
MFF Multi-annual Financial Framework
MFN Most Favoured Nation
MRA Mutual Recognition Agreement
NAO National Audit Office
OECD Organisation for Economic Co-operation and Development
PEM Pan-Euro-Mediterranean preferential rules of origin
PSE Producer Support Estimate
RDP Rural Development Programme
ROOs Rules of Origin
SAD Single Administrative Document
SPS Sanitary and Phytosanitary Standards
TARIC Integrated Tariff of the European Union
TEU Treaty of the European Union
TFEU Treaty on the Functioning of the European Union
TIR Transports Internationaux Routiers, International Road Transport
TRQ Tariff Rate Quota
UCC Union Customs Code
UK United Kingdom
WTO World Trade Organisation
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
115
LIST OF TABLES
Table 1
Timeline of events around the UK withdrawal from the EU 130
Table 2
EU's applied MFN tariff summary, 2016 133
Table 3
Examples of customs and other controls in international trade 136
Table 4
Topics and actions for support in the 2017 Work Programme for information and
promotion measures for agricultural products 190
LIST OF FIGURES
Figure 1
Impact of UK referendum result on value of sterling 123
Figure 2
Gap between EU and world market prices 135
Figure 3
Alternative post-Brexit trade scenarios beyond WTO terms 142
Figure 4
Main elements of different EU trade arrangements 151
Figure 5
Annual lorry traffic and EU share of trade for selected major UK ports
in 2015 166
Policy Department for Structural and Cohesion Policies
116
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
117
EXECUTIVE SUMMARY
Introduction
On 29 March 2017 the United Kingdom (UK) notified the President of the European Council of
its intention to withdraw from the European Union (EU). Article 50 of the Treaty of the
European Union sets out the procedures to be followed when a Member State wishes to leave
the EU.
The UK has set out its ambition for a bold and ambitious free trade agreement with the EU,
while respecting its four ‘red lines’ of ending the jurisdiction of the European Court of Justice,
controlling immigration from the EU, ending most contributions to the EU budget, and being
able to strike trade deals with third countries.
The EU has set out its position through the European Council (Art. 50) guidelines, the Council’s
negotiating directives and resolutions of the European Parliament, emphasising that a non-
member of the Union, that does not live up to the same obligations as a member, cannot have
the same rights and enjoy the same benefits as a member. It also set out a phased approach
to the withdrawal negotiations in which progress must be made on three key withdrawal issues
before it will give a mandate to move to the second phase of negotiations on the future
relationship.
Withdrawal negotiations began on 22 June 2017 but the European Council (Art. 50) decided
on 20 October 2017 that insufficient progress had been made in the first phase of the
negotiations to justify preparing a mandate for the second phase. However, it invited the
Council (Art. 50) and the Union negotiator to start internal preparatory discussions in relation
to the framework for the future relationship and on transitional arrangements, with a view to
being able to move to the second phase of the negotiations in December 2017.
The issues at stake for agri-food trade
In the absence of a future trade agreement tariffs would be re-imposed on bilateral UK-EU27
trade. The tariffs applicable to UK exports would be those in the EU’s Common External Tariff
(CET). The tariffs applicable to EU exports are not yet known, but at least initially may be kept
at the CET level.
Even apart from the imposition of tariffs, the UK would be a less attractive market for EU
exporters because exporters would lose the preferential trade transfers they currently earn on
sales to the UK market. These represent the difference between the price paid by UK
consumers for EU27 exports behind the EU tariff wall and the price EU exporters would receive
if the products were sold instead at world market prices.
Customs clearance costs would be an additional cost for firms exporting or importing from the
UK. These costs would be increased for certain agricultural and food products because of the
need for additional border checks to ensure compliance with EU27 food safety, plant and
animal health regulations.
In the absence of an agreement covering road transport services, hauliers travelling between
the UK and EU27 could face additional costs because of the need to secure licences with
individual Member States.
Ireland faces particular issues in the event of a ‘hard’ Brexit because of the importance of the
UK land bridge for the transport of agri-food products to and from the EU27, and because
transport from one location in Ireland to another may in some instances need to travel through
Northern Ireland.
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A range of potential trade arrangements are available which address one or more of these
potential trade costs. However, the current ability to trade frictionlessly between the UK and
the EU27 is due to the UK’s EU membership and can only be maintained if the UK were to
remain a member of the EU.
There are a number of ‘models’ for the future long-term trade relationship between the UK
and the EU27. These include the ‘Canada’, ‘Turkey’, ‘Ukraine’, ‘Swiss’ and ‘Norway’ models.
The UK government has ruled out the Canada, Turkey and Norway models, but it has not
defined where it might like to end up between the Ukraine and Swiss models. The EU27, for
its part, is unlikely to make the Swiss model available because of its institutional deficiencies,
though its attitude to the Ukraine model has not been clarified. The Ukraine model is
implemented through an Association Agreement with the EU which has been specifically
endorsed by the European Parliament.
Avoiding a ‘cliff-edge’ for agri-food trade
Even if the UK and the EU27 were to conclude an agreement on the withdrawal conditions and
on the nature of their future relationship by 29 March 2019, traders face a ‘cliff-edge’ situation
because of the lack of preparedness of customs administrations and other relevant authorities
on both sides to manage border controls; the lack of knowledge on the part of the large
number of new businesses that will face the need to seek customs clearance for their exports
and imports; and the almost certain congestion at major ports of entry and exit because of
the extra time required for these controls.
Both parties have indicated a willingness to consider a transition period. In this study, the
purpose of a transitional period would be to maintain the trade status quo between the UK
and the EU27 until the arrangements for the future trade relationship were put in place. Both
parties have indicated their ‘red lines’ regarding matters on which they would insist during a
transition period. There is little clarity, however, as to how extensive such a transition
arrangement might be and what laws and regulations it would have to cover to ensure that
trade, including trade in agri-food products, would continue on the same basis as it does today.
One option is that the UK would remain a Member State of the EU for a further time-limited
period, either by including a withdrawal date later than 29 March 2019 in the withdrawal
agreement or by unanimously agreeing to extend the Art.50 TEU deadline for the negotiations.
Another option is that the UK would agree to bind itself to following the relevant Union acquis
as a non-Member State for a time-limited period after 29 March 2019 while also joining a
temporary customs union for this period. Negotiating what would effectively be a complete if
temporary trade agreement at the same time as the parties are negotiating a withdrawal
agreement and the framework for their future relations may be more than can be achieved in
the remaining time available.
Fall-back positions which would avoid some but not all of the additional trade costs, such as a
temporary customs union on its own or just a free trade agreement in goods, should be
considered if it proves impossible to reach an agreement in which the UK remains bound by
the relevant Union acquis in the time available.
Following the mandate at the October 2017 meeting of the European Council (Art.50), the
General Council (Art. 50) and the Union negotiator should seek to rapidly progress preparatory
work particularly on models of transitional arrangements. This should help to clarify what
might be the minimum requirements to ensure that trade can continue to take place with the
UK as it does today for the duration of the transition period, and what the appropriate balance
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
119
of rights and obligations might be during this period. Specific issues for consideration will
include whether UK membership of the CAP and the Common Fisheries Policy (CFP) will be
deemed necessary as a prerequisite for continued free trade in agricultural and fishery
products during the transition period, as well as arrangements to ensure the continued
protection of Geographical Indications in the UK.
Protecting agricultural interests following Brexit
The EU has gained considerable experience in recent years in the management of adverse
shocks to agricultural markets which can be drawn upon in designing possible responses to a
negative Brexit shock. They include the use of safety-net intervention; targeted aid;
mobilisation of the crisis reserve; advancing direct payments; making use of the income
stabilisation tool; permitting flexibility in state aids; and facilitating supply management.
Farmers and food businesses in the EU27 will need such support to adjust to the structural
consequences of a ‘hard’ Brexit. This might include the provision of adjustment assistance;
greater use of financial instruments; a strengthened promotion policy; and improved access
to third country markets.
A specific market access concern is how UK TRQs will make provision for traditional EU27
export flows, and vice versa for EU27 TRQs. Merely splitting the EU TRQs does not go far
enough to protect the interests of EU producers to access the UK market in the event of a
‘hard’ Brexit.
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1. INTRODUCTION
KEY FINDINGS
On 29 March 2017 the UK notified the President of the European Council of its
intention to withdraw from the European Union (EU).
Article 50 of the Treaty of the European Union sets out the procedures to be followed
when a Member State wishes to leave the EU.
The UK has set out its ambition for a bold and ambitious free trade agreement
with the EU, while respecting its four ‘red lines’ of ending the jurisdiction of the
European Court of Justice, controlling immigration from the EU, ending most
contributions to the EU budget, and being able to strike trade deals with third
countries.
The EU has set out its position through the European Council (Art. 50) guidelines,
the Council’s negotiating directives and resolutions of the European Parliament,
emphasising that a non-member of the Union, that does not live up to the
same obligations as a member, cannot have the same rights and enjoy the
same benefits as a member. It also set out a phased approach to the withdrawal
negotiations in which progress must be made on three key withdrawal issues before
it will give a mandate to move to the second phase of negotiations on the future
relationship.
Withdrawal negotiations began on 22 June 2017 but the European Council (Art. 50)
decided on 20 October 2017 that insufficient progress had been made in the first
phase of the negotiations to justify preparing a mandate for the second phase.
However, it invited the Council (Art. 50) and the Union negotiator to start internal
preparatory discussions in relation to the framework for the future relationship
and on transitional arrangements, with a view to being able to move to the second
phase of the negotiations in December 2017.
The United Kingdom (UK) Prime Minister announced in a letter to the European Council
President Donald Tusk dated 29 March 2017 that the UK intended to withdraw from the
European Union (EU) in accordance with Article 50(2) of the Treaty on European Union
(TEU) (May 2017b). 0F
72 This letter followed a referendum among the UK electorate on 23 June
2016 on the question “Should the United Kingdom remain a member of the European Union
or leave the European Union?” with the possible responses being either “Remain a member of
the European Union” or “Leave the European Union”. The Leave response was supported by a
narrow majority of 52% compared to 48% for Remain. The Prime Minister’s letter did not
specify a specific date for this withdrawal. However, in her speech delivered in Florence on 22
September 2017 she made clear that “The United Kingdom will cease to be a member of the
European Union on 29th March 2019” (May 2017c).
1.1. Purpose of the study
This decision of the UK to exit the EU (Brexit) threatens to unwind over four decades of
increasing inter-dependence, including trade inter-dependence, within the framework of the
EU. The extent of the possible disruption to existing trade flows will depend, in part, on the
72 Throughout this report, the term European Union or EU is used to refer to the existing Union of 28 Member States.
The term EU27 is used to refer to the Union following the departure of the United Kingdom.
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nature of any future trade relationship that the UK and the EU27 may agree. Negotiating this
relationship is likely to take time and may not be in place before 29 March 2019 which is the
end of the two-year time limit specified in Art 50 TEU when withdrawal must take place if
there is no agreement on an alternative date. 1F
73 This has given rise to discussion about a
possible transition period, or implementation period, which would preserve much of
the existing Union rules which govern internal trade while applying them to a non-EU
state until the future relationship is ready to take effect. Various legal scholars have put
forward ideas on how this might be achieved.
There remains the possibility that the UK and the EU27 will fail to conclude a withdrawal
agreement within the two-year time limit specified in Article 50 TEU. The result would be a
disorderly withdrawal in which future trade relations can best be described as a
‘hard’ Brexit. The withdrawal of the UK from the EU without a trade arrangement in place
would lead to huge disruption to UK-EU27 agri-food trade. In 2016, the EU27 exported agri-
food products worth €40.3 billion to the UK, while the EU27 imported agri-food products to
the value of €16.8 billion from the UK. 2F
74 Within the single market and Customs Union, 3F
75 this
trade takes place seamlessly and without frictions; for example, it allows just-in-time
deliveries to supermarkets or to plants for further processing in either party from suppliers in
the other party. This trade would be utterly disrupted by a ‘hard’ Brexit, for three reasons.
The first reason is that additional trade costs would apply under a ‘hard’ Brexit scenario
which are described in detail in Chapter 2. They include the levying of tariffs, the costs of
customs clearance, and the costs of demonstrating compliance with the other party’s
regulatory standards. These costs would bear particularly heavily on the agri-food sector
because of the generally higher level of agricultural tariffs and the greater need for physical
checks when food, and particularly animal products, cross frontiers.
The second reason is the lack of preparedness and the potential for huge disruption on
both sides of the UK and EU27 border in a ‘hard’ Brexit scenario. This scenario would require
the updating of customs computer systems, the provision of parking space at ports to
accommodate the additional delays expected when clearing customs, expansion of the
laboratory and other facilities needed at entry points to check goods for compliance with
regulatory standards, the recruitment of additional staff to cope with the expected dramatic
increase in the workload of border control officials once UK-EU27 trade became ‘external’
trade, and considerable investment in training the hundreds of thousands of new businesses
which would now be involved in extra-EU trade. While businesses would learn in time to cope
with many of the additional trade costs that would follow from UK exit from the EU, the
requirement to adapt to sudden changes as well as the lack of readiness of the official
infrastructure in the event of a ‘hard’ Brexit would add to short-run disruption. Both sides will
lose in this outcome, although the largest costs on the EU27 side will be borne by those
Member States with the greatest exposure to UK trade.
The third reason is that the economic disruption that would result from a ‘hard’ Brexit would
be likely to lead to a further significant depreciation of the pound sterling relative to
the euro and other currencies used in the EU27. When the UK referendum result was
announced on 23 June 2016, it led to an immediate 10% drop in the value of sterling which
has not been reversed since then (Figure 1). There would be a strong possibility that markets
would react in the same way faced with the disruptive impact of a ‘hard’ Brexit. A further drop
73 The Council negotiating directives specify the withdrawal date as at the latest 30 March 2019 at 00:00 (Brussels
time). The withdrawal date is sometimes referred to as Brexit Day in this study. 74 Agri-food trade is defined as trade in the Harmonised System Chapters 01-24, source Eurostat with the EU27 as
reporter. 75 For clarity, we refer to the EU Customs Union throughout this paper with initial capital letters, and customs unions
generally in lower case.
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in the value of sterling would make EU27 exporters to the UK market even less competitive,
on top of the additional trade costs including tariffs they would face. A lower value of sterling
would reduce the price of UK-sourced food for EU27 importers, but this would only partly offset
the higher trade costs they would pay including tariffs in the event of a ‘hard’ Brexit.
Figure 16: Impact of UK referendum result on value of sterling
Source: European Central Bank
Against this background, this study has three objectives which are developed in the following
three chapters. The overall aim is to provide AGRI Committee members with an
overview of the institutional choices that could help to avoid the negative outcomes
of a ‘hard’ Brexit for the agri-food sector, while also exploring the instruments
available under the Common Agricultural Policy (CAP) to mitigate the adverse
impacts that may occur as a result of Brexit.
Chapter 2 surveys the trade costs that agri-food traders selling into or importing
from the UK might face in the event of a ‘hard’ Brexit. It emphasises how these additional
trade costs would bear most heavily on agri-food trade. It also highlights the likelihood of
disruption if the UK leaves the EU by 29 March 2019 without an arrangement which largely
replicates the existing rules for internal market EU trade. It investigates how different ‘ideal
types’ of trade arrangements might help to avoid some or all of these trade costs. It compares
these trade arrangements with examples of current EU trade agreements with third countries.
What is increasingly clear is that, even if the withdrawal agreement is successfully concluded
prior to 29 March 2019 and depending on the nature of the future trade relationship, not all
systems will be in place to facilitate the transition from the current rules applying to UK-EU27
trade to the rules that will apply under the future trade relationship. Again, this is particularly
the case for agri-food trade. Chapter 3 sets out the views of both parties on transition
arrangements and examines how agri-food trade could be affected by different types
of transition arrangement.
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Any future trade relationship will introduce additional frictions and costs affecting trade flows
between the UK and the EU27 compared to the current situation under the Union acquis. There
is also the possibility that the withdrawal negotiations will not be successfully concluded,
leading to a disorderly Brexit on 29 March 2019. Because the agri-food sector is uniquely
exposed to these higher trade costs and to the negative shock of a disorderly Brexit, it is
prudent to consider how ready the Union is to protect farmers from the immediate impacts of
disruption and to assist them to adjust to the new market conditions that will prevail after
Brexit. Chapter 4 examines the CAP measures able to support EU farmers and to
strengthen agri-export incentives after a ‘hard’ Brexit.
1.2. Article 50
The procedure for a Member State to leave the European Union is governed by Article 50 in
the Treaty of European Union. Relevant extracts include:
“2. A Member State which decides to withdraw shall notify the European Council of its
intention. In the light of the guidelines provided by the European Council, the Union shall
negotiate and conclude an agreement with that State, setting out the arrangements for its
withdrawal, taking account of the framework for its future relationship with the Union. That
agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the
Functioning of the European Union. It shall be concluded on behalf of the Union by the
Council, acting by a qualified majority, after obtaining the consent of the European
Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force
of the withdrawal agreement or, failing that, two years after the notification referred to in
paragraph 2, unless the European Council, in agreement with the Member State concerned,
unanimously decides to extend this period.”
There are three things to note about this Article:
It sets a time limit of two years following the receipt of the notification to withdraw
following which the Treaties would no longer apply to the withdrawing state in the
absence of a withdrawal agreement. This period could be shorter if the withdrawal
agreement entered into force earlier, or it could be longer if the withdrawal agreement
entered into force later, or if there were unanimous agreement by the European Council
and the Member State concerned to extend this time limit.
The withdrawal agreement is approved by a qualified majority in the European
Council (at least 72% of participating Member States (20 out of 27) representing at
least 65% of the population of the 27 remaining Member States voting in favour),
having first received the consent of the European Parliament.
The withdrawal agreement sets out the arrangements for withdrawal of the Member
State concerned, taking account of the framework for its future relationship with
the Union.
1.3. The UK position on the long-term trade relationship
The UK proposal for its future relationship with the EU27 was first set out in the Prime
Minister’s Lancaster House speech on 17 January 2017 (May 2017a). Its broad outline has
remained consistent over time, although critics on the EU side complain that it remains
incomplete and imprecise.
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In her Lancaster House speech, the Prime Minister set out broad long-term objectives,
twelve principles for the negotiations, and four red lines. These were elaborated and, in some
cases repeated verbatim, in the UK White Paper The United Kingdom’s exit from and new
partnership with the European Union published in February 2017 (HM Government 2017d).
The UK’s broad objectives were defined in the Lancaster House speech as:
“We will pursue a bold and ambitious free trade agreement with the European Union.
This agreement should allow for the freest possible trade in goods and services between
Britain and the EU’s member states. It should give British companies the maximum freedom
to trade with and operate within European markets – and let European businesses do the
same in Britain.
But I want to be clear. What I am proposing cannot mean membership of the single market.
European leaders have said many times that membership means accepting the ‘4 freedoms’
of goods, capital, services and people. And being out of the EU but a member of the single
market would mean complying with the EU’s rules and regulations that implement those
freedoms, without having a vote on what those rules and regulations are. It would mean
accepting a role for the European Court of Justice that would see it still having direct legal
authority in our country.
That agreement may take in elements of current single market arrangements in certain
areas – on the export of cars and lorries for example, or the freedom to provide financial
services across national borders – as it makes no sense to start again from scratch when
Britain and the remaining Member States have adhered to the same rules for so many
years.
…
A Global Britain must be free to strike trade agreements with countries from outside the
European Union too.
That means I do not want Britain to be part of the Common Commercial Policy and I do not
want us to be bound by the Common External Tariff. These are the elements of the Customs
Union that prevent us from striking our own comprehensive trade agreements with other
countries. But I do want us to have a customs agreement with the EU.
Whether that means we must reach a completely new customs agreement, become an
associate member of the Customs Union in some way, or remain a signatory to some
elements of it, I hold no preconceived position. I have an open mind on how we do it. It is
not the means that matter, but the ends.
The key messages in this speech were that the UK would leave the single market, it would
leave the Custom Union, but it wished to pursue a “bold and ambitious” free trade agreement
and it held open the possibility that the UK might opt into specific elements of the EU single
market. Any such agreement would have to observe the four ‘red lines’ mentioned in the
speech:
.. we will take back control of our laws and bring an end to the jurisdiction of
the European Court of Justice in Britain.
.. we will ensure we can control immigration to Britain from Europe. We will
design our immigration system to ensure that we are able to control the numbers of
people who come here from the EU. In future, therefore, the Free Movement Directive
will no longer apply and the migration of EU nationals will be subject to UK law.
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.. we will not be required to contribute huge sums to the EU budget. There may
be some specific European programmes in which we might want to participate. If so,
and this will be for us to decide, it is reasonable that we should make an appropriate
contribution. But the principle is clear: the days of Britain making vast contributions to
the European Union every year will end.
.. [we] must be free to strike trade agreements with countries from outside
the European Union too.
Also of relevance to future trade arrangements is the UK’s position on the border between
Northern Ireland and Ireland. This would be the only land border between the UK and the
EU27 after Brexit, as the Prime Minister recalled in her Article 50 letter. This letter contained
the following commitment:
“We want to avoid a return to a hard border between our two countries, to be able to
maintain the Common Travel Area between us, and to make sure that the UK’s withdrawal
from the EU does not harm the Republic of Ireland. We also have an important responsibility
to make sure that nothing is done to jeopardise the peace process in Northern Ireland, and
to continue to uphold the Belfast Agreement.”
In her Florence speech, the Prime Minister reiterated that the UK will no longer be a member
of the EU single market or its Customs Union. She recognised that “the single market is built
on a balance of rights and obligations” and identified as a joint task the need “to find a new
framework that allows for a close economic partnership but holds those rights and obligations
in a new and different balance”.
She expounded on the nature of the future trade relationship in the following terms:
“One way of approaching this question is to put forward a stark and unimaginative choice
between two models: either something based on European Economic Area membership; or
a traditional Free Trade Agreement, such as that the EU has recently negotiated with
Canada.
I don’t believe either of these options would be best for the UK or best for the European
Union.
European Economic Area membership would mean the UK having to adopt at home -
automatically and in their entirety - new EU rules. Rules over which, in future, we will have
little influence and no vote.
Such a loss of democratic control could not work for the British people. I fear it would
inevitably lead to friction and then a damaging re-opening of the nature of our relationship
in the near future: the very last thing that anyone on either side of the Channel wants.
As for a Canadian style free trade agreement, we should recognise that this is the most
advanced free trade agreement the EU has yet concluded and a breakthrough in trade
between Canada and the EU.
But compared with what exists between Britain and the EU today, it would nevertheless
represent such a restriction on our mutual market access that it would benefit neither of
our economies.
Not only that, it would start from the false premise that there is no pre-existing regulatory
relationship between us. And precedent suggests that it could take years to negotiate.”
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On the crucial issue of how to settle disputes, for example, over regulatory issues, the Prime
Minister commented:
“To make this partnership work, because disagreements inevitably arise, we will need a
strong and appropriate dispute resolution mechanism.
It is, of course, vital that any agreement reached – its specific terms and the principles on
which it is based – are interpreted in the same way by the European Union and the United
Kingdom and we want to discuss how we do that.
This could not mean the European Court of Justice – or indeed UK courts - being the arbiter
of disputes about the implementation of the agreement between the UK and the EU
however.
It wouldn’t be right for one party’s court to have jurisdiction over the other. But I am
confident we can find an appropriate mechanism for resolving disputes.”
The speech was more notable for what it ruled out that what it proposed. The Prime Minister
ruled out both a model based on the European Economic Area (EEA) and a comprehensive
free trade agreement such as the recent agreement with Canada. This implies the UK would
like a deal somewhere in between these models. But where in between? She also noted that
any trade agreement should implement the joint commitment “that we will not accept any
physical infrastructure at the border” between Northern Ireland and Ireland. However, there
remains a lack of precision with regard to the nature of the long-term trade
relationship with the EU27 that the UK would like, and how it would avoid physical
controls at the border on the island of Ireland.
1.4. The EU27 position on the long-term trade relationship
The European Parliament adopted a resolution on 5 April 2017 on negotiations with the
United Kingdom following its notification that it intended to withdraw from the European Union.
It noted that the UK Prime Minister’s letter triggering the Article 50 withdrawal process
indicated that the UK’s future relationship with the EU “will not include membership of the
internal market or membership of the customs union” (European Parliament 2017).
“Whereas, nevertheless, continued membership of the United Kingdom of the internal
market, the European Economic Area and/or the customs union would have been the
optimal solution for both the United Kingdom and the EU-27; whereas this is not possible
as long as the United Kingdom Government maintains its objections to the four freedoms
and to the jurisdiction of the Court of Justice of the European Union, refuses to make a
general contribution to the Union budget, and wants to conduct its own trade policy.”
The Parliament resolution called for the Article 50 negotiations to begin as soon as possible,
and addressed fair treatment for EU27 and UK citizens who will find themselves living in the
other party after Brexit, a full settlement of financial obligations, and the need to mitigate the
effects of the United Kingdom’s withdrawal on the border between Ireland and Northern
Ireland. It also set down some conditions of its own regarding the nature of the future
relationship:
“Hopes that under these conditions the European Union and the United Kingdom will
establish a future relationship that is fair, as close as possible and balanced in terms of
rights and obligations; regrets the decision by the United Kingdom Government not to
participate in the internal market, the European Economic Area or the customs union;
considers that a state withdrawing from the Union cannot enjoy similar benefits to those
enjoyed by a Union Member State, and therefore announces that it will not consent to any
agreement that would contradict this;
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Believes that the future relationship between the European Union and the United Kingdom
should be balanced and comprehensive and should serve the interests of the citizens of
both parties, and will therefore need sufficient time to be negotiated; stresses that it should
cover areas of common interest while respecting the integrity of the European Union’s legal
order and the fundamental principles and values of the Union, including the integrity of the
internal market as well as the decision-making capacity and autonomy of the Union; notes
that Article 8 of the Treaty on European Union, as well as Article 217 of the Treaty on the
Functioning of the European Union, which provides for ‘establishing an association involving
reciprocal rights and obligations, common action and special procedures’, could provide an
appropriate framework for such a future relationship;
Stresses that any future agreement between the European Union and the United Kingdom
is conditional on the United Kingdom’s continued adherence to the standards provided by
international obligations, including human rights, and the Union’s legislation and policies,
in, among others, the fields of the environment, climate change, the fight against tax
evasion and avoidance, fair competition, trade and social rights, especially safeguards
against social dumping;
Opposes any future agreement between the European Union and the United Kingdom that
would contain piecemeal or sectorial provisions, including with respect to financial services,
providing United Kingdom-based undertakings with preferential access to the internal
market and/or the customs union; underlines that after its withdrawal the United Kingdom
will fall under the third-country regime provided for in Union legislation.”
There are four messages which can be taken from these paragraphs including three which
might be interpreted as the Parliament’s red lines:
Points to an association agreement (under Article 217 of the Treaty on the
Functioning of the European Union, TFEU) as an appropriate framework for the future
relationship.
Underlines that a state withdrawing from the Union cannot enjoy similar benefits
to those enjoyed by a Union Member State.4F
76
Wants any future trade agreement to bind the UK to respecting international
norms and standards in a range of non-trade policy areas such as environment,
climate change, the fight against tax evasion and avoidance, fair competition, and trade
and social rights.
Opposes piecemeal or sectoral provisions that would give UK businesses
preferential access to the single market or customs union.
The European Council (Art. 50) issued its guidelines for the negotiations on 29 April
2017 emphasising the need for a phased approach “giving priority to an orderly
withdrawal”.5F
77 The guidelines were intended to define the framework for negotiations under
Article 50 TEU and set out the overall positions and principles that the Union will pursue
throughout the negotiation. It recognised that the guidelines would need to be updated over
76 Note that this phrase goes back to the Interlaken Principles which were announced on May 20, 1987 by Willy de
Clercq, then EC Commissioner for External Relations, at a ministerial meeting between the then European
Communities (EC) and the European Free Trade Association. They set the principles which the EC would follow in
its trade and economic relations with third countries. The Interlaken Principles make clear that the EU will a)
prioritise internal integration over relations with non-member states and b) the EU will always safeguard its own
decision-making autonomy. The Principles declare that any relationship with the EU must be based on a balance
of benefits and obligations. Non-member states will not be able to choose what aspects of EU integration they
particularly favour. See Phinnemore, D., “Why the UK can’t just pick and choose from the EU menu after Brexit”,
The Conversation, 14 September 2016. 77 “European Council (Article 50) guidelines on Brexit negotiations”, 29 April 2017.
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time. The first phase of negotiations would settle the disentanglement of the UK from the EU
and from all the rights and obligations the UK derives from commitments undertaken as a
Member State. The withdrawal agreement would address, in particular, the UK’s long-term
financial commitments to the EU as well as reciprocal rights for British and EU citizens.
It reiterated its wish to have the UK as a close partner in the future, and noted that Article 50
TEU requires taking account of the framework for its future relationship with the Union in the
arrangements for withdrawal. It therefore proposed a second phase of negotiations which
would identify an overall understanding of the framework for this future relationship. “We
stand ready to engage in preliminary and preparatory discussions to this end in the context of
negotiations under Article 50 TEU, as soon as the European Council decides that sufficient
progress has been made in the first phase towards reaching a satisfactory agreement on the
arrangements for an orderly withdrawal”.
The European Council (Art. 50) guidelines also set down some markers for this future
relationship which closely resemble those identified by the European Parliament in its
resolution of 5 April 2017. In summary:
Preserving the integrity of the Single Market excludes participation based on a sector-
by-sector approach.
A non-member of the Union, that does not live up to the same obligations as a member,
cannot have the same rights and enjoy the same benefits as a member.
[A future trade agreement] must ensure a level playing field, notably in terms of
competition and state aid, and in this regard encompass safeguards against unfair
competitive advantages through, inter alia, tax, social, environmental and regulatory
measures and practices.
In view of the unique circumstances on the island of Ireland, flexible and imaginative
solutions will be required, including with the aim of avoiding a hard border, while
respecting the integrity of the Union legal order.
On 22 May 2017 the Council adopted a set of negotiating directives (Council of the
European Union 2017). These cover only the first phase of the negotiations and subsequent
sets of negotiating directives are envisaged to address other issues in the negotiations.
On 20 October 2017, the European Council (Art.50) met to discuss the progress of the
negotiations. It had been anticipated that, if sufficient progress had been achieved in the
negotiations to that date, that European Council meeting might agree to move to the second
phase, keeping in mind the principle that nothing is agreed until everything is agreed. The
European Council noted that progress had been made on some of the issues in the first phase
of the negotiations but concluded that, at this time, insufficient progress had been made
in the first phase of the negotiations to move on to the second.6F
78 Building on the
progress made, it called for:
“… work to continue with a view to consolidating the convergence achieved and pursuing
negotiations in order to be able to move to the second phase of the negotiations as soon
as possible.
At its next session in December, the European Council will reassess the state of progress
in the negotiations with a view to determining whether sufficient progress has been
achieved on each of the three above issues. If so, it will adopt additional guidelines in
relation to the framework for the future relationship and on possible transitional
arrangements which are in the interest of the Union and comply with the conditions and
78 “European Council (Art. 50) conclusions”, 20 October 2017.
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core principles of the guidelines of 29 April 2017. Against this background, the European
Council invites the Council (Art. 50) together with the Union negotiator to start internal
preparatory discussions”.
In reporting on the European Council outcome, President Donald Tusk noted that: 7F
79
“Today the Council has agreed to start internal preparatory discussions in relation to the
framework for the future relationship and on transitional arrangements. It is clear that this
would not be possible without the new momentum given by the Florence speech of Prime
Minister May. I would like to reassure our British friends that in our internal work we will
take account of proposals presented there. So the negotiations go on, and we will continue
to approach them positively and constructively. And as we are all working actively on a
deal, I hope we will be able to move to the second phase of our talks in December”.
Table 12: Timeline of events around the UK withdrawal from the EU
DATE EVENT
23 June 2016 The UK votes to leave the EU
29 March 2017 UK invokes Article 50
5 April 2017 European Parliament adopts resolution on the UK’s withdrawal from the EU
29 April 2017 European Council adopts its guidelines for the Brexit negotiations
22 May 2017 EU General Affairs Council authorises opening of negotiations with the UK
8 June 2017 UK General Election
19 June 2017 Negotiations between the UK and the EU begin
20 Oct 2017 European Council (Article 50) Summit
14-15 Dec 2017 European Council Summit
22-23 Mar 2018 European Council Summit
28-29 June 2018 European Council Summit
Oct 2018 European Council Summit
Dec 2018 European Council Summit
29 Mar 2019 Deadline for UK withdrawal unless an alternative date is agreed
May 2019 European Parliament elections
October 2019 New Commission takes up office
79 “Remarks by President Donald Tusk on the European Council meetings and the Leaders' Agenda”, 20 October
2017
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2. The issues at stake for agri-food trade
KEY FINDINGS
In the absence of a trade agreement tariffs would be re-imposed on bilateral
UK-EU27 trade. The tariffs applicable to UK exports would be those in the EU’s
Common External Tariff (CET). The tariffs applicable to EU exports to the UK are not
yet known, but at least initially may be kept at the CET level.
Even apart from the imposition of tariffs, the UK would be a less attractive
market for EU agri-food exporters, because intra-EU trade gives exporters higher
prices than sales to the rest of the world, described as a preferential trade transfer.
Customs clearance costs would be an additional cost for firms exporting to
or importing from the UK. These costs are increased for certain agricultural and
food products because of the need for additional border checks to ensure compliance
with EU food safety, plant and animal health regulations.
In the absence of an agreement covering road transport services, hauliers
travelling between the UK and EU27 could face additional costs if there is a
need to secure licences with individual Member States.
Ireland faces particular issues in the event of a ‘hard’ Brexit because of the
importance of the UK land bridge for the transport of agri-food products to and from
the EU27, and because transport from one location in Ireland to another may in some
instances need to travel through Northern Ireland.
A range of potential trade arrangements are available which address one or
more of these potential trade costs. However, the current ability to trade
frictionlessly between the UK and the EU27 is due to the UK’s EU membership and
can only be maintained if the UK were to remain a member of the EU.
There are a number of ‘models’ for the future long-term trade relationship between
the UK and the EU27. These include the ‘Canada’, ‘Turkey’, ‘Ukraine’, ‘Swiss’ and
‘Norway’ models. The UK government has ruled out the Canada, Turkey and
Norway models, but it has not defined where it might like to end up between
the Ukraine and Swiss models. The EU27, for its part, is unlikely to make the
Swiss model available because of its unsatisfactory institutional nature, though its
attitude to the Ukraine model as a template for a future UK partnership has not been
clarified. The Ukraine model is implemented through an Association Agreement with
the EU which is an arrangement that has been specifically endorsed by the European
Parliament.
This chapter defines the meaning of a ‘hard’ Brexit by examining the way agri-food trade takes
place with countries that the EU does not have a trade agreement with but operates under
WTO rules. It identifies the additional costs which food traders in the UK and EU27 would face
compared to the way trade takes place today. These include tariffs, customs clearance costs,
the loss of preferential trade transfers, costs to show compliance with regulatory standards,
and higher costs for transport services. It then discusses how different ‘ideal types’ of trade
arrangement might address these costs. The discussion covers customs agreements, free trade
areas, customs unions, regulatory cooperation and regulatory unions. The EU has a wide
variety of trade agreements with non-member countries which differ in scope and ambition.
The extent to which these actual trade agreements deliver the promised reductions in trade
costs is evaluated.
Policy Department for Structural and Cohesion Policies
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2.1. Trade terms in the ‘no deal’ scenario
2.1.1. Tariffs
The most obvious consequence of a ‘hard’ Brexit would be the re-introduction of tariffs on agri-
food trade between the UK and the EU27. The EU’s tariffs including on agri-food products would
be those set out in the Common External Tariff (CET) which can be accessed via TARIC. 8F
80 The
UK’s tariffs which would apply in the event of a ‘hard’ Brexit are not yet known. The tariffs the
UK could impose (‘applied tariffs’) would be limited under WTO rules in two ways: (a) they
cannot exceed the maximum tariff levels (called ‘bound tariffs’) contained in the UK’s Schedule
of Concessions in Goods which has yet to be notified to the WTO, and (b) they cannot
discriminate between different import sources (for this reason, these applied tariffs are often
referred to as Most Favoured Nation (MFN) tariffs). This means that the UK would have to
apply the same tariffs on products imported from the EU27 as from other countries,
with the important exception of countries with which it has signed a WTO-compatible
preferential trade agreement, preferences granted to developing countries under the WTO
Enabling Clause or where a specific waiver has been granted.
The UK is a member of the WTO in its own right but its Schedule is currently that notified by
the EU. The UK has indicated that it will seek the replicate the bound tariffs in the EU’s Schedule
of Concessions in Goods when it extracts its own Schedule after Brexit. 9F
81 Under a ‘hard Brexit’
scenario, it would be at liberty to decide what level of applied tariffs it would wish to apply to
EU27 imports, provided these met the two WTO restrictions in the previous paragraph. As
mentioned, in the EU27’s case, the tariffs that would apply to the UK once it ceased to be an
EU member are those set out in the EU’s TARIC.
The UK has not yet clarified what approach it intends to take to its applied tariffs
after Brexit. In its White Paper on future UK trade policy, it stated that “The Government …
intends to introduce legislation that would allow the UK to operate standalone customs and
indirect tax regimes as we withdraw from the EU. This will include the power to set customs
duties, tariff rate quotas and preferences, as well as wider tariff-related provisions” (HM
Department of International Trade 2017). However, no indication is given in the White Paper
whether the UK intends to change its current tariffs. In the White Paper on the future Customs
Bill, the UK government notes that under the new UK standalone customs regime “The level of
this duty would be decided by the government, and set out in secondary legislation before the
UK leaves the EU” (HM Treasury 2017). Again, there is neither a commitment to maintaining
current tariffs nor any specific proposal to alter them.
There have been suggestions that applied tariffs might be reduced on products not
produced in the UK (e.g. citrus fruit) or where imported products are an important raw material
for a domestic processing industry (e.g. sugar). The UK might also be tempted to simplify some
of the highly complex elements of the current EU applied tariff schedule, such as the Meursing
formula which sets tariffs for processed foods and the entry price system for certain fruits and
vegetables. Other voices outside government have argued in favour of a more wholesale
reduction in applied tariffs as part of the move towards a ‘Global Britain’ strategy. A reduction
in applied tariffs might also be seen as a way to mitigate some of the effects of higher food
prices on UK consumers due to the additional trade costs and any further depreciation of
sterling in the run-up to Brexit Day (alternatively, it would be open to the UK to unilaterally
introduce erga omnes tariff rate quotas based on current import quantities to achieve the same
objective). In the Trade Policy White Paper, the UK government invited the views of businesses
and other stakeholders on, inter alia, “an inclusive and transparent trade policy” to be
80 TARIC is the integrated Tariff of the European Union, which is a multilingual database in which are integrated all
measures relating to EU customs tariff, commercial and agricultural legislation. 81 UK Department for International Trade, Preparing for our Future UK Trade Policy, HMSO, 2017, p. 25.
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submitted by early November 2017. At this point in time, there remains uncertainty about
the level of applied tariffs that would face EU27 exporters in the event of a ‘hard
Brexit’ scenario, but it may be reasonable to assume that, at least initially, the UK
will apply the same MFN tariffs as it does today under the EU’s CET.
Table 13: EU's applied MFN tariff summary, 2016
Number
of lines
Simple average
(%)
Tariff
range (%)
Standard
deviation
Share of duty-free lines (%)
Share of non-ad
valorem tariffs (%)
Total 9,414 6.3 0-695.5a 12.1 26.1 10.6
HS 01-24 2,456 14.2 0-695.5a 21.7 15.3 38.3
By WTO category
WTO agricultural
products 2,075 14.1 0-695.5a 23.7 19.1 46.4
Animals and
products thereof 351 19.4 0-132.5 21.3 15.1 68.7
Dairy products 151 35.6 2.8-695.5a 65 0 100
Fruit, vegetables,
and plants 508 13 0-169.9 13.9 11.8 16.9
Coffee, tea, and
cocoa and cocoa
preparations 47 11.3 0-18.7 6.7 14.9 51.1
Cereals and
preparations 230 14.9 0-76.9 11.9 8.7 80
Oilseeds, fats, oil
and their products 174 6 0-103.5 10.4 35.6 6.9
Sugars and
confectionery 44 26.8 0-172.7 37.5 4.5 88.6
Beverages, spirits
and tobacco 305 12.8 0-76.8 15.9 18 55.4
Cotton 6 0 0-0 0 100 0
Other agricultural
products, n.e.s. 259 5.8 0-168.7 16 51 22
Notes: a The tariff peak was calculated on a tariff line for which imports in 2015 were 0.1 tonnes. The next tariff
peak in the dairy sector was 187.2%.
Calculations for averages are based on the national tariff line level (8-digit), excluding in-quota rates. Tariff schedule
is based on HS2012. Ad Valorem Equivalents (AVEs) for specific tariffs were estimated based on 2015 import data at
the 8-digit tariff from the Eurostat database. If unavailable, the ad valorem part is used for compound and mixed
rates.
Source: WTO, 2017
The scale of tariffs that would apply if the UK were to adopt the current EU CET is shown in
Table 2. The highest average tariffs would be faced by EU27 exports of dairy products, sugars
and confectionery, and animal products. The highest peak tariffs are also found in these
sectors but also in the category ‘Other agricultural products n.e.s’. In defining a ‘hard’ Brexit,
we assume that the UK will continue to apply the EU MFN tariff schedule after Brexit on trade
with third countries with which it does not have a Free Trade Agreement (FTA).
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2.1.2. Loss of preferential trade transfers
The loss of preferential trade transfers on EU27 agri-food exports to the UK is not,
strictly, a trade cost but it is a consequence of a ‘hard’ Brexit. Preferential trade transfers
arise on agri-food exports to the UK because the UK currently applies the EU’s Common
External Tariff. This means that UK consumers pay a (somewhat) higher price for foodstuffs
imported from the EU27 than they would have to pay if these products were imported from
third countries at world market prices. The Customs Union effectively gives a preference to EU
exporters in supplying the UK market which is why this trade transfer is called a preferential
one. The difference between the price paid by UK consumers behind the EU tariff wall for EU27
exports and the price EU exporters would receive if the products were sold at world market
prices is the measure of the preferential trade transfer accruing to EU27 exporters.
This preferential trade transfer on exports to the UK market might be eroded in two
ways in a ‘hard’ Brexit. One way would be if the UK decided to lower or eliminate its MFN
tariffs on foodstuffs. In the situation of full elimination, EU27 exporters would not face tariffs
on exporting to the UK market, but the UK market would be a less attractive one because the
price exporters would receive would be lower than they currently earn on these exports.
Maintaining tariff-free trade between the UK and the EU27 after Brexit would not avoid the loss
of this preferential trade transfer if the UK decided to lower the level of its tariff protection.
It would also be possible for EU27 exporters to face both higher tariffs and the loss of the
preferential trade transfer. This would occur if the UK applied MFN tariffs to EU27 exports but
entered into free trade agreements with third country competitive agricultural exporters which
effectively drove down domestic UK food prices to world market levels. This ‘double whammy’
would be the consequence of the additional discrimination against EU27 exporters in a situation
where the UK raised tariffs against EU27 exporters but lowered them against third country
competitive agricultural exporters as a result of free trade agreements with these countries.
The preferential trade transfer on intra-EU trade has fallen significantly in recent
years as EU producer prices have converged on world market prices, in part due to
successive CAP reforms, and in part due to the rise in world market prices over the past decade.
The left-hand panel in Figure 2 shows that the average difference between EU producer and
world market prices has steadily declined but remains positive in recent years. The right-hand
panel shows that the remaining gap is largely the result of continued EU protection for a handful
of commodities, in particular beef, sugar, poultrymeat and some vegetables. These are the
products where EU27 exports to the UK market continue to earn a preferential trade transfer.
A corollary of the fall in the preferential trade transfer earned on exports to the UK in recent
years is that the potential fall in UK food prices if it were to lower or eliminate its applied tariffs
on imported foodstuffs is now much smaller than might have been estimated based on figures
from a decade ago.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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Figure 17: Gap between EU and world market prices
Source: Own calculations based on the OECD Producer Support Estimate (PSE) database. The left–hand panel shows
the trend in the producer Nominal Protection Coefficient, the right-hand panel uses the consumer Nominal Protection
Coefficient. Note that DG AGRI’s Key Performance Indicator 2 suggests that the fall in the ratio between EU and world
agricultural commodity prices has been even steeper than shown in the OECD database, from almost 40% in 2005 to
6% in 2016 (DG AGRI 2017). There are several world market reference prices in the meat sector. In calculating the
EU PSE, the OECD uses the average price of fresh and chilled imports from Australia. If Brazil’s export price were
used, the Nominal Protection Coefficient shown for beef would be higher.
2.1.3. Customs clearance
Since the Single Market was established on 1 January 1993, goods leaving the UK for
elsewhere in the EU, and vice versa, have not been subject to customs checks at frontiers. In
the event of a ‘hard’ Brexit, there will be a requirement for customs clearance. Customs
clearance gives rise to two sources of additional costs: the costs of clearance as
such, and the time costs of delay while goods are being cleared. While it is possible to
minimise these costs (a process called ‘trade facilitation’), it is not possible to avoid them. We
consider each of these costs in turn in the context of UK-EU27 agri-food trade in the event of
a ‘hard’ Brexit.
Customs processes have a number of different objectives (Table 3).
Tariffs. Ensure that any customs duties are paid when goods arrive from third countries
and the goods are released either at the border or subsequently (suspended duty),
including the administration of tariff preferences, tariff quotas, tariff suspensions, and
anti-dumping duties at importation.
Tax. Collect import VAT and any excises when goods are released.
Documentation. Ensure businesses correctly declare goods for import or export and
provide the required documentation, including customs declarations, safety and security
information and any licenses required or supporting documentation (such as that
required to demonstrate the origin of goods, as may be required under a future free
trade agreement between the UK and the EU27);
Standards. Ensure that the goods entering comply with relevant safety and
environmental standards, with special attention paid to products such as food products,
chemicals and electrical equipment.
Supply chain security. Security aspects were first introduced in customs legislation
in the aftermath of the terrorist attacks in September 2001 in the United States. In
2005 the World Customs Organisation adopted the SAFE Framework of Standards that
introduced security measures for supply chains, including the requirement for advanced
cargo data notification, security risk assessment and an industry partnership
(Authorised Economic Operator) programme.
Policy Department for Structural and Cohesion Policies
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Table 14: Examples of customs and other controls in international trade
CONTROLS EXAMPLES OF RELATED ACTIVITY
Revenue collection Collection of customs duties, excise duties and other indirect taxes;
payment of duties and fees; management of bonds and other financial
securities
Safety and security Security and anti-smuggling controls; dangerous goods; vehicle checks;
immigration and visa formalities; export licences
Environment and health Phytosanitary, veterinary and hygiene controls; health and safety
measures; CITES controls; ships’ waste
Consumer protection Product testing; labelling; conformity checks with marketing standards
(e.g. fruits and vegetables)
Trade policy Administration and enforcement of quotas, surveillance measures and
quantitative restrictions
Source: Grainger, 2015
Under the EU Customs Union, customs policy is the exclusive competence of the EU. The EU
Customs Union comprises the 28 EU Member States, with Turkey, San Marino and Andorra
also having their own customs unions with the EU. All EU Member States are required to
operate customs procedures in accordance with EU legislation (the key legislation being the
Union Customs Code).
In October 2013, the EU introduced a new Union Customs Code (UCC) (Regulation 952/2013)
and Delegated and Implementing Regulations (as amended). This changed a number of the
rules and procedures governing the way that customs duties are levied, calculated and
collected by EU Member States. Part of these changes is to require that all communications
between customs authorities and economic operators must be electronic by December 2020.
These changes came into force in 2016, with some transition arrangements operating until
the end of 2020.
HOW CUSTOMS CONTROLS WORK IN THE EU
Carriers must submit an Entry Summary Declaration via an electronic information system
before the arrival of the goods in the EU which is a pre-arrival declaration for risk analysis. A
similar declaration (Exit Summary Declaration) is required before the departure of goods out
of the EU again to facilitate risk analysis.
Traders must lodge a customs declaration form (known as the Single Administrative
Document/SAD) for goods imported from and exported to countries outside the EU which
requires 54 boxes of information from details of the consignor to the consignee, the product
details and tariff details, values, country of origin information, weights and packaging
information and terms of trade. Some trusted traders (AEOs) can make simplified declarations
at the border and provide a supplementary declaration later.
Traders pay any tax and duty which is due on imports. Payment is due on clearance at the
border, unless the trader is part of the duty deferment scheme and pays a single sum each
month (this facility is subject to provision of a bank guarantee).
Importers and exporters can be subject to post clearance audit checks by Customs at any time
within the following three or four years. Businesses have to keep customs paperwork for this
period.
Most goods are cleared for import/export instantly. However, a small sample must be subject
to documentary checks by customs (of the order 2-3%) and a smaller sample undergo physical
checks as required by the harmonised risk management rules under the UCC (the proportions
for certain agri-food products are significantly higher as discussed in the text).
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The level of import checks required at borders can be reduced as the result of pre-
authorisation of traders, advance lodgement of declarations and an extensive
system of post-clearance checks, including customs audit, which are carried out at
traders’ premises. Authorised Economic Operators (AEOs) have a special status in the
system and under agreed protocols are allowed to operate greatly simplified customs
procedures. 10F
82 While currently AEOs tend to be large firms (which tend to account for the bulk
of international trade), the new EU UCC opens the possibility for smaller traders to receive
this authorisation. This is scheduled to happen regardless of Brexit, but has obvious
implications for how customs procedures might operate with the UK after Brexit.
2.1.4. Regulatory checks on food products
Specific rules apply to the import of food and especially animal products. According to the
General Food Law (Regulation 178/2002), food and feed imported into the EU must comply
with food law or conditions recognised as equivalent or, where a specific agreement exists,
with requirements contained therein (Article 11 - Imports). The regulations differentiate
between food of non-animal origin, food of animal origin, and food containing both processed
ingredients of animal origin and ingredients of plant origin (composite foods). Depending on
the product and where appropriate, imports are required to meet food hygiene standards;
other health requirements (e.g. maximum residue levels for pesticides, the use of food
additives, flavourings and enzymes, contaminants); product specific requirements (e.g.
concerning quick frozen foodstuffs, foodstuffs for particular nutritional purposes, genetically
modified organisms or approved residue control plans); plant health requirements; and animal
health requirements.
Food of non-animal origin. The EU rules on food hygiene require that all food businesses in
third countries after primary production wishing to export to the EU must put in place,
implement and maintain a procedure based on HACCP principles. 11F
83 The competent authorities
in the Member States must ensure that foodstuffs imported into the EU are submitted to official
controls for the purpose of ensuring that the relevant provisions of the food hygiene rules,
including the requirement of putting in place, implementing and maintaining HACCP-based
procedures, are observed.
Most food of non-animal origin can enter the EU through any entry point and is not subject to
specific import conditions, a pre-notification requirement nor certification by the competent
authorities of the third country of dispatch. When importing food into the EU responsibility
rests with the importer to ensure compliance with the relevant requirements of EU food law
or with conditions recognised as ‘equivalent’ by the EU. Nonetheless, some food of non-
animal origin may be submitted to controls in accordance with a control plan drawn
up by the Commission in the light of potential risks. Such controls may be at the point
of entry, the point of release for free circulation, the importer’s premises, retail outlets etc.
The Commission has established a list of food of non-animal origin that, on the basis of known
or emerging risks, must be subjected to an increased level of official controls when entering
the EU.
82 The EU Authorised Economic Operator (AEO) system permits qualifying companies to undergo streamlined
customs procedures under the Union Customs Code. It applies to companies authorised for customs simplification
(AEOC) or security or safety (AEOS) or a combination of the two. This is a version of the ‘trusted trader’ scheme
used in other countries and allows importers to ‘fast track’ customs, reducing the burden of checks, security and
taxation requirements for regular importers. SEE DG TAXUD “Authorised Economic Operator” for more detail. 83 HACCP stands for Hazard Analysis Critical Control Point and is a systematic approach to the identification,
evaluation, and control of food safety hazards.
Policy Department for Structural and Cohesion Policies
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Under the currently applicable legislation on trade in plants and plant products (Directive
2000/29/EC), 12F
84 a phytosanitary certificate from the competent authority in the exporting
country is required for plants for planting, cut flowers, and some fruits, vegetables and seeds
(‘controlled plants’). For non-controlled plants, imports into the EU do not require prior
approval or notification, although they are subject to rules on food safety and customs
procedures and inspection. 13F
85 Under the new Regulation (EU) 2016/2031 which will come into
force in December 2019, all living plant material (namely entire plants, fruits, vegetables, cut
flowers, seeds, etc.) will require a phytosanitary certificate confirming their compliance with
the EU legislation if they are to be imported into the EU. The Commission will adopt within two
years a list of plant materials that can be exempted from that certification if they are deemed
safe for the EU territory.
Once the UK becomes a third country, movement of controlled plants and plant
products from the UK to the EU27 (and, under the UK European Union (Withdrawal)
Bill, from the EU27 to the UK) will have to be accompanied by a phytosanitary
certificate issued by the plant health authority of the country of origin rather than a
plant passport. This will involve additional costs for those moving plants and plant materials
between the UK and the EU27. Whereas a plant passport can be issued by a private grower
or merchant sending material to another Member State (the only proviso is that the issuing
business is licensed to do so by the competent authority in the Member State and is subject
to regular quality control checks), a phytosanitary certificate has to be issued by the
competent authority of the exporting state. Importers of controlled plants and plant products
will have to register as an importer and will have to give advance notice of the arrival of
consignments. When the consignment arrives at the EU27 (or UK) border, it will have to be
inspected to check that it is accompanied by all the required documents, that it contains the
plants claimed, and that it is free of pests and diseases. Consignments can only enter through
Designated Points of Entry (DPEs).
Products of animal origin. Products of animal origin must be presented at an EU
approved Border Inspection Post for submission to an import control. Prior notification
of the physical arrival of the products in the EU must be provided to the border inspection post
of arrival using the Common Veterinary Entry Document (CVED). Consignments will only be
accepted if the products are derived from approved third countries, regions thereof and
establishments as appropriate and if veterinary checks had favourable results. Health
certificates must accompany all animal products when introduced into the EU. These
documents must be signed by an official veterinarian of the competent authority of the
exporting third country guaranteeing that the conditions for import into the EU have been met.
Further random checks may be carried out on the imported product at the final destination.
The Official Controls Regulation (Regulation (EC) No 882/2004) provides national authorities
and the Commission with the necessary powers to ensure effective enforcement of regulatory
requirements, including audit and control powers in the Member States and third countries. It
lays down specific rules for official controls on imported products. All products of animal origin
are subjected to a documentary check. Most consignments are also subject to an identity
check which involves verification that the product, health marks, stamps and other necessary
product and or package information conform to the declaration on the health certificates and
EU legislation. A percentage of consignments must also be physically checked to see
that it is fit for its intended purpose. The physical check may include sampling the product
84 A new plant health Regulation (EU) 2016/2031 on protective measures against pests of plants was adopted on 13
December 2016 but its provisions will not come into force until 13 December 2019 in order to allow sufficient time
for the necessary delegated and implementing acts to be adopted and to give time to businesses to prepare for
the new rules. For a summary of the changes brought in by the new Regulation, see European Commission Fact
Sheet, “New Plant Health Regulation: stringent rules for a better protection from plant pests”, 13 Dec 2016. 85 Details of the EU regulations governing imports of plants & plant products from non-EU countries can be found on
the DG SANTE web page “Trade in plants & plant products from non-EU countries”.
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to look for pathogenic micro-organisms or illegal contaminants such as veterinary drugs
residues or heavy metals. Commission Decision 94/360/EC prescribes the level of physical
checks for certain products. In general, the minimum number of consignments to be subjected
to a physical check are 20% for meat, meat products, fish, fishery products, 50% for poultry
meat, honey, dairy products and shellfish, and at between 1% and 10% for most products of
animal origin that are not intended for human consumption. For certain products where there
is a known health risk the Commission may prescribe a higher level of checking which may
include compulsory sampling. The EU has negotiated equivalence agreements with New
Zealand and Canada and imports from these countries are subject to lower physical checks
and in the case of New Zealand the charges levied for imports are at a reduced level.
A new Official Controls Regulation (Regulation (EU) 2017/625) which replaces the 2004
legislation entered into force on 27 April 2017. The new rules will gradually become applicable
with the main application date being 14 December 2019. 14 F
86 The regulation establishes an
integrated approach to import controls by eliminating the current fragmentation of
requirements. Common rules will apply to controls carried out at borders on animals, products
of animal origin, plants and other products and goods that must be checked before they enter
the EU. The import control system will be more risk-based and targeted. Border Control Posts
(BCPs) will replace the different Border Inspection Posts (BIPs) and Designated Points of Entry
(DPEs) which currently carry out border control tasks. All consignments to be presented at the
border control posts will undergo documentary checks. Identity and physical checks will be
carried out at a frequency depending on the risk linked to the specific animals or goods. A
single standard document, the Common Health Entry Document (CHED), will be used by
operators for the prior notification of consignments. It will be transmitted to the border control
post through a new integrated computerised system for official controls (Integrated
Management System for Official Controls, IMSOC).
In dealing with customs, a company can employ a clearance agent or freight forwarder to act
as their representative (which is an additional cost), or they can request authorisation to lodge
these declarations themselves. In either case, these are additional direct costs of customs
clearance. Examples of charges in force are given in Annex 1 of this study.
2.1.5. Road transport services
The importance of haulage services for the transport of goods across customs borders should
not be underestimated. One of the main reasons for the often choking congestion that Turkish
hauliers face on the Turkey-Bulgaria border is because Turkey does not have an agreement in
transport services with the EU. There is a risk of further border delays in the absence
of a UK-EU27 deal on the movement of trucks or lorries, vehicle registration, and the
ability of drivers who are EU nationals to drive vehicles into the UK and vice versa if
a customs border is established after 29 March 2019.
Bilateral traffic-sharing agreements are the predominant mode of organisation of international
road transport. These split the traffic between the two parties to the exclusion of all others
and provide a quantitative framework by annually establishing quotas for the number of
authorised journeys. One estimate suggests that there are around 1,400 bilateral agreements
for the 43 states participating in the European Conference of Ministers for Transport (ECMT),
that is some 20 agreements per EU Member State and 30 to 35 agreements for the other
member countries (WTO 2010). Under the ECMT model agreement, which is considered
broadly representative of existing road transport agreements in Europe, permits are required
for many types of traffic (although with exceptions, such as transport of live animals). Quotas
are agreed on the number of individual journeys or the number of permits issued (though with
86 The rules for official controls on imported food and feed products are described on this DG SANTE web page.
Policy Department for Structural and Cohesion Policies
140
the important exception that quotas do not generally apply to traffic with perishable goods).
Bilateral quotas are always fixed at the same level for both parties. Accordingly, it often
happens that, when the two countries are not equally competitive, the quota allocated to the
more competitive country is exhausted before the end of the year. In these circumstances,
the country that has exhausted its quota tries to obtain an additional quota from its partner.
If it is unable to do so or if the additional quota is exhausted in its turn, the goods can still be
carried but with additional costs and journey times, either by the less competitive country or
by carriers of a third country that has not yet exhausted its quota.
International road haulage with HGVs within the EU is authorised by the EU-wide
‘community licence’ system. Hauliers with a community licence established in any
EU Member State are permitted to undertake any international road haulage in the
EU - the international road haulage market in the EU is fully liberalised. However, road
transport between EU and non-EU countries (third countries) is still largely based on bilateral
agreements between individual Member States and third countries. The EU has only agreed
open-access road transport deals with those neighbouring EU countries that have committed
to observing the rules of the single market including free movement of persons (these are the
EEA agreement with Norway, Iceland and Liechtenstein and the agreement on land transport
between the EU and Switzerland). In a worst-case scenario, the UK could be required to
negotiate lorry quotas with individual EU27 countries and presumably would retaliate with
similar quota restrictions on the number of EU27 hauliers that could operate to the UK. 15 F
87
2.2. Specific issues facing Ireland
The particular problems facing Ireland in the event of a ‘hard’ Brexit have been highlighted in
the European Council (Art.50) guidelines, the Council’s negotiating directives, the European
Parliament resolutions on Brexit, and in the UK government’s position and future partnership
papers.
It is estimated that, in the space of one month 177,000 lorries, 205,000 vans and
over 1.8 million cars cross the border between Ireland and Northern Ireland. Each
day it is estimated that 30,000 people make the cross-border commute to work. 16F
88 Cross-
border flows of agricultural products are particularly important. The shared land border
between Ireland and Northern Ireland has resulted in the development of a highly integrated
agri-food sector, with large volumes of trade annually in live animals, finished products and
products requiring further processing. Over 400,000 pigs are exported live from Ireland to
Northern Ireland for processing annually, with almost 400,000 lambs imported from Northern
Ireland for processing. Over 800m litres of milk are imported from Northern Ireland annually,
much of which is processed and exported from Ireland. Overall, in 2015, exports of agricultural
products from Ireland to Northern Ireland (including food, drink, forestry and animal by-
products) were €750m, with imports from Northern Ireland of €567m (IFA 2016). A future
border between Ireland and Northern Ireland would be most similar to the border with
Germany or France and Switzerland in terms of the intensity of traffic across this border.
However, while movement of persons across these frontiers takes place without restrictions
as all countries are parties to the Schengen Agreement (although where there is a suspicion
of irregularities, controls are allowed in all Schengen countries and at the border as well), the
movement of goods requires customs clearance and there are dozens of customs posts along
the Swiss border with its EU neighbours. 17F
89
87 For this reason, the UK road haulage industry proposes that the UK and the EU27 would enter into a Land Transport
Agreement for international road haulage that maintains the basic structure of the community licence system. See
Road Haulage Association, “Proposal for a UK-EU Land Transport Agreement”, 4 May 2017. 88 Gough, A. “Plan, act and engage for a better Brexit”, InterTrade Ireland. 89 For details see the Swiss Customs Administration web site.
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Both the UK and the EU27 have made clear that they do not wish to see a return to
a hard border on the island of Ireland. The European Council (Art. 50) guidelines state
“In view of the unique circumstances on the island of Ireland, flexible and imaginative solutions
will be required, including with the aim of avoiding a hard border, while respecting the integrity
of the Union legal order”. This was repeated in the Council negotiating directives for the first
phase of the withdrawal negotiations which stated that “Negotiations should in particular aim
to avoid the creation of a hard border on the island of Ireland, while respecting the integrity
of the Union legal order”. The UK has also stated its intention to avoid a hard border in Ireland,
most recently in its White Paper on a future Customs Bill (HM Treasury, 2017), and specifically
stating its aim “to avoid any physical border infrastructure.” Whether this objective is possible
and how it might be achieved is discussed later in this chapter.
Although the ambition to avoid a hard border on the island of Ireland has received most
attention, in terms of the volume and value of trade involved a more important issue
concerns the implications of Brexit for the Irish ‘land bridge’ to continental EU
markets. After Brexit Ireland will be the only EU country which must access other EU countries
in the single market using road freight by passing through a non-EU country.18F
90 At present, it
is estimated that around two-thirds of Irish exports to the continent move via the UK. 19F
91 This
involves two ferry crossings (one over the Irish Sea and the other over the Channel between
the UK and France, Belgium or the Netherlands) as well as using the UK as a land bridge. Once
the UK leaves the EU, there is the possibility that Irish hauliers would be stopped four times
for customs clearance on the way to service customers in the rest of the EU (and vice versa
for EU hauliers transporting goods from the rest of the EU27 to Ireland). Movements could
take place using sealed TIR trucks provided the UK joins the Common Transit Convention as
it has indicated it wants to, but international TIR movements provide much less flexibility to
hauliers than they currently enjoy under single market rules (see further discussion later in
this chapter). The alternative of direct ferry movements between Ireland and France is much
less attractive and would be much more costly. A truck takes 10.5 hours to travel between
Dublin and Zeebrugge over the UK land bridge: the same journey via Cherbourg would take
three times as long. 20F
92 This problem has been recognised in the Council’s negotiating directives
which noted that: “The [withdrawal] Agreement should also address issues arising from
Ireland’s unique geographic situation, including transit of goods (to and from Ireland via the
United Kingdom)”. Transit issues will also arise in moving goods from one part of Ireland to
another when the shortest route may be through Northern Ireland.
2.3. Trade arrangements to avoid or mitigate trade costs
If the UK leaves the EU without a trade agreement (a ‘hard’ Brexit), traders would be required
to absorb all the additional trade costs identified in Section 2.1: customs clearance costs,
tariffs, and the costs of complying with and demonstrating that regulatory standards had been
met. A trade agreement between the UK and the EU after Brexit would allow some,
or even most, of these costs to be avoided. The catch is that avoiding these costs
would come with the trade-off of less policy autonomy for the UK. One of the promises
90 There is significant goods traffic from Northern Europe to Italy which passes through Switzerland. Swiss borders
are more manageable because of the bilateral agreements between Switzerland and the EU which mean that
effectively, if not legally, it is part of the European Economic Area for goods. Greece has a land border with Bulgaria
but the majority of its goods exports to the rest of the EU use RoRo services to Italy. This would not be feasible
in the case of Ireland for reasons discussed later. 91 The Independent, “Majority of exporters travel through Britain to ship goods overseas”, 10 March 2017. The figure
of 80% is quoted in Posaner, J. and Livingstone, E. “Brexit burns Ireland’s British bridge to EU markets”, Politico
(Europe edition), 20 July 2017. The Irish Department of Transport, Tourism and Sport has commissioned a study
into the use of the UK land bridge by Irish importers and exporters. The research is intended to establish the
volume of traffic using the UK land bridge at present, the likely consequences that Brexit will have on land bridge
usage and the various options to minimise the likely consequences. See Minister’s reply to a Dail question, 11
September 2017. 92 Posaner and Livingstone, op. cit.
Policy Department for Structural and Cohesion Policies
142
of those campaigning for the UK to leave the EU was ‘to take back control’. At the time of
writing, the UK government seems undecided as to how much policy autonomy it is prepared
to cede in order to achieve ‘almost frictionless’ trade between the two parties. The choices it
faces are discussed in this section and summarised in Figure 3. Trade facilitation refers to
steps that the customs and health authorities can take to minimise the checks and the time
required to clear goods through customs, while the other scenarios refer to trade agreements
with different levels of ambition.
Figure 18: Alternative post-Brexit trade scenarios beyond WTO terms
Barrier
Customs
agree-
ment
Free Trade
Area (FTA) FTA+
Customs
Union
(CU)
CU+
Single
market
(Regulatory
Union)
Trade
facilitation Yes Yes Yes Yes Yes Yes
Tariffs Not
affected Removed Removed Removed Removed Removed
Preferential
rent Lost Lost Retained Retained Lost
Rules of
origin Yes Yes No No Yes
Customs
clearance Yes Yes Yes Yes Yes
Regulatory
controls Yes Reduced Yes Reduced No
Source: Own presentation. Note that the single market scenario is assumed not to include a customs union.
It should be absolutely clear that the current ability to trade frictionlessly between the UK and
the EU27 is due to the UK’s membership of the EU and can only be maintained if the UK were
to remain a member. As the UK customs future partnership paper admits, any alternatives will
increase the burden for business — whether by requiring companies to declare goods traded
with the EU27 in the case of a streamlined system or by obliging them to track their final
destination in a deeper customs partnership with the bloc.
If the option of continued UK membership of the EU is off the table, it remains the
case that a lot can be done to reduce the additional trade costs that businesses will
face through a future long-term trade agreement. Many of the proposals put forward in
the UK policy papers are sensible proposals, once it is accepted that they are second-best
proposals compared to avoiding the consequences of having to deal with Brexit in the first
place, and that they cannot fully replicate the frictionless trade within the single market and
the Customs Union. The choice for the EU27 is how far it is ready to go to embrace these
proposals, given the red lines set down by the European Council (Art. 50) and the European
Parliament, particularly the refusal to extend participation in the single market on a sector-
by-sector approach. 21 F
93 If one objective of the UK in withdrawing from the EU is to gain the
ability to lower or remove regulatory standards, the EU27 will want to ensure that any
proposals to facilitate trade will not undermine EU27 standards.
93 If Canada had approached the EU during the negotiations on the EU-Canada Comprehensive Economic and Trade
Agreement (CETA) and offered to align its food safety and animal health regulations precisely with those of the
EU in order to facilitate an agreement on regulatory equivalence which would avoid the need for regulatory checks
on trade between the two countries, it is interesting to speculate how the EU might have responded to that offer.
The United States and Canada signed such an agreement recognising each other’s food safety systems as
comparable to each other in May 2016 even though there is not full alignment.
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2.3.1. Customs agreement
The UK has proposed a customs arrangement with the EU27 “that facilitates the freest
and most frictionless trade in goods possible, and which, crucially, avoids a hard border and
any physical border infrastructure on the island of Ireland” (HM Government 2017a). The UK
published a future partnership paper on customs arrangements in June 2017 in which it put
forward two possible models for future customs co-operation to minimise the costs and delays
of clearing customs as discussed previously: the streamlined and the partnership models (HM
Government 2017b).
The highly streamlined customs arrangement between the UK and the EU27 would
involve:
“streamlining and simplifying requirements, leaving as few additional requirements on EU
trade as possible. This would aim to: continue some of the existing arrangements between
the UK and the EU; put in place new negotiated and potentially unilateral facilitations to
reduce and remove barriers to trade; and implement technology-based solutions to make
it easier to comply with customs procedures. This approach involves utilising the UK’s
existing tried and trusted third country processes for UK-EU trade, building on EU and
international precedents, and developing new innovative facilitations to deliver as
frictionless a customs border as possible”.
Four examples of simplification are given in the UK customs paper to illustrate how the
streamlining model might work.
Simplifying requirements to move goods across frontiers, by negotiating a waiver from
the requirement to submit Entry and Exit Summary Declarations and by joining the
Common Transit Convention which simplifies border crossing for goods in transit.
Reducing delays at ports and airports by negotiating mutual recognition of Authorised
Economic Operators (AEOs) and implementing bilateral technology-based solutions for
roll-on roll-off ports linked to customs declarations and vehicle registration numbers so
that vehicles are not required to stop at the border.
Addressing the safety and security agenda through replicating existing levels of customs
cooperation and data-sharing.
Reducing administrative burdens primarily when importing through unilateral measures
of simplification and speeding up authorisations.
Some of these proposals are already in place for EU trade with other third countries.
With Switzerland and Norway the EU concluded bilateral agreements which entered into force
on 1 July 2009 that waive the obligation of traders to provide customs with the Summary
Declarations prior to import and export in bilateral trade which were introduced to improve
safety and security procedures. The EU has also signed agreements on supply chain security
with main partner countries that provide the legal basis for mutual recognition of AEOs. Most
of those agreements, e.g. with US, China, Japan or Canada, go beyond mutual recognition;
they focus on improving supply chain security, joint risk rules, creating joint standards
regarding security controls etc.
Looking at Norway in greater detail, Norway is not part of the EU’s Customs Union and does
not apply the EU’s common customs rules and tariffs. Norway is, however, involved in the
EU’s customs cooperation through Protocol 10 of the EEA Agreement. Norway has
signed a separate agreement with the EU in order to ensure that customs rules do not hamper
trade flows between Norway and the EU. The agreement waives the obligation to provide
information for security purposes prior to the import or export of goods to the EU and requires
Norway to apply customs security measures that are equivalent to those applied by the EU in
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its trade with third countries. This has involved mutual recognition of the Authorised Economic
Operator (AEO) certification scheme and of systems of risk analysis and management. As a
result of the agreement with the EU, Norway is invited to participate as an observer in several
of the comitology committees under the EU’s Customs Policy Group.
The new customs partnership model with the EU would align the UK’s approach to the
customs border in a way that removes the need for a UK-EU27 customs border.
“One potential approach would involve the UK mirroring the EU’s requirements for imports
from the rest of the world where their final destination is the EU. This is of course
unprecedented as an approach and could be challenging to implement and we will look to
explore the principles of this with business and the EU.”
The customs partnership model would involve the UK operating an import regime that aligns
precisely with the EU27’s external customs border, for goods that will be consumed in the
EU27 market, even if they are part of a supply chain in the UK first. The UK would need to
apply the same tariffs as the EU27, and provide the same treatment for rules of origin for
those goods arriving in the UK and destined for the EU27. The customs paper admits the need
for:
“..a robust enforcement mechanism that ensured goods which had not complied with the
EU’s trade policy stayed in the UK. This could involve, for instance, a tracking mechanism,
where imports to the UK were tracked until they reached an end user, or a repayment
mechanism, where imports to the UK paid whichever was the higher of the UK’s or the EU’s
tariff rates and traders claimed a refund for the difference between the two rates when the
goods were sold to an end user in the country charging lower tariffs. Businesses in supply
chains would need to be able to track goods or pass the ability to claim a repayment along
their supply chain in order to benefit”.
Much of the early comment on the customs partnership model focused on the higher
administrative costs it would imply. Manufacturers and traders would be required to follow
imported goods through to the final consumer. In the case of integrated supply chains, it
would not only be UK firms that would be required to do this. Indeed, it is striking that the
customs position paper only discusses the UK perspective.
The biggest weakness of this proposal is that no one is sure how it might work. The
paper itself notes:
“We acknowledge this is an innovative and untested approach that would take time to
develop and implement. The Government is keen to explore this approach with businesses
and other stakeholders to understand the practical complexities involved in making it work
and assess which other approaches could have a similar effect, how they would work in
practice and whether they could achieve the Government’s objectives”.
As Mr Jon Thompson, Chief Executive and Permanent Secretary, HM Revenue and Customs,
put it in oral evidence to the House of Commons Treasury Select Committee on 14 September
2017: 22F
94
“Let us make this real. You bring something to Felixstowe where the contents need to be
split between those that are going to remain in the United Kingdom and those that are
going on onward transfer to the European Union. At that point you begin to have dual
systems for everything, whereas at the moment you have a single system. Therefore, that
requires not only us but everyone who is involved in that supply chain to run multiple
systems at the same time, because there may be different tariff regimes. Essentially, the
94 House of Commons Treasury Committee, “Oral evidence: Her Majesty's Revenue and Customs Annual Report and
Accounts”, HC 314.
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new customs partnership means we are running the EU tariff system at the UK border. That
is why it is quite innovative and different, and it requires new technology.”
In summary, trade facilitation measures can do a lot to reduce the time required to cross
borders and to make it as easy as possible for traders to manage the necessary paper work
(Grainger 2017; Owen, Shepheard, and Stojanovic 2017). However, only in the context of the
EU single market and Customs Union can they be fully removed.
2.3.2. Free trade agreement
A free trade agreement (FTA) is the simplest possible improvement on WTO terms.
An FTA would reduce or eliminate tariffs on trade in goods between the two parties. It would
be notified to the WTO under GATT Article XXIV which permits discriminatory trade
arrangements in the case of FTAs and customs unions which cover substantially all trade. Both
parties would maintain their autonomy with respect to their trade policy vis a vis third
countries, i.e. their applied MFN tariff schedule, the administration of tariff rate quota (TRQ)
preferences for agricultural products, the use of trade defence measures such as anti-dumping
and countervailing duties, and the ability to enter into separate FTAs with third countries. 23 F
95
Although FTAs remove one of the additional trade costs that trade on WTO terms
would incur, this is at the cost of introducing a further additional cost, namely, the
need to check that a traded product seeking to enter the importing country with a preferential
duty has actually originated in the exporting country and is not simply a third country’s export
transhipped through the exporting country in order to benefit from the tariff preference. Rules
of origin (ROOs) determine whether a particular import consignment should be treated as
originating in the exporting country (and thus eligible for the preferential duty) or originates
in some third country and is simply using the exporting country as a country of transit. This
requires the product either to be wholly obtained from the territory of the exporting country
or to have undergone ‘sufficient working or processing’ to qualify as originating.
The EU tariff schedule uses four different criteria to determine whether ‘sufficient processing’
has taken place. These are: i) a change of tariff heading (e.g. chocolate spread will originate
in the UK if it is made from imported materials of any other heading); ii) a minimum value
added (e.g. for passenger cars, the value of all the non-originating materials used to
manufacture the car may not exceed 40% of the total value of the product); iii) specific
processing or working requirements or iv) a combination of the first three requirements (e.g.
in the case of chocolate spreads, an additional requirement is that no more than 30% of the
ex-works value of the product can be accounted for by the value of sugar). 24F
96
Cumulation is the term used to describe a system that allows originating products
of country A to be further processed or added to products originating in country B,
just as if they had originated in country B. The resulting product would have the origin of
country B. It can only be applied between countries operating with identical origin rules. A UK-
EU27 FTA could allow bilateral cumulation, meaning that when a UK car producer imports
intermediate parts from the EU to manufacture a car, those intermediate parts will be
considered as originating in the UK when calculating the maximum threshold for non-
originating materials (i.e. 40%, as explained above).
The UK could join the Regional Convention on Pan-Euro-Mediterranean preferential
rules of origin (PEM). As the Convention is based on a network of FTAs with identical origin
protocols, joining it allows parties to apply a principle of diagonal cumulation when determining
95 However, parties to an FTA can agree to jointly negotiate FTAs with third countries, as in the case of the European
Free Trade Association (EFTA). Today, EFTA has 27 FTAs covering 38 countries and territories outside the EU. 96 The EU rules on preferential origin arrangements are summarised on the DG TRADE website “Common provisions”.
Policy Department for Structural and Cohesion Policies
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the country of origin of goods. Diagonal cumulation would go further than bilateral cumulation
in that originating materials from any party to the Convention would be deemed to originate
in the UK for the purpose of calculating the origin of a product exported from the UK to the
EU27 (or vice versa). Currently, the parties of the Convention include 42 countries: the EU,
EFTA states, Faroe Islands, the Republic of Moldova, participants in the Barcelona Process
(Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia and Turkey), and
participants in the EU's Stabilisation and Association Process (Albania, Bosnia and
Herzegovina, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo).
Under EU rules, to claim preferential treatment under an FTA, importers must
present a movement certificate known as EUR.1 or, in certain cases, an invoice
declaration. A movement certificate EUR.1 will be issued by the customs authorities of the
exporting country following requests by exporters, while an invoice declaration can be made
by an approved exporter, or by any exporter with a shipment consisting of originating products
whose value does not exceed a certain amount. The customs authorities can grant the status
of approved exporter to any frequent exporter subject to conditions they consider appropriate;
and withdraw it at any time.
For goods with low preferential margins or which are parts of complex supply chains,
the costs of showing compliance with rules of origin and requesting the tariff
preference are often seen as too high to make it worthwhile. The EU is anyway trying
to reduce the costs of complying with ROOs by moving away from the use of paper certificates
to certify origin to a system of self-certification by exporters. It is phasing in the REX
(Registered Exporter) system from 1 January 2017, initially for exporters in developing
countries benefiting from the Generalised System of Preferences and later for other FTAs.
Exporters in beneficiary countries will be invited to become registered for REX with the national
authority of the country in which they are established. Once registered they will be entitled to
issue ‘Statements on Origin’ on their commercial documents such as invoice declarations
without any limit on the value of the goods covered. Presumably, REX would be the basis for
any system of self-certification for UK exporters following an eventual UK-EU27 FTA (the
Canadian CETA is the first FTA to which the REX procedures will apply).
There are other drawbacks of FTAs. FTAs only cover goods but not services, and even
for goods not all goods may benefit from a preferential duty, and not all preferential
duties may be zero. In the case of sensitive products, such as agricultural products,
preferential access may be limited to specific volumes of imports under a TRQ (meaning that
exports above this volume are required to pay the full MFN applied duty) and may be subject
to safeguard clauses permitting the withdrawal of the concession if there is a surge in import
volumes.
For EU27 agricultural producers, a particular concern with an FTA which gave tariff-
free access under all agricultural tariff lines would be the potential for trade
displacement. This could occur if the UK were to open up its market to third country produce
(e.g. lamb) either by lowering its MFN applied tariffs or by entering into FTAs with third country
competitive agricultural exporters. While this third country produce would not receive the
benefit of the preferential duty because it does not originate in the UK, the UK could increase
its imports from third countries to meet its domestic demand while diverting more of its own
production to the higher-priced EU27 market, hence the notion of trade displacement. 25F
97 If the
UK did not enter a customs union with the EU27 which would avoid this problem, this could
lead to pressure from producer groups within the EU27 to limit imports from the UK to the
97 Trade displacement would be perfectly legitimate and can be distinguished from trade deflection, which would be
the attempt by third country exporters to use the UK as a ‘back door’ into the higher-priced EU market.
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volumes currently imported using TRQs. If this happened, the UK would be likely to insist on
limiting EU exports to its market in return.
FTAs also require the maintenance of customs posts at borders even if there is 100%
coverage of tariff lines. This is not only because of the need to check rules of origin, but
also because of the many other checks that need to be performed at the border, including the
payment of appropriate taxes and excises, security and safety checks and compliance with
regulatory standards. A customs agreement can help to minimise some of these costs and the
time required to cross borders, as discussed above, but they cannot be completely avoided
even in an FTA scenario. Avoiding regulatory checks requires a deeper level of integration and
is discussed in the next section.
2.3.3. FTA+ arrangement with regulatory cooperation
An FTA could be combined with various forms of regulatory co-operation. Regulatory
co-operation is a way of minimising or eliminating regulatory checks at borders. There are
different levels of co-operation depending on the degree of integration the trading partners
wish to achieve. Regulatory co-operation is usually implemented through Mutual Recognition
Agreements (MRAs). 26 F
98
Harmonisation of regulations means that both parties agree to use the same
regulatory standards. This is the approach used in the EU’s Association Agreements
with the three eastern neighbours Ukraine, Georgia and Moldova with respect to
technical standards for industrial products. Agreements on Conformity Assessment and
Acceptance of Industrial Products (ACAAs) are a specific type of MRA based on the full
alignment of the legislative system, including standards, and implementing
infrastructure of the country concerned with those of the EU.
Recognition of the equivalence of regulations is based on the fact that
regulatory goals, e.g., in relation to health and food quality, in practice may be
fulfilled by the use of different kinds of measures. This allows trade barriers to be
removed and imported products can be accepted on the basis that they fulfil the
relevant regulatory objectives – even though regulatory differences persist. Equivalence
assessment is an obligation since 1995 under the WTO Agreement on Sanitary and
Phytosanitary Standards (SPS) (Article 4) which requires that “Members shall accept
…measures of other Members as equivalent, even if these measures differ from their
own …if the exporting Member objectively demonstrates to the importing Member that
its measures achieve the importing Member's appropriate level of sanitary or
phytosanitary protection. Members shall, upon request, enter into consultations with
the aim of achieving …agreements on recognition of the equivalence”. The EU has
negotiated only a small number of MRAs which recognise other countries’ standards as
equivalent. Food trade across the US-Canadian border is facilitated because the U.S.
Food and Drug Administration signed an MRA with the Canadian Food Inspection Agency
and the Department of Health Canada recognizing each other’s food safety systems as
comparable to each other. 27F
99
Mutual recognition can simply mean that two or more parties mutually accept
each other’s conformity assessment procedures, i.e., the process by which
products are evaluated for compliance with the rules. Traditional MRAs enable the
competent authority nominated by one party to certify products for access to the other
party’s market, according to the other party’s standards and legislation. No regulatory
98 Mutual recognition agreements that facilitate access to markets between the EU and non-EU countries should not
be confused with the principle of mutual recognition in the EU single market which ensures market access for
products that are not subject to EU harmonisation. 99 U.S. Food and Drug Administration, “FDA Recognizes Canada as Having a Comparable Food Safety System to the
U.S.”, May 4 2016.
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148
convergence is implied by a traditional MRA. In other words, there is no implication that
the regulations imposed on products by the parties are to be brought into alignment at
any stage. The EU has many MRAs in the SPS area under which it agrees to recognise
the validity of certificates issued by the competent authority in the exporting country
stating compliance with EU standards, in return for the exporting country agreeing to
regular auditing of its practices and procedures.
The most limited form of regulatory co-operation would be to agree to
exchange information on regulatory standards and to provide the opportunity for
stakeholders and regulatory authorities in one country to comment on proposed new or
revised standards in the other country. Provisions for information exchange and joint
activities between regulatory authorities are increasingly included in FTAs.
The UK has proposed that the UK and the EU27 should aim at regulatory equivalence
on agri-food measures after Brexit (HM Government 2017c). Although this proposal was
put forward in the context of avoiding a hard border on the island of Ireland, it would apply to
all UK-EU27 trade after Brexit.
“One option for achieving our objectives could be regulatory equivalence on agri-food
measures, where the UK and the EU agree to achieve the same outcome and high
standards, with scope for flexibility in relation to the method for achieving this. An
agreement on regulatory equivalence for agri-food, including regulatory cooperation and
dispute resolution mechanisms, would allow the UK and the EU to manage the process of
ensuring ongoing equivalence in regulatory outcomes following the UK’s withdrawal from
the EU. Providing the UK and the EU could reach a sufficiently deep agreement, this
approach could ensure that there would be no requirement for any SPS or related checks
for agri-food products at the border between Northern Ireland and Ireland.”
Regulatory co-operation including the recognition of regulatory equivalence is a useful and
effective way of minimising trade barriers due to differences in regulatory standards. The EU
has signed MRAs for organic farming standards with a number of countries, as well as MRAs
covering SPS measures. 28F
100 These agreements often require lengthy negotiations, and
demonstrating the equivalence of different standards can be difficult. Achieving the degree
of regulatory equivalence sought by the UK while still allowing the UK regulatory
autonomy in the SPS area would be a difficult balancing act.
2.3.4. Customs union
A customs union represents a higher level of economic integration because, in this
arrangement, the parties agree to maintain a common external trade policy vis á vis
third countries. Thus, both parties agree to apply the same tariffs, to share the same
agricultural TRQs, and to jointly conclude FTAs with third countries. This option further reduces
the costs of customs clearance because checks on the origin of goods are no longer necessary
– imported goods entering either of the parties will have paid the same tariff so there is no
danger of transhipment to avoid the payment of a higher duty in one of the partners. However,
border checks would still need to be undertaken for regulatory compliance because there is
no presumption in a pure customs union model that the participating countries have the same
regulatory standards. VAT payments and excise duties would also need to be paid on crossing
the frontier. If there were any exceptions of any kind, customs checks would also be required
for those goods.
Another advantage of a customs union for EU agri-food exporters is that it would
retain the residual preferential trade transfers on exports to the UK, to the extent that
100 In addition to SPS provisions in FTAs, DG SANTE has this list of stand-alone Sanitary and Phytosanitary
Agreements.
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prices paid by consumers within the customs union are higher than world market prices
because of the Common External Tariff. This advantage of a customs union to EU exporters
would, of course, be seen as a disadvantage by the UK because it would represent a
deadweight cost for the UK economy. It would also keep food prices higher in the UK than
they might otherwise be if the UK were able to import at world market prices. We have
previously noted that the size of this preferential trade transfer is now much smaller than it
was in the past.
Under the current rules for EU own resources, tariff revenue on imported goods is considered
an EU own resource and is paid directly to the EU budget (less an amount equivalent to 25%
of the revenue collected which can be retained by the importing country to offset
administrative costs). Under a stand-alone customs union between the UK and the
EU27, it would be open to each party to decide that tariff revenue collected should
remain with the importing country (as is the case with the EU-Turkey customs union) or
be divided up in some other proportion. Allowing the UK to keep the tariff revenue collected
on imports from outside the EU27 would eliminate the transfer that the UK currently makes
when this revenue is transferred to the EU budget. However, the UK would still make a transfer
through the preferential trade transfers on imports from the EU27 itself.
2.3.5. Customs union with regulatory cooperation
As with a free trade agreement, it is possible to envisage a customs union combined with
elements of regulatory cooperation. From an agri-food perspective, this would again require
harmonisation or close equivalence between the food, sanitary and phytosanitary standards
in the UK and the EU27. The same concerns as previously discussed would arise: on the UK
side, the possible loss of regulatory autonomy; on the EU27 side, the possible dangers of
‘cherry-picking’ if the UK were to opt for regulatory coherence in some sectors but not in
others.
2.3.6. A regulatory union
A regulatory union is one in which both parties agree to align their regulations on a
set of common standards. As the EU single market demonstrates, this does not require
agreement on a set of harmonised standards. In the single market, there is agreement on a
set of high minimum standards and after that the principle of mutual recognition applies. Any
product lawfully marketed in one Member State can be sold in another Member State. Member
States can introduce higher standards for their own producers, but they cannot exclude the
products of other Member States which do not meet those standards provided they are lawfully
marketed in the other Member State. Crucial to the operation of a regulatory union is a high
level of protection in the basic standards that are common to all, a high degree of trust and
confidence in the competence of the other partners to ensure compliance with the rules, as
well as a dispute settlement mechanism which ensures consistent policing of those rules.
A customs union with full and consistent adoption of the EU regulatory acquis (a
regulatory union) would replicate the status quo with respect to trading conditions.
However, because the UK would no longer be an EU Member State, it would have lost its ability
to influence the shape of EU regulations through its voice in the Council or Ministers and
through its MEPs in the European Parliament. Although this option would be very attractive to
EU exporters, for obvious reasons, it has no attractions for the UK as it would imply no
extension of its regulatory or trade policy autonomy despite the fact that it had exited the EU.
2.3.7. Northern Ireland
Both the UK and the EU27 recognise that avoiding a hard border on the island of Ireland will
require flexible and imaginative solutions. The UK government has set out some ideas to
avoid a hard border in its Northern Ireland-Ireland position paper ((HM Government 2017c).
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150
This outlines nine principles on which to base a future customs arrangement at the Northern
Ireland-Ireland land border. These include aiming to avoid any physical border infrastructure
on either side of the border between Northern Ireland and Ireland, but also preventing new
barriers to doing business within the UK, including between Northern Ireland and Great Britain.
The UK Government insists that the answer to avoiding a hard border between Northern
Ireland and Ireland cannot be to impose a new customs border between Northern Ireland and
Great Britain. Instead, it points to a number of examples where the EU has set aside its normal
regulations and codes set out in EU law in order to recognise the circumstances of certain
border areas. Its view is that devising a way forward on the Irish side of the land border will
require similar derogations that go beyond current EU frameworks to maintain the absence of
a hard border after Brexit.
In addition to the trade facilitation measures it proposed under its highly streamlined customs
arrangement in its customs position paper, the UK believes it would be necessary to go still
further to agree specific facilitations for the Northern Ireland-Ireland land border. The UK has
proposed a cross-border trade exemption that acknowledges that many of the
movements of goods across the land border are by smaller traders operating in a
local economy. They cannot be properly categorised or treated as economically significant
international trade. The cross-border trade exemption would ensure that smaller traders could
continue to move goods with no new requirements in relation to customs processes at the
land border. It estimates that, in 2015, over 80% of north to south trade was carried out by
micro, small and medium-sized businesses. For businesses not eligible for an exemption, the
UK proposes that administrative processes could be very significantly streamlined, including
for ‘trusted traders’ on either side of the border, which could allow for simplified customs
procedures. There has been no formal response as yet to this suggestion from the EU27 side.
Guy Verhofstadt, the European Parliament’s Brexit coordinator and chair of its Brexit Steering
Group, in an address to the Irish Oireachtas noted that most of the people he met along
the Irish border believed that the unique solution involved the UK staying in both
the single market and the customs union. Acknowledging that the UK has ruled out that
option, he observed that “the resolution of this border issue is entirely the responsibility of the
United Kingdom. It is for them to come up with a workable solution.. [that] doesn't
compromise the Irish membership and the integrity of the single market and the customs
union.”29F
101
2.3.8. Facilitating the UK land bridge
The UK proposes to address the transit of goods to and from Ireland to the rest of
the EU via the UK land bridge by joining the Common Transit Convention. This would
allow Irish exporters to use the land bridge across the UK to access continental EU markets
without having to ‘enter’ the UK for customs purposes. It could also facilitate the movement
of goods from one part of Ireland to another when the quickest route goes through Northern
Ireland. In turn, it would allow exports from Northern Ireland to cross through Ireland for
onward delivery to markets outside the EU without having first to ‘enter’ the EU for customs
purposes. The Transit Convention also permits the use of the SAD as a transit document to
cover movement of goods between the EU and the other signatories and between these
signatories themselves.
But using the Common Transit Convention is far from frictionless trade. Making use
of the transit system incurs administrative and financial costs as well as restrictions on
movements. 30F
102 Transit movements must be declared, accepted and registered before the
movement takes place. This includes a deadline for delivering the goods at destination as well
as prescribing the route that will be followed by the haulier. The requirement to use sealed
101 Verhofstadt, G., “Speech to Members of the Houses of Oireacthas.” Dublin, 21 September 2017. 102 DG TAXUD has a 674-page document which describes transit procedures in greater detail.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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trucks would rule out the possibility of ‘groupage’ which means logistics firms can off-load
pallets or part-loads on their way through the UK which may help to increase capacity
utilisation of lorries and thus keep freight rates low. The Transit Convention approach would
also not seem appropriate for the movement of goods from one part of Ireland to another
where the shortest route was through Northern Ireland and where in most cases the transit
journey would be less than one hour.
2.4. Models of the future relationship
Different trade arrangements can potentially reduce some or all of the trade frictions that
would arise under a ‘hard’ Brexit with trade on MFN terms. The EU has entered into a wide
range of trade arrangements with different countries which differ in their scope and ambition,
and which might provide a template for the future trade relationship between the UK and the
EU27. Reference is made to different models which are conveniently summarised by
association with a country which exemplifies that relationship. A number of possible models
are set out in Figure 4. It is suggested that the overall level of integration increases as we
move from left to right across the table, but this is not necessarily the case in all dimensions.
The discussion highlights in particular the treatment of agri-food trade in these different
agreements.
It must be stressed that the UK government has explicitly ruled out the Canadian, Turkey and
Norway models but they are discussed here for the sake of completeness. Mrs May, in her
Florence speech, indicated that no existing EU trade arrangement would suit the UK. This is
because (a) of the size and significance of the economic and trade relationships between the
two parties (b) the fact that the UK would be negotiating a trade agreement on the basis that
it had exactly the same regulatory standards (although this argument overlooks the fact that
the argument for withdrawal is that the UK wishes to have the ability to change these
standards in the future). The UK’s preferred option is a bilateral FTA which gives it
most if not all of the benefits of the single market yet which meets the UK’s four red
lines. The EU’s chief negotiator Michel Barnier has ruled out this option on the grounds
that third countries cannot have the same rights and benefits, since they are not
subject to the same obligations.31F
103
103 “Introductory comments by Michel Barnier”, European Commission website, 6 December 2016.
Policy Department for Structural and Cohesion Policies
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Figure 19: Main elements of different EU trade arrangements
Element ‘Canada’ ‘Turkey’ ‘Ukraine’ ‘Swiss’ ‘Norway’
< Less ………………………………………..Degree of integration………………………………….More >
Non-
agricultural
trade with
EU
Liberalised for
goods plus
services
commitments
Liberalised
for goods
On way to being
liberalised for
goods and
services
Goods and
some
services
liberalised
Goods and
services
liberalised
Agricultural
trade with
EU
Partial
liberalisation
Partial
liberalisation
Partial
liberalisation
Partial
liberalisation
Partial
liberalisation
Trade with
third
countries
No impact Turkey must
apply EU
FTAs
No impact No impact No impact
Regulatory
coherence
Limited Aspiration Aspiration High Complete
Agricultural
policy
Unilateral CAP
aspiration
CAP aspiration* Unilateral Unilateral
Freedom of
movement
No No No Yes Yes
Budget
contributions
No No No Yes Yes
Dispute
settlement
WTO-like Limited WTO-like Limited Effective
Source: Own presentation. * The Georgian DCFTA has no aspiration that Georgia will adopt CAP regulations.
2.4.1. Canada
Traditionally, EU trade agreements were mainly about reducing tariffs on trade in goods. With
changes in production processes leading to the emergence of global supply chains, the growth
in the importance of services trade and the emergence of new platforms such as the digital
economy, other barriers to trade have become more important. As a result, the EU now seeks
deeper trade agreements (called Deep and Comprehensive Free Trade Agreements) which
address a wider range of issues. The objectives were set out in the Commission’s
Communication Trade, Growth and World Affairs as follows: “Cutting tariffs on industrial and
agricultural goods is still important, but the brunt of the challenge lies elsewhere. What will
make a bigger difference is market access for services and investment, opening public
procurement, better agreements on and enforcement of protection of IPR, unrestricted supply
of raw materials and energy, and, not in the least, overcoming regulatory barriers including
via the promotion of international standards. Through trade, we should also promote the
greening of the world economy and decent work” (DG TRADE 2010). The Comprehensive
Economic and Trade Agreement (CETA) with Canada is a representative example of this type
of agreement. 32F
104
The tariff reduction package is one of the most comprehensive the EU has achieved in the
context of an FTA; overall, tariffs for 98.6% of all Canadian tariff lines and 98.7% of all EU
tariff lines will ultimately be fully eliminated. For a few sensitive agricultural products,
there will be a special treatment based on TRQs or an exclusion from any tariff
reduction. This preferential access is without any prejudice to the rules and regulations that
the products in question need to satisfy on the respective import market (technical, sanitary
or phytosanitary rules for the security and the protection of the consumer, the user or the
environment, including food safety and labelling requirements). These rules remain untouched
by CETA.
104 This description of CETA provisions is based on DG TRADE, “CETA – Summary of the final negotiating results”,
2016.
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On technical barriers to trade, both sides agreed to further strengthen the links and
cooperation between their standard setting bodies as well as their testing, certification and
accreditation organisations. A separate protocol improves the recognition of conformity
assessment between the parties. It provides for a mechanism by which EU certification bodies
will be allowed to certify for the Canadian market according to Canadian technical regulations
and vice-versa.
There is a limited extension of the rights and obligations of the EU and of Canada
under the WTO SPS Agreement. As regards meats and meat products, the existing EU-
Canada Veterinary Agreement was integrated into CETA. As additional elements of trade
facilitation, the parties agreed to simplify the approval process for exporting establishments
and work on further elements aimed at minimising trade restrictions in the event of a disease
outbreak. In the area of plant health, CETA sets up new procedures that will facilitate the
approval process of plants, fruit and vegetables by Canada. Overall, CETA will streamline
approval processes and improve predictability of trade in animal and plant products but it does
not amend either the European or the Canadian SPS rules. All products need to fully comply
with applicable sanitary and phytosanitary standards of the importing Party.
CETA represents a minimalist model for future UK-EU27 trade relations. It would enable the
elimination of tariffs and mutual recognition for conformity assessment with each other’s
standards, but many of the additional trade costs identified in a ‘hard’ Brexit scenario would
remain. Dispute settlement is limited to a state-to-state dispute settlement mechanism very
similar to the WTO panel procedure.
2.4.2. Turkey
An incomplete customs union between the EU and Turkey was created on 1 January
1996, guaranteeing free circulation of industrial goods and processed agricultural
products. Tariffs are eliminated on these covered goods and Turkey agreed to adopt the
Union’s Common External Tariff. However, both sides can introduce anti-dumping duties on
each other and on third countries. The customs union does not deal with agriculture or services
and also has some gaps in its coverage of manufactures. It also has a very limited mechanism
for dealing with disputes.
There is a key asymmetry in the design of the customs union in that the EU is permitted
to negotiate FTAs with third countries, but Turkey is not permitted a seat at the negotiations
because it is not an EU member. This situation is exacerbated by the fact that Turkey has
been unable to obtain the same agreement from trading partners in parallel negotiations. This
means that Turkey has to apply external tariffs at the level negotiated by the EU but does not
gain reciprocal access to the third country’s market in return. This asymmetry is potentially
very costly for both parties as it risks the introduction of origin controls, the absence of which
is a key source of the benefits from the customs union (World Bank 2014).
Although Turkey is not an EU member state, it has the obligation to adopt the EU
acquis in areas related to the customs union. This includes rules and regulations in areas
such as intellectual and industrial property rights, competition rules, state aid, the custom
code and administrative cooperation. The EU agreed to accept without additional conformity
assessment checks Turkish goods for which relevant EU legislation had been incorporated,
although this did not happen until 2006. 33F
105 However, the transposition of new regulations
suffers from outdated procedures. The commitment to approximation of laws under the
customs union agreement should be seen as part of the more general alignment process as
part of Turkey’s application for EU membership. Although Turkey has made considerable
105 Holmes, P., “Staying in the Customs Union: Neither Soft Nor Simple”, 11 July 2017.
Policy Department for Structural and Cohesion Policies
154
strides in implementing the EU food safety, veterinary and plant health acquis, Turkish food
exports are not exempt from EU border checks. However, for some products (e.g. fruits and
vegetables, dairy) the EU has begun to recognise certificates issued by the Turkish authorities
that export produce complies with EU standards on the same basis as for other third countries.
Trade in agricultural products is addressed through a bilateral agriculture and
fisheries agreement which entered into force in 1998, and which provided for a 22-year
period for Turkey to “adjust its agricultural policy with a view to adopting, at the end of that
period, those measures of the common agricultural policy which must be applied in Turkey if
free movement of agricultural products between it and the Community is to be achieved.”
Pending the fulfilment of these conditions, the EU and Turkey grant each other preferential
treatment in agricultural goods and fishery products.
The customs union does not cover services, and particularly road transport services.
In the EU, bilateral road transport agreements including quota negotiation remain the
responsibility of the individual EU Member States. By limiting the number of Turkish-registered
vehicles that can carry goods in their territory, EU Member States set limits on Turkish goods
that can be transported to the EU by Turkish road transport operators (although they can still
be carried by EU road transport operators). This raises costs if the most efficient transport
operator can no longer be used.
The customs union with Turkey is the only example where the EU has entered into a customs
union arrangement with a third country of significant size (the customs unions with Andorra
and San Marino are discounted in this respect). It would have limited attractions as a model
for UK-EU27 trade relations in the future. The asymmetries in Turkish participation in decisions
stem from the initial expectation that the customs union would be a transitional arrangement
while Turkey moved towards full EU membership. The agreement goes further than CETA in
that it foresees the movement of goods between the two parties not on the basis of originating
status but on the fact that they comply with provisions on free circulation. In the case of agri-
food products, the requirement for this is that Turkey aligns its food safety, veterinary and
plant health legislation with the Union acquis, and that it adopts those elements of the CAP
which are necessary to ensure free movement can be achieved. As these requirements are
not yet in place, trade liberalisation in agriculture is limited to some preferential concessions.
Agri-food products traded between the EU and Turkey must comply with the standard rules
for third countries.
2.4.3. Ukraine
The European Parliament in its Brexit resolution of 5 April 2016 specifically noted that an
association agreement could be an appropriate model for the future UK-EU27 trade
relationship. Provision for Association Agreements is set out in Article 217 TFEU which ordains
that the Union “shall develop a special relationship with neighbouring countries, aiming to
establish an area of prosperity and good neighbourliness, founded on the values of the Union
and characterised by close and peaceful relations based on cooperation”. In 2014 the EU
concluded an association agreement with the Ukraine (along with similar agreements with
Georgia and Moldova) which some observers believe could be a useful template for a future
UK-EU27 agreement (Duff 2016; Emerson 2017).
The Ukraine’s association agreement goes beyond a trade agreement only as it provides for
future political cooperation in the field of justice and home affairs, foreign, security and
defence policies as well as specifying an elaborate institutional architecture. However, at its
heart is a Deep and Comprehensive Free Trade Agreement in which three of the four principles
of freedom of movement are respected. There is mostly tariff free access for goods, passports
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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for services, and customs cooperation. The movement of labour is subject to work permits
against the backdrop of visa liberalisation (Duff, 2016).
Trade in agricultural goods has been liberalised, but for sensitive commodities the tariff
preferences are limited by TRQs. The agreement also covers agricultural policy, where the
parties “shall cooperate to promote agricultural and rural policies, in particular through
progressive convergence of policies and legislation”. The parties agree to support “gradual
approximation to relevant EU laws and standards”, and a list of EU regulations which broadly
govern the EU’s Common Agricultural Policy is attached. However, no timetables are stipulated
for approximation. The view of Emerson and Movchan (2016) is that “the overall message is
that Ukraine retains much flexibility over how far or how fast to replicate elements of EU farm
policy”. The companion DCFTA signed with Georgia does not require approximation of EU
agricultural policy yet notably provides for full liberalisation of agricultural trade between the
two parties.
Ukraine will progressively adapt its technical regulations and standards to those of the EU.
Future negotiation of an Agreement on Conformity Assessment and Acceptance of Industrial
Products (ACAA) will provide that, in the specific sectors, covered trade between the parties
will take place under the same conditions as between EU Member States. The main treaty text
of each chapter is accompanied by an annex that lists the EU regulations and directives with
which Ukraine agrees to comply, mostly taking these laws in their entirety, but in some cases
identifying only those articles that apply, or may be excluded (Emerson 2017). DG TRADE
estimates that harmonisation and/or mutual recognition of technical standards should cut
existing non-tariff barriers in the agri-food sector by half compared to 2004 (DG TRADE 2013).
Ukraine is also committed to aligning its SPS and animal welfare legislation with that
of the EU. The SPS chapter deals with verification procedures, listing of establishments, levels
of checks, and settlement of trade problems. The Agreement did not itself define the list of
laws to be approximated, but instead required Ukraine to submit a Comprehensive Strategy
for the implementation of EU SPS standards within three months of its entry into force. In
February 2016 agreement was reached between Ukraine and the European Commission on
the contents of the Comprehensive Strategy, which is a list of roughly 255 EU regulations and
directives (Emerson and Movchan 2016). Rules are established for recognising the equivalence
of measures taken by Ukraine with those of the EU. The process should be launched by the
exporting party based on the “objective demonstration of equivalence” and the “objective
assessment of this demonstration” by the importing party. Where equivalence is recognised
there will be a reduction of physical checks at frontiers and simplified procedures.
Dispute settlement follows the state-to-state WTO panel approach but with faster procedures.
There is a procedure that obliges the arbitration panel to ask the Court of Justice of the
European Union (CJEU) for a binding preliminary ruling when there is a dispute concerning the
interpretation and application of EU law (i.e. EU legislation annexed to the Agreement). This
procedure aims to ensure a uniform interpretation and application of the Agreement’s annexed
EU legislation without jeopardising the exclusive jurisdiction of the CJEU to interpret EU law.
The ‘Ukraine model’ presupposes a high degree of integration, yet allows for flexibility in
deciding the areas where common standards would apply, it does not require acceptance of
free movement and CJEU rulings do not have direct effect. Unlike the Turkish model, there is
no presumption that Ukraine is a candidate country for EU membership. Advocates of this
model believe it could be developed as a template for a future UK-EU27 agreement
in ways that meet both the UK’s and EU27’s red lines. The EU, of course, might look
very differently at extending the provisions of the Ukraine DCFTA to a much more developed
economy.
Policy Department for Structural and Cohesion Policies
156
2.4.4. Switzerland
Relations between the EU and Switzerland are based on more than 120 bilateral
agreements,34F
106 including a free trade agreement in 1972 and two major series of sectoral
bilateral agreements that aligned a large portion of Swiss law with that of the EU at the time
of signing.35F
107 The first set of sectoral agreements (known as Bilaterals I) was signed in 1999
and entered into force in 2002. These seven agreements cover the issues of free movement
and mutual market opening including in agriculture. These agreements are linked by a
‘guillotine clause’ meaning that the suspension, denunciation or non-renewal of one agreement
causes the whole package to lapse. This became important following the Swiss referendum
vote in 2014 to restrict the free movement of persons from the EU. A further set of sectoral
agreements (Bilaterals II) was signed in 2004 and entered into force in 2005. These
agreements extended cooperation on asylum and free travel within the Schengen borders as
well as to new areas such as environment and taxation. These agreements give Switzerland
effective membership of the EU single market for goods. 36F
108 In contrast to the EEA Agreement,
the sectoral agreements between Switzerland and the EU do not cover the free movement of
services (except for some aspects such as civil aviation and overland transport or direct
insurance for damage). In return, the Swiss have agreed to make budgetary transfers to the
less prosperous EU Member States as a contribution to the economic and social cohesion of
the single market.
The bilateral Agreement on Agriculture between Switzerland and the EU, which regulates trade
of basic agricultural products, entered into force in 2002. Contrary to the FTA for industrial
products, this bilateral agreement does not create a free trade area; instead mutual market
access is improved by reducing tariffs and non-tariff barriers to trade for products of particular
interest to the EU and Switzerland (mainly fruits and vegetables, cheese, and meat
specialities). 37F
109
Switzerland maintains its own trade policy and its ability to enter into FTAs with third countries.
Goods passing between Switzerland and the EU must still pass through customs clearance to
check that documentation is in order and that the goods are what they say they are. However,
the bilateral Agreement on Agriculture simplifies trade in the agricultural sector by
reducing or even eliminating non-tariff barriers to trade. Since 2009, Switzerland and
the EU have formed a common veterinary area without veterinary controls on animals and
products of animal origin (extended in 2012 to Norway and Iceland). Switzerland applies the
same controls at its borders as does the EU. Certain technical regulations in the areas of plant
health, animal feed, seeds, organic farming, wine and spirits as well as quality norms for fruit
and vegetables are mutually recognized as being equivalent. Switzerland has introduced a
new General Food Law Revision which came into force on 1 May 2017 and which aligns the
majority of Swiss food law with EU food law.
From the EU perspective, this arrangement based on a network of bilateral agreements has a
number of disadvantages. Unlike the EEA Agreement, the nature of the bilateral agreements
with Switzerland is static, given that there are no proper mechanisms to adapt the agreements
to evolving EU legislation. EU law is adopted by Switzerland based on the dates of signature
106 For the full list of agreements, see Swiss Confederation, Department for European Affairs, “Liste der Abkommen
Schweiz - Europäische Union, in Kraft am 1. Januar 2017”. 107 For a review, see European Parliament, Fact Sheet “The European Economic Area (EEA), Switzerland and the
North”, June 2017. 108 Strictly, only EU Member States can be members of the single market. However, the EFTA members of the
European Economic Area are also often regarded as members, since they have a level of access to the single
market similar to that enjoyed by EU members. Similarly, Switzerland has a high degree of access to the single
market in goods without being an EU member (House of Commons International Trade Committee, 2017). 109 Swiss Confederation Federal Office for Agriculture, “Agreement on Agriculture”.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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of the agreements; although in some cases adaptations can be made by Joint Committees.
There is also an absence of surveillance and an efficient dispute settlement mechanism. For
some agreements, the case law of the CJEU is treated as binding until the date of signature,
but not beyond. The EU has therefore insisted that it will not allow Switzerland any
further single market access (e.g. as regards electricity) without a framework
institutional agreement to resolve these problems. EU-Swiss negotiations for a
framework institutional agreement were launched on 22 May 2014. 38F
110 Switzerland is resisting
EU pressure to agree a framework agreement emphasising that the bilateral path allows the
country to prosper while maintaining its independence. 39F
111 Negotiations on the framework
agreement are continuing. Because of these institutional deficiencies, it is unlikely that the EU
would be prepared to govern its future trade relations with the UK under a similar network of
bilateral agreements.
2.4.5. Norway
In this family of five models of EU trade relations with non-EU countries, the ‘Norway’ model
represents the model with the greatest degree of integration, although still less than
the single market within the EU Customs Union. Norway is an EFTA Member State and a
signatory to the European Economic Area agreement with the EU. EEA membership means
that there is free trade in goods and services between Norway and the EU with the exception
of agricultural trade. However, some liberalisation of agricultural trade has taken place under
a separate bilateral agreement between Norway and the EU which was updated and extended
in 2011.
The EEA agreement gives Norway membership of the single market by ensuring that
Norway adopts the EU’s regulatory acquis. It also incorporates the four freedoms of the
internal market (free movement of goods, people, services and capital) and related policies
(competition, transport, energy, and economic and monetary cooperation). The agreement
includes horizontal policies strictly related to the four freedoms: social policies (including
health and safety at work, labour law and the equal treatment of men and women); policies
on consumer protection, the environment, statistics and company law; and a number of
flanking policies, such as those relating to research and technological development, which are
not based on the EU acquis or legally binding acts, but are implemented through cooperation
activities.40F
112 Norway also makes a budget contribution to economic and social cohesion in the
single market through the EEA Financial Mechanism (referred to as EEA Grants and Norway
Grants).
Apart from excluding agricultural trade liberalisation with the EU, there are a
number of EU policy areas which the EEA Agreement does not cover. Norway continues
to have its own agricultural and fisheries policies. It is not a member of the EU customs area
so it has an independent trade policy (as a member of EFTA, Norway jointly negotiates free
trade agreements with third countries with the other EFTA Member States). The EEA
agreement does not cover broader co-operation in the areas of foreign and security policy,
nor justice and home affairs (although Norway like the other EFTA countries is part of the
Schengen area).
There are provisions specifying that the EFTA-EEA countries should be involved in preparing
EU acts but, although they can make representations, they do not participate in EU decision-
making. The EEA Joint Committee, composed of representatives of the EU and the three EFTA-
EEA states, meets monthly to decide which pieces of EU legislation should be incorporated into
the EEA. Legislation is formally incorporated by including the relevant acts in lists of protocols
110 The Council mandate for these negotiations is here. 111 Swiss Confederation, “Switzerland’s European policy – state of play”, accessed 20 October 2017. 112 European Parliament, Fact Sheet “The European Economic Area (EEA), Switzerland and the North”, June 2017.
Policy Department for Structural and Cohesion Policies
158
and annexes to the EEA Agreement. Several thousand acts have been incorporated into the
EEA Agreement in this way. Once an EU act has been incorporated into the EEA Agreement,
it must be transposed into the national legislation of the EFTA-EEA countries (if this is required
under their national legislation). This may simply require a governmental decision, or it may
require parliamentary approval. Transposition and application are monitored by the EFTA
Surveillance Authority and the EFTA Court.
The EFTA Court is a key part of the institutional structure. It plays the same role in
enforcing the laws regulating the single market for the three EFTA-EEA states as the CJEU
does for the EU Member States. The EFTA Court judges are appointed by the EFTA-EEA states.
Because the relevant EU laws are transposed into national legislation, individuals and
businesses can defend their rights under these laws in national courts. The EFTA Court has a
particular role in adjudicating on cases brought by the EFTA Surveillance Authority against a
Member State, and actions concerning the settlement of disputes between two or more EFTA
states regarding the interpretation or application of the EEA Agreement. It can also issue
advisory opinions interpreting the EEA Agreement on the request of a national court of an
EFTA-EEA state.
The Norway model has the great advantage that it would keep the UK as a member of the
single market and thus avoid border controls for regulatory purposes. However, unless at the
same time the UK also entered into a customs union with the EU27, border controls would still
be required (as they are between Norway and Sweden, and between Germany/France and
Switzerland) even if their practical effect could be minimised through a far-reaching customs
agreement. The UK government has to date ruled out an EEA-type trade arrangement on the
grounds that it would require the UK to transpose EU legislation in which it had no say in
deciding into UK law. This would run counter to the objective of Brexit of ‘taking back control’.
2.5. The WTO dimension of UK withdrawal
Paragraph 13 of the European Council’s negotiating guidelines deals broadly with honouring
international commitments.
“Following the withdrawal, the United Kingdom will no longer be covered by agreements
concluded by the Union or by Member States acting on its behalf or by the Union and its
Member States acting jointly. The Union will continue to have its rights and obligations in
relation to international agreements. In this respect, the European Council expects the
United Kingdom to honour its share of all international commitments contracted in the
context of its EU membership. In such instances, a constructive dialogue with the United
Kingdom on a possible common approach towards third country partners, international
organisations and conventions concerned should be engaged.”
From an agri-food perspective, the most significant sharing of international commitments will
be the division of the EU’s World Trade Organisation (WTO) commitments. The EU’s
commitments are listed in documents called ‘schedules of concessions’, which reflect the
specific tariff concessions and other commitments that it has given in the context of WTO
negotiations on trade liberalisation. For trade in goods in general, these usually consist of
maximum tariff levels which are often referred to as ‘bound tariffs’ or ‘tariff bindings’. In the
case of agricultural products, these concessions and commitments also relate to tariff rate
quotas, limits on export subsidies, and some kinds of domestic support. The content of the EU
schedules has changed over time to take account of successive enlargements as well as
different modifications, such as GATT Article XXVIII negotiations or rectification procedures.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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The UK is a member of the WTO in its own right, as are all other EU Member States
as well as the EU itself. At the moment, the UK’s commitments on maximum tariffs, tariff
rate quotas, domestic agricultural subsidies and agricultural export subsidies are bundled with
the EU’s schedule of concessions. Following Brexit, the UK will need to agree its own schedule
of concessions with other WTO members. 41 F
113 This should not be contentious in the case of its
commitments on bound tariffs where the general assumption is that the UK will inherit the
commitments in the EU schedule (although there will still be issues around the exchange rate
to use in converting EU tariffs in euro to UK tariffs in sterling). However, where the EU’s
commitments consist of quantitative bindings (for example, to import specific amounts of third
country lamb under preferential tariffs, or to limit non-exempt domestic support 42F
114 to a specific
ceiling), the question arises how this shared commitment will be allocated between the UK
and the EU27 after Brexit.
Two sets of quantitative bindings are scheduled under the WTO Agreement on
Agriculture. These are the EU’s commitments on limits on agricultural export subsidies and
on non-exempt domestic agricultural support.
Under the WTO Ministerial Decision on Export Competition adopted at the Nairobi WTO
Ministerial Council in December 2015, developed countries including the EU agreed to
immediately eliminate their remaining scheduled export subsidy entitlements as of the date
of adoption of that Decision. A delay was agreed for processed products, dairy products and
pigmeat until the end of 2020 for developed countries that had provided export subsidies for
these products in a recent period, provided that the quantities subsidised did not exceed the
quantities exported with subsidy in the years 2003-2005 and that no export subsidies would
be applied either to new products or new markets. The UK might be interested to acquire a
share of the EU entitlements to be able to use export subsidies for these products but in any
case they would lapse for both the UK and the EU27 by the end of 2020. 43F
115 In any case, the
EU has already made a voluntary commitment that it will not make further use of agricultural
export subsidies, so agreement on an allocation of the EU remaining entitlements should not
be difficult. The UK would not be able to make use of any entitlement to export subsidies on
the exempted products to subsidise exports of these products to the EU because no subsidies
were paid on exports to this market during the base years 2003-05. As any agreement with
the UK to share entitlements would reduce the EU27 entitlements by a corresponding amount,
an allocation formula based on relative shares of usage in a base period would not likely be
opposed by WTO members.
Somewhat similar considerations apply in the case of the EU commitments on non-
exempt domestic support. The amount of non-exempt support notified by the EU in its
latest notification to the WTO for the year 2013-2014 amounted to €5.97 billion compared to
its non-exempt domestic support ceiling (BTAMS) of €72.38 billion. 44F
116 Because the EU is only
using a fraction of its entitlement to non-exempt domestic support, agreement with the UK on
sharing the EU entitlement based on relative use in a base period should not be difficult
113 These issues are also discussed in House of Commons International Trade Committee, 2017, Chapter 2. 114 Not all domestic support is disciplined under the WTO Agreement on Agriculture. Support which is covered by
Annex 2 (Green Box), Article 6.5 (Blue Box) and de minimis support is exempted from the limit on a developed
country’s domestic support (called the Bound Total Aggregate Measurement of Support, BTAMS). All other types
of support are deemed trade-distorting and must be limited to the country’s BTAMS ceiling in its schedule of
concessions. Domestic support for WTO notifications is calculated according to procedures set out in Annexes 3
and 4 of the WTO Agreement on Agriculture. 115 The EU Mission to the WTO announced on 6 October 2017 that the EU had just submitted a revised goods
schedule to the WTO which includes both the outcome of recent negotiations linked to EU enlargement as well
as implementation of the Nairobi Decision. The revised schedule, which is awaiting certification, incorporates the
full Nairobi Decision including the exemptions until 2020 into the EU schedule. 116 WTO Notification by the European Union G/AG/N/EU/34, 8 February 2017.
Policy Department for Structural and Cohesion Policies
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(although there will be knotty technical problems to resolve in deciding on these shares). 45F
117
Any proposed allocation is also not likely to meet with opposition from other WTO Members
because any scheduled commitment by the UK would lead to a corresponding reduction in the
EU’s entitlement to provide trade-distorting support in the future (although those countries
that were unable to establish a BTAMS ceiling at the time of their accession might object to
the UK being able to do so now). Unlike in the case of export subsidies, where all entitlements
will anyway lapse less than two years after Brexit, the EU27 should be conscious that the
ceiling agreed for the UK will determine its margin for manoeuvre with respect to its future
use of trade-distorting support (e.g. its future use of coupled payments). The higher the ceiling
allocated to the UK, the greater the potential damage to EU27 producers if the UK were to
make full use of its entitlement at some point in the future.
The most controversial area in the division of the EU’s quantitative WTO
commitments concerns its scheduled tariff rate quotas (TRQs) (Downes 2017). These
scheduled TRQs arose at the end of the Uruguay Round as a way of preserving and ensuring
some minimum access for third countries in the face of tariffication.46F
118 Tariffication was the
obligation on WTO Members to replace all forms of import barriers (including quotas, import
licenses, voluntary export restraints, variable import levies and many others) by tariffs which
could then be bound and reduced over time. The fear was that the resulting tariffs might be
set so high that very little trade liberalisation might occur. As a result, two types of TRQs were
created under the WTO Agreement on Agriculture: minimum access and current access
TRQs.47F
119 Where there were no significant imports, minimum access TRQs equal to 5% of
domestic consumption in the base period 1986-88 had to be established. Where an importer
had current imports greater than these minimum amounts, current access TRQs had to be
introduced in order to maintain these export opportunities and allow them to increase. Further
TRQs have been created subsequently by the EU, for example, to compensate third countries
for the loss of market access arising from successive enlargements of the EU, or as part of the
resolution of a WTO dispute brought by a third country against the EU.
There were 85 TRQs in the EU’s initial schedule resulting from the Uruguay Round and this
number increased to 93 in 2006, 112 in 2009 and to 119 in 2013 covering meat, cereals, dairy
products, fruits and vegetables and more (Matthews, Salvatici, and Scoppola 2016). 48F
120 The
quotas vary considerably in both size and form. Some provide a zero duty in-quota tariff rate,
others have tariffs below the MFN rate. The administration of these TRQs is further complicated
because some are pre-allocated to specific exporters (country-specific TRQs) while others are
open to any exporter (global TRQs), and often further restricted by elaborate conditions.
117 Brink, L., “UK Brexit and WTO farm support limits”, capreform.eu, 13 July 2016. 118 Scheduled TRQs at the WTO should be distinguished from TRQs introduced as part of the EU’s FTAs with third
countries. TRQs are often used to provide some concessions to the FTA partner in the case of sensitive products. 119 These provisions are found in the Modalities for the establishment of specific binding commitments under the
reform programme circulated by the Chairman of the Market Access Group, WTO MTN.GNG/MA/W/24, 20
December 1993. 120 The full list is contained in the EU’s Schedule CLXXIII of which the latest version available on the WTO website
is dated 1 December 2016. See also the latest EU notification of imports under TRQs WTO G/AG/N/EU/37 dated
17 March 2017 which lists each scheduled TRQ, the quota quantity, actual imports and the actual fill rate. The
actual use of many of the EU’s TRQs as shown by the fill rate varies widely.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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The UK and EU27 have jointly written a letter to other WTO Members saying that
they will propose a methodology for splitting these TRQs based on relative
consumption shares of the TRQ imports over a recent period.49F
121 However, a bilateral
agreement on sharing out TRQ quantities has a different impact on other WTO Members
compared to sharing out export subsidy or domestic support entitlements. TRQs provide
market access opportunities to other WTO Members. A letter signed by a number of
agricultural exporters in response claims that a division of the existing EU TRQs between the
UK and the EU27 would diminish their export opportunities in both quantity and quality
terms.50F
122 While currently the full volume of a given TRQ can be imported into any Member
State, under the proposed approach those volumes would be reduced. Further, any product
sent into the UK or EU27 currently enjoys effectively ‘frictionless’ onward trade into the other
party, thanks to EU Customs Union and single market rules. If there are additional trade costs
following Brexit, these countries claim this would further diminish the ‘quality’ of access
provided. They also raise the technical problem that using import shares to mirror
consumption can give biased results given that product may be imported into a particular
country for technical reasons but then sent on to other EU Member States for consumption.
These other WTO Members therefore imply that the overall size of the combined TRQs after
Brexit should be increased to reflect this diminution of their export opportunities. 51F
123 In the
extreme, the suggestion has been made that the EU27 should maintain the full value of current
TRQs and that the UK should, in turn, also schedule TRQs of equal value. Such an outcome
would be opposed by UK and EU27 farmers because it would represent additional competition
from third country exporters on these markets.
This study is not the place to discuss the rights and wrongs of these positions on future
scheduled TRQ commitments, 52F
124 but there are implications for possible transition
arrangements particularly in the event of a ‘hard’ Brexit. In particular, splitting the EU TRQs
would mean that the UK TRQs would make no specific provision for existing UK-EU27
trade, and vice versa. This might not have any practical implications if the UK and the EU27
create a bilateral free trade agreement covering agricultural products on Brexit Day. However,
this omission has huge implications if tariff barriers are erected. These implications are further
explored in Chapter 4. There may also be a need to split TRQs specifically allocated to the EU
by other WTO members as part of their commitments, although the number and importance
of these TRQs has not been clarified.
121 UK Department of International Trade, “UK and EU set out proposals to WTO members for trade post-Brexit”,
11 October 2017. 122 The letter is available on the Financial Times website. 123 To meet this criticism, the UK and the EU27 could enter into their schedules that their TRQs represent a joint
obligation to meet their commitments to other WTO Members. 124 See Ungphakorn, P., “EU joins UK in post-Brexit WTO talks as data emerges as first major hurdle”, Agra Europe,
23 Oct 2017 for the most recent account of the TRQ discussions in Geneva at the time of writing this study.
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Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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3. Avoiding a ‘cliff edge’ for agri-food trade
KEY FINDINGS
Even if the UK and the EU27 conclude an agreement on the withdrawal conditions
and on the nature of their future relationship by 29 March 2019, traders face a
‘cliff-edge’ situation because of the lack of preparedness of the customs
administrations and other relevant authorities on both sides to manage border
controls; the lack of knowledge on the part of the large number of new businesses
that will face the need to seek customs clearance for their exports and imports; and
the almost certain congestion at major ports of entry and exit because of the extra
time required for these controls.
Both parties have indicated a willingness to consider a transition period. Both parties
have also indicated their ‘red lines’ regarding matters on which they would insist
during a transition period. There is little clarity, however, about how extensive
such a transition arrangement might be and what laws and regulations it
would have to cover to ensure that trade, including trade in agri-food products,
would continue on the same basis as it does today.
One option is that the UK would remain a Member State of the EU for a
further time-limited period, either by including a withdrawal date later than 29
March 2019 in the withdrawal agreement or by unanimously agreeing to extend the
Art.50 TEU deadline for the negotiations.
Another option is that the UK would agree to bind itself to following the
relevant Union acquis as a non-Member State for a time-limited period after
29 March 2019 while also joining a temporary customs union for this period.
Negotiating what would effectively be a complete if temporary trade agreement at
the same time as the parties are negotiating a withdrawal agreement and the
framework for their future relations may be more than can be achieved in the
remaining time available.
Fall-back positions which would avoid some but not all of the additional trade
costs, such as a temporary customs union on its own or just a free trade agreement
in goods, should be considered if it proves impossible to reach an agreement in which
the UK remains bound by the relevant Union acquis in the time available.
Following the mandate at the October 2017 meeting of the European Council
(Art.50), the General Council (Art. 50) and the Union negotiator should seek
to rapidly progress preparatory work particularly on models of transitional
arrangements. This should help to clarify what might be the minimum requirements
to ensure that trade can continue to take place with the UK as it does today for the
duration of the transition period, and what an appropriate balance of rights and
obligations might be during this period.
Specific issues for consideration will include whether UK membership of the CAP
and the Common Fisheries Policy (CFP) will be deemed necessary as a prerequisite
for continued free trade in agricultural and fishery products during the transition
period, as well as arrangements to ensure the continued protection of Geographical
Indications in the UK
The previous chapter discussed the nature of the additional trade costs that would face EU
agri-food traders in the event that the UK withdrew from the EU in a ‘hard’ Brexit, and possible
long-term trade arrangements between the UK and the EU27 which would help to mitigate
some or all of these trade costs.
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In this chapter, we assume that the Article 50 TEU negotiations proceed fruitfully and
there is an agreement both on the withdrawal conditions and on the nature of the
future relationship which is ratified by both parties before March 29 2019. However,
if the UK insists that this should be the date of its departure from the EU, it will result
in the ‘cliff edge’ problem that traders would be likely to face considerable disruption
immediately after Brexit Day. One reason is that both parties are highly likely not to have
agreed and ratified a fully-fledged trade agreement by this date, even if they have reached
agreement on an outline or a future framework. A second reason is that market access under
the future trade arrangement will inevitably be more restricted than is the case at present.
This implies increased administrative formalities when goods cross the UK-EU27 border, as
well as the possibility of increased physical checks and associated time delays, and time will
be needed to make these arrangements possible. For these reasons, both the EU27 and the
UK have recognised the need for a transitional or interim arrangement although there is
disagreement about what this might entail and how long it would last. This chapter examines
how agri-food trade could be affected by different transition arrangements.
There is also the possibility that, after 29 March 2019, trade between the UK and the
EU27 could reflect a ‘hard’ Brexit situation because the withdrawal negotiations
break down and the UK exits without a withdrawal agreement. Trade would then take
place on MFN terms and, given the likely bad blood between the parties in this outcome, the
prospect of a trade agreement would be postponed to some future date. In this situation, the
question of negotiating a transitional arrangement does not arise. A transitional arrangement
to avoid a ‘hard’ Brexit is only relevant when the parties either have ratified or are continuing
to negotiate their future relationship.
3.1. The need for transition arrangements
A key concern for EU27-UK agri-food trade in the event of a ‘hard’ Brexit, especially
for perishable food products, is the prospect of delays at the key cross-Channel
crossings. The UK, Ireland, France, Belgium and the Netherlands will have to make big
investments in customs systems and lorry parks at their ports to cope with the post-Brexit
surge of customs declarations and consignment checks. There are three main concerns: the
ability of customs systems to cope with the dramatic increase in consignments requiring
clearance, the huge increase in the number of firms with no previous experience that will now
need to access customs clearance procedures, and the prospect of logistical bottlenecks
because of the inability of the key cross-Channel entry points to cope with the extra time that
would be required for customs and health checks.
Lack of customs readiness. The specific challenges facing the UK have been well
documented, particularly in a recent National Audit Office (NAO) report on implementation of
the new UK Customs Declaration Service (CDS) by Her Majesty’s Revenue and Customs
(HMRC) (National Audit Office 2017). This replacement for the software currently handling
customs clearance in the UK was initiated partly in response to the need to upgrade UK
customs systems to meet the requirements of the new EU Union Customs Code. It is scheduled
to come into force in January 2019 so as to be ready to meet the EU deadline for all customs
procedures to be handled electronically after 2020, but the Brexit date at end March 2019
makes delivery of the new system even more time-sensitive.
All experience with the introduction of large and complex software systems suggests
there will be inevitable teething problems. The NAO report found that HMRC has made
progress in designing and developing the new software but that there is still a significant
amount of work to complete, and there is a risk that HMRC will not have the full functionality
and scope of CDS in place by March 2019 when the UK plans to leave the EU.
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Also, the addition of customs clearance requirements for current intra-EU trade
would make demands on the CDS system above its design capacity. Currently, there
are 141,000 UK traders who make customs declarations for trade outside the EU. HMRC
estimate that a further 180,000 traders will make declarations for the first time under the new
system, assuming that the UK leaves the customs union. Currently, there are around 55 million
declarations per year; this is expected to rise nearly five-fold to 255 million after March 2019
based on current levels of UK/EU27 trade. The current design capacity for the new CDS is to
handle 150 million declarations each year, rather than the estimated 255 million.
While these are the potential problems that the UK would face, similar challenges
face EU27 Member State customs administrations, many of which are also upgrading
systems to meet the new UCC requirements. There is virtually no information available on the
EU side on its preparedness to deal with exports to the UK or imports from the UK in the event
of a ‘hard’ Brexit. 53F
125 However, Ireland is expecting the number of customs transactions to
increase by a factor of ten. 54F
126
It is not only customs administrations that will be challenged to cope with UK-EU27 trade after
Brexit. Many plant and animal products are only able to enter through designated entry points
where physical inspections including laboratory tests can take place. There is very limited
capacity to handle all of the additional inspections that would be required if trade between the
UK and the EU27 also had to be inspected. For example, neither Calais nor Coquelles, the two
main points of entry into France, has a Border Inspection Post for animal products.
Lack of business readiness. It is not only the public authorities that need to prepare for a
’hard’ Brexit but also private businesses. New systems would have to be installed, and staff
would have to be trained. This will be especially important for the many businesses now
exporting within the single market that have no experience with customs clearance
procedures. As Joe Owen of the Institute for Government in the UK explained: 55F
127
“Again, the best way to understand timelines for customs is to look at past changes. The
EU’s Union Customs Code was designed in 2013, introduced across the EU in 2016 and
businesses have until 2020 to become compliant. While that seven-year planning horizon
could be reduced in the case of Brexit, could you really cut it back to just two years? That
is a heroic timeline.”
Logistical difficulties. Access to the UK market requires goods to be moved through UK
ports (including the Channel Tunnel in this designation) and UK access to the EU27 market
means moving goods through EU27 ports. The only exception is lorries crossing the only land
border between the UK and the EU27 between Northern Ireland and Ireland. As can be seen
from Figure 5, there are two main corridors which will be affected by a ‘hard’ Brexit,
the Dover Strait corridor across the Channel and the Dublin corridor across the Irish
Sea. Dover is the key artery for UK trade with continental Europe, with over 2.5 million heavy
goods vehicles (HGVs) passing through the port each year (10,000 per day) in either direction,
and a further 1.6 million freight movements through the Channel Tunnel.
125 Mr Jim Harra, Director General, Customer Strategy and Tax Design, HM Revenue and Customs, “Oral evidence:
Her Majesty's Revenue and Customs Annual Report and Accounts, HC 314”, UK House of Commons Treasury
Select Committee, 14 September 2017 stated: “But when it comes to post-Brexit arrangements, other member
states have been clear that that is a matter for the Commission and the Commission’s negotiating team to deal
with. So we are not having significant discussions with other customs authorities in the EU about what their
arrangements will be post-Brexit, but clearly, just as there is a task for the UK to deliver, there will be a task
for them as well. More insight into their preparedness for that will be very useful to us, but we don’t currently
have it (italics added)”. 126 “Brexit - Recent Developments and Future Negotiations: Discussion”, Evidence by Liam Irwin of the Office of the
Revenue Commissioners to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and
Taoiseach, 16 May 2017. 127 “Britain’s ‘heroic timeline’ to introduce new customs regime”, Financial Times, October 10, 2017.
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Both Dover and the Channel Tunnel crossings are designed for RoRo traffic (where goods
remain on the back of a lorry and are driven on to a ferry or the train for the Channel Tunnel
or, in the case of Dover, also for trailer transport (where the trailers are dropped off and picked
up on the other side by another haulier). Lorries account for 45% of all non-bulk goods traffic
with the EU and trailers for a further 24% (Owen, Shepheard, and Stojanovic 2017). A lorry
driver arriving at the port of entry will stop briefly only to show passport and boarding
information, and on arrival will be on the motorway within minutes. This compares to lorry
loads of goods entering Dover from outside the EU (around 3% of the total) which are subject
to checks that take 45 minutes on average (Meaney 2017). Currently, the Channel ports do
not have the parking facilities to cope with delays of this magnitude, leading to fears of
massive congestion for traffic on the cross-Channel and Irish Sea routes.
Figure 20: Annual lorry traffic and EU share of trade for selected major UK ports
in 2015
Source: Owen et al, 2017, reproduced with permission.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
167
3.2. Views of the parties on transition
3.2.1. Article 50 on transition
Article 50(3) TFEU provides for the following arrangements for withdrawal:
“3. The Treaties shall cease to apply to the State in question from the date of entry into
force of the withdrawal agreement or, failing that, two years after the notification referred
to in paragraph 2, unless the European Council, in agreement with the Member State
concerned, unanimously decides to extend this period.”
This Article provides for two possible withdrawal dates but makes no explicit
reference to a transition period. If there is a date agreed in the withdrawal agreement,
then the UK would remain a full member to that alternative date, and would then cease to be
a member altogether (as a curiosum, the exit date could also be before 29 March 2019 if this
were agreed as part of the withdrawal agreement). The withdrawal agreement needs only a
qualified majority of the EU27 Member States, as well as the approval of the European
Parliament. The two-year deadline which expires on 29 March 2019 is a default in the event
there is no such agreed date.
The second way envisaged by Article 50 TEU of extending the two-year period is for the period
to be extended without a withdrawal agreement in order to allow negotiations to continue.
This extension would require unanimous support of the EU27 and the UK. Again, the UK would
remain a full member of the EU. The new date could be a specific one, or it could be an open
extension ‘until further notice’. 56F
128
In the UK Prime Minister’s Florence speech in September 2017, Mrs May appeared to close off
these options. In her speech she stated:
“The United Kingdom will cease to be a member of the European Union on 29th March
2019. We will no longer sit at the European Council table or in the Council of Ministers, and
we will no longer have Members of the European Parliament”.
At face value, this implies that the UK is not interested in pursuing a withdrawal
agreement that sets a withdrawal date later than 29 March 2019. Nor is it interested
in trying to persuade the EU to unanimously extend the negotiating period. The speech states
that the UK intention is to leave the EU on 29 March 2019. EU traders should therefore prepare
for a change in trading conditions from that date.
3.2.2. The EU position on a transition period
The European Parliament expressed its view on transition arrangements in its Brexit resolution
of 5 April 2017:
“Believes that transitional arrangements ensuring legal certainty and continuity can only be
agreed between the European Union and the United Kingdom if they contain the right
balance of rights and obligations for both parties and preserve the integrity of the European
Union’s legal order, with the Court of Justice of the European Union responsible for settling
any legal challenges; believes, moreover, that any such arrangements must also be strictly
limited both in time – not exceeding three years – and in scope, as they can never be a
substitute for European Union membership.”
128 David Allen Green, “The problems of the Brexit transition”, Financial Times, 26 September 2017
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The European Council (Art. 50) in its guidelines in April 2017 accepted that transition
arrangements could be part of the withdrawal agreement. Having defined what it felt
were core principles in the negotiations, it emphasised that “The core principles set out above
should apply equally to the negotiations on an orderly withdrawal, to any preliminary and
preparatory discussions on the framework for a future relationship, and to any form of
transitional arrangements”. The core principles, in turn, are defined as follows:
The desire to have the United Kingdom as a close partner in the future.
Any agreement with the United Kingdom will have to be based on a balance of rights
and obligations, and ensure a level playing field.
Preserving the integrity of the Single Market excludes participation based on a sector-
by-sector approach.
A non-member of the Union, that does not live up to the same obligations as a member,
cannot have the same rights and enjoy the same benefits as a member.
The Union will preserve its autonomy as regards its decision-making as well as the role
of the Court of Justice of the European Union.
In accordance with the principle that nothing is agreed until everything is agreed,
individual items cannot be settled separately.
The Union will approach the negotiations with unified positions, and will engage with
the United Kingdom exclusively through the channels set out in these guidelines and in
the negotiating directives.
The guidelines went on to specify the following conditions around any transition arrangements.
“To the extent necessary and legally possible, the negotiations may also seek to determine
transition arrangements which are in the interest of the Union and, as appropriate, to
provide for bridges towards the foreseeable framework for the future relationship in the
light of the progress made. Any such transition arrangements must be clearly defined,
limited in time, and subject to effective enforcement mechanisms. Should a time-limited
prolongation of Union acquis be considered, this would require existing Union regulatory,
budgetary, supervisory, judiciary and enforcement instruments and structures to apply.”
Based on the guidelines, any transition arrangements would need to fulfil three conditions:
they must (a) be clearly defined, (b) limited in time, and (c) subject to effective enforcement
mechanisms. Furthermore, a transition which involves “a time-limited prolongation of Union
acquis” would also require “existing Union regulatory, budgetary, supervisory, judiciary and
enforcement instruments and structures to apply”. These conditions were repeated verbatim
in the Council’s negotiating directives to the EU negotiator Michel Barnier.
The European Parliament in its resolution on the state of play of negotiations with
the United Kingdom in October 2017 was even more explicit on the conditions that
should apply during a transition period:
“Notes, in line with its resolution of 5 April 2017, that the Prime Minister of the United
Kingdom proposed in her speech of 22 September 2017 a time-limited transitional period;
such a transition can only happen on the basis of the existing European Union regulatory,
budgetary, supervisory, judiciary, enforcement instruments and structures; underlines that
such a transitional period, when the United Kingdom is no longer a Member State, can only
be the continuation of the whole of the acquis communautaire which entails the full
application of the four freedoms (free movement of citizens, capital, services and goods),
and that this must take place without any limitation on the free movement of persons by
imposing any new conditions; stresses that such a transitional period can only be envisaged
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
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under the full jurisdiction of the Court of Justice of the European Union (‘ECJ’); insists that
such a transition period can only be agreed provided that a fully-fledged withdrawal
agreement covering all the issues pertaining to the United Kingdom’s withdrawal is
concluded.”
3.2.3. The UK position on a transition period
The British government has been clear from the outset that some form of transition
period would be desirable if not essential.57 F
129 The UK Prime Minister, Mrs May, in her
Lancaster House speech in January 2017, under the rubric Smooth orderly Brexit, set out the
objectives for the transition period. These were repeated verbatim in the subsequent UK White
Paper on exit from and new partnership with the European Union published in February 2017.
“But there is one further objective we are setting. For as I have said before – it is in no
one’s interests for there to be a cliff-edge for business or a threat to stability, as we change
from our existing relationship to a new partnership with the EU.
By this, I do not mean that we will seek some form of unlimited transitional status, in which
we find ourselves stuck forever in some kind of permanent political purgatory. That would
not be good for Britain, but nor do I believe it would be good for the EU.
Instead, I want us to have reached an agreement about our future partnership by the time
the 2-year Article 50 process has concluded. From that point onwards, we believe a phased
process of implementation, in which both Britain and the EU institutions and member states
prepare for the new arrangements that will exist between us will be in our mutual self-
interest. This will give businesses enough time to plan and prepare for those new
arrangements.
This might be about our immigration controls, customs systems or the way in which we co-
operate on criminal justice matters. Or it might be about the future legal and regulatory
framework for financial services. For each issue, the time we need to phase-in the new
arrangements may differ. Some might be introduced very quickly, some might take longer.
And the interim arrangements we rely upon are likely to be a matter of negotiation.
But the purpose is clear: we will seek to avoid a disruptive cliff-edge, and we will do
everything we can to phase in the new arrangements we require as Britain and the EU
move towards our new partnership”.
In her Article 50 letter to European Council President Donald Tusk on 29 March 2017, the UK
Prime Minister wrote:
“We should work together to minimise disruption and give as much certainty as possible.
Investors, businesses and citizens in both the UK and across the remaining 27 member
states - and those from third countries around the world - want to be able to plan. In order
to avoid any cliff-edge as we move from our current relationship to our future partnership,
people and businesses in both the UK and the EU would benefit from implementation
periods to adjust in a smooth and orderly way to new arrangements. It would help both
sides to minimise unnecessary disruption if we agree this principle early in the process.”
129 The UK side has made reference to an ‘implementation period’. This assumes that agreement has been reached
on the details of the future trade agreement and it is just a question of phasing in these arrangements. It reflects
the early belief expressed by UK Government Ministers that it would be a simple matter to agree both the
withdrawal arrangements and a future trade agreement and that all of this could be wrapped up within the two-
year period specified in Article 50. Events suggest that these expectations have proved over-optimistic, to put it
mildly.
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The UK view on an interim arrangement was further developed in the context of
future customs arrangements in its position paper on future customs arrangements
(HM Government 2017b).
“However, under either approach [to future customs arrangements], both the UK and EU
Member States would benefit from time to fully implement the new customs arrangements,
in order to avoid a cliff-edge for businesses and individuals on both sides. The Government
believes a model of close association with the EU Customs Union for a time-limited interim
period could achieve this. It would help both sides to minimise unnecessary disruption and
provide certainty for businesses and individuals if this principle were agreed early in the
process. The Government would need to explore the terms of such an interim arrangement
with the EU across a number of dimensions. The UK would intend to pursue new trade
negotiations with others once we leave the EU, though it would not bring into effect any
new arrangements with third countries which were not consistent with the terms of the
interim agreement”.
While the previous references to transition arrangements had simply made the case that such
arrangements would be in the mutual interest of both parties, this was the first reference to
the concrete form that a transitional arrangement might take. The UK Prime Minister was still
hedging her bets (talking about an unspecified “model of close association with the EU
Customs Union” rather than the more straightforward idea of a temporary customs union
between the two parties). She also laid down a marker that the UK would intend to enter into
negotiations with third countries on possible free trade agreements, although she recognised
that these could not be implemented if they were “not consistent with the terms of the interim
agreement”. That the customs paper put emphasis on maintaining a close association with the
EU Customs Union but made no reference to regulatory coherence could simply reflect the fact
that the paper was focused on customs arrangements.
The UK Prime Minister went much further in outlining her views on a transition
period in her Florence speech in September 2017:
“But the fact is that, at that point [i.e. 29 March 2019], neither the UK - nor the EU and its
Members States - will be in a position to implement smoothly many of the detailed
arrangements that will underpin this new relationship we seek.
Neither is the European Union legally able to conclude an agreement with the UK as an
external partner while it is itself still part of the European Union.
And such an agreement on the future partnership will require the appropriate legal
ratification, which would take time.
It is also the case that people and businesses – both in the UK and in the EU – would benefit
from a period to adjust to the new arrangements in a smooth and orderly way.
As I said in my speech at Lancaster House a period of implementation would be in our
mutual interest. That is why I am proposing that there should be such a period after the
UK leaves the EU.
Clearly people, businesses and public services should only have to plan for one set of
changes in the relationship between the UK and the EU.
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So during the implementation period access to one another’s markets should continue on
current terms and Britain also should continue to take part in existing security measures.
And I know businesses, in particular, would welcome the certainty this would provide.
The framework for this strictly time-limited period, which can be agreed under Article 50,
would be the existing structure of EU rules and regulations.
How long the period is should be determined simply by how long it will take to prepare and
implement the new processes and new systems that will underpin that future partnership.
For example, it will take time to put in place the new immigration system required to re-
take control of the UK’s borders.
So during the implementation period, people will continue to be able to come and live and
work in the UK; but there will be a registration system – an essential preparation for the
new regime.
As of today, these considerations point to an implementation period of around two years.
But because I don’t believe that either the EU or the British people will want the UK to stay
longer in the existing structures than is necessary, we could also agree to bring forward
aspects of that future framework such as new dispute resolution mechanisms more quickly
if this can be done smoothly.
It is clear that what would be most helpful to people and businesses on both sides, who
want this process to be smooth and orderly, is for us to agree the detailed arrangements
for this implementation period as early as possible. Although we recognise that the EU
institutions will need to adopt a formal position.
And at the heart of these arrangements, there should be a clear double lock: a guarantee
that there will be a period of implementation giving businesses and people alike the
certainty that they will be able to prepare for the change; and a guarantee that this
implementation period will be time-limited, giving everyone the certainty that this will not
go on for ever.
These arrangements will create valuable certainty.”
This speech goes much further in spelling out how the transition/implementation period might
work by proposing a time-limited implementation period “based on current terms”. For the
first time the UK has indicated that the transition period should cover rules as well as the
customs union. Nonetheless, there is evidence of different views within the UK
Conservative Party on some of the details of this transition. In the run up to the
Conservative Party conference in October 2017 the UK Foreign Secretary Boris Johnson gave
an interview to The Sun newspaper in which he set out four ‘red lines’ which expanded on the
Florence speech. 58F
130 These were:
The transition period post-Brexit must be a maximum of 2 years and not a second more.
UK must refuse to accept new EU or European Court of Justice (ECJ) rulings during
transition.
No payments for single market access when transition ends.
UK must not agree to shadow EU rules to gain access to market.
130 Newton Dunn,, T., “Brexy beast: Boris Johnson reveals his four Brexit ‘red lines’ for Theresa May”, The Sun, 29
September 2017.
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On the one hand, the Foreign Secretary appeared to want a stricter time limit for the transition
period where the Prime Minister had suggested a period of ‘around two years’ but in any case
based on the length of time needed to put new processes and systems in place. Where the
Prime Minister had talked about “new dispute settlement mechanisms”, the Foreign Secretary
was explicit that these should not require acceptance by the UK of CJEU rulings. Where the
Prime Minister had talked about accepting EU rules and regulations during the transition, the
Foreign Secretary was explicit that the UK should not be required to implement new EU rules
and regulations during transition. Many will agree with his position given that the UK will not
have any representation on EU decision-making bodies during this period. On the other hand,
the Foreign Secretary was clear that the UK should not make payments for single market
access when transition ends, leaving open whether he would support budgetary contributions
for single market access during the transition.
Further details on the UK view of the transition period were provided in the Prime
Minister’s statement to and in answers to questions in the House of Commons on the
Brexit negotiations on 9 October 2017.59F
131 In response to a question to explain how the
arrangements she was seeking for the transition differ from being a member of the single
market and the Customs Union for the period of the transition the Prime Minister replied:
“I have to say to the right hon. Gentleman that, as we leave the European Union in March
2019, we will leave full membership of the customs union and full membership of the single
market. What we then want is a period of time when practical changes can be made, as we
move towards the end state—the trade agreement—that we will have agreed with the
European Union. We have to negotiate for the implementation period what the
arrangements would be. We have suggested that that should be a new agreement—an
agreement that we should be able to operate on the same basis and on the same rules and
regulations.”
The Prime Minister did not make clear in what way a new agreement might differ from
membership of the Customs Union and single market while permitting trade to continue on
the same basis as when the UK was a member of the Customs Union and single market.
In response to a further question to clarify the consistency between being out of the Customs
Union and the single market while still trading on the same basis as firms do at the moment,
the Prime Minister replied:
“As of 29 March 2019, we leave the European Union. That means we leave full membership
of the customs union and full membership of the single market. … during that
[implementation] period what we are proposing is that it is in the interests of individuals
and businesses on all sides to be able to continue to operate on the same basis as they
do today”.
When asked specifically whether she agreed with the views of the European Parliament in its
Brexit resolution of 3 October 2017 that a transition period can happen only on the basis of
the existing EU regulatory, budgetary, supervisory, judiciary and enforcement instruments,
her response was:
“That is the view of the European Parliament in its resolution. In my statement and my
Florence speech, I put out that we expect that the implementation period will be based
on the current rules and regulations, but of course this is part of the negotiation”.
131 May, T., “UK plans for leaving the EU”, Statement to the UK House of Commons, 9 October 2017.
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In responding to an invitation to confirm that the rulings of the CJEU would no longer apply in
the UK after 29 March 2019, and that any new laws introduced by the EU27 after that date
would have no effect until agreed specifically the UK Parliament, the Prime Minister clarified
that “We will have to negotiate what will operate during the implementation period. Yes, that
may mean that we start off with the ECJ still governing the rules we are part of for that period,
but we are also clear that we can bring forward discussions and agreements on issues such as
a dispute resolution mechanism. If we can bring that forward at an earlier stage, we would
wish to do so”. This was the first time the UK indicated that it would be willing to
accept a role for the CJEU during the transition.
On the question regarding the status of legislation that might come into effect during the
transition period, the Prime Minister distinguished between legislation which has already been
introduced and new legislation that might be proposed during the transition period. With
respect to legislative proposals which were brought forward before Brexit Day, she pointed
out that the UK would be in a position to make clear in the withdrawal agreement whether
that was a regulation it would be willing to sign up to or not. With respect to legislative
proposals introduced after Brexit Day but during the transition period, her view was that the
EU legislative process moves so slowly that, in practice, this would not be an issue.
The UK Prime Minister’s Florence speech and statement and replies to the House of
Commons gives much more substance to how the UK envisages the transition period
and the conditions it is prepared to accept during that period. The following four points
can be highlighted as underlying the UK position:
During the implementation period access to one another’s markets should continue “on
current terms”. The framework during this period would be “the existing structure of EU
rules and regulations”. On the other hand, the Prime Minister is saying that “the UK will
leave full membership of the customs union and full membership of the single market”. It
is hard to see these positions as consistent. The customs union case might be
reconciled as follows. By joining a temporary customs union with the EU27 for the
transition period, the UK would continue to apply the Common Commercial Policy including
the CET. But it would use its position as a non-EU Member State to open free trade
negotiations with third countries, something it could not do while an EU Member State,
while accepting that any agreements could not be implemented until the end of the
transition period. The desire to retain the benefits of the single market while leaving the
single market is, at face value, more difficult to reconcile. One interpretation might be that
the UK would like to ‘take back control’ immediately of those aspects of the Union acquis
which are not essential to the operation of the single market, while being willing to observe
the Union acquis which underpins the single market. However, the Florence speech puts
down a marker that, while EU27 citizens will continue to be able to come and live and work
in the UK, the UK would want to introduce a registration system.
While the length of the transition period should be strictly time-limited, the
Florence speech leaves open to further negotiations what this length might be.
The length “should be determined by how long it will take to prepare and implement the
new processes and new systems that will underpin the future partnership” and the
suggestion is made that these considerations “point to an implementation period of around
two years”. The speech also suggests that different aspects of the new arrangements might
be phased in at different times, and that some aspects could be introduced earlier than
others. New dispute mechanism procedures are specifically highlighted in this context.
The UK has accepted that it would be under the jurisdiction of the CJEU during a
transition arrangement, something which should facilitate an agreement which would
bind the UK to implementing the relevant Union acquis during this period.
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While the Florence speech states that the UK would be prepared to accept the EU’s rules
and regulations during the transition period, it makes no reference to a willingness to
make budgetary contributions towards economic and social cohesion in the single
market during this period (which would be separate to any financial settlement agreed as
part of the withdrawal negotiations).
3.3. Extending the date for Brexit beyond 29 March 2019
Although the UK government appears to have ruled this out, it is worth considering further
the implications of this option given that it is by far the easiest and most obvious way of
maintaining the existing trade relationship during the transition period. 60F
132 It does this by
avoiding the need for a transition period, because the UK would remain a full member of
the EU, with the attendant rights and obligations of membership, until a future agreement
was ready to be put in place. The UK would continue to accept the four freedoms, decisions of
the CJEU would continue to have direct effect in the UK (while also protecting the rights of UK
nationals and businesses in other parts of the EU), the UK would continue to have a say on
proposed new regulations during this period, and the UK would continue to make budgetary
contributions to the EU. In return, trade would continue exactly as it does today. This solution
has the great merit that it would avoid Governments and businesses, both in the EU and the
UK, having to change processes twice: once to reflect the terms of the transition and again to
reflect the terms of the new relationship. It would also avoid the need for any border checks
on the Northern Ireland border during the transition period.
The first major obstacle to this solution is on the British side. The government would
be open to the charge that it had not delivered Brexit. This criticism could be countered if a
firm date for Brexit were agreed even if later than 29 March 2019. This could be achieved
either by concluding a withdrawal agreement before 29 March 2019 which specified an
alternative, later, date (which would have to be agreed by a qualified majority of the EU27
Member States and gain the consent of the European Parliament), or by unanimous agreement
of the EU27 to extend the period for the withdrawal negotiations to a specific future date. It
could be further guaranteed on the UK side by specifying a withdrawal date in the European
Union (Withdrawal) Bill or through another Act of Parliament.
The next UK general election is scheduled to be held on 5 May 2022 under the Fixed-term
Parliaments Act 2011 (an election may be held at an earlier date in the event of an early
election motion being passed by a super-majority of two-thirds in the House of Commons, a
vote of no confidence in the government or other exceptional circumstances). Thus, the date
for UK withdrawal from the EU could be extended by three years beyond 29 March 2019 while
still ensuring that the next UK general election would be held when the UK was no longer an
EU Member State. The UK Conservative Party would still be able to fight that election on the
basis that it had delivered Brexit. From a British perspective, opposition to this solution is
more likely to emerge from the internal politics of the UK Conservative Party where one wing
seems determined on exit regardless of the economic consequences.
Accepting that the UK would remain an EU Member State for, say, a further three
years after 29 March 2019 would likely cause equal complications on the EU side. In
May 2019 there will be elections to the European Parliament for a five-year period. If the UK
were still a Member State it would be entitled to elect MEPs in those elections. The EU is about
to embark on the negotiations for its next Multi-Annual Financial Framework (MFF). Indeed,
the Commission proposal for the next MFF which was due to be presented before the end of
2017 has already been delayed to the first half of 2018 because of the uncertainty around the
132 See Winters, A., Holmes, P. and Szyszczak, E. “Transition made easy”, UK Trade Policy Observatory, 26
September 2017.
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extent of future UK contributions to the EU budget. Agreeing the MFF is always contentious
because there are net contributors to and net beneficiaries from the EU budget. Thus,
agreement on both its size and composition involves decisions on the distribution of resources
between Member States. The UK is the second largest net contributor to the UK budget so
whether it is a Member State or not when the MFF negotiations take place will have a
determining impact on the outcome. Nonetheless, a time-limited extension of UK membership
would be manageable. The objections from the EU side are more likely to be political rather
than practical.
3.4. Extending the EU acquis to a non-member
The second option is that when the UK leaves the EU there is agreement to maintain current
rules and regulations during a transition period. Some object to the suggestion that one can
discuss a transition or implementation period without knowing the final destination. 61F
133 This
criticism may be valid with respect to the concept of an implementation period, which is
premised on the idea that the terms of the future relationship will be fully negotiated by 29
March 2019. However, there is no ambiguity around the concept of a transition period
which simply aims to maintain trade on the same basis as at present; the only issue
is how to achieve this.
The UK would no longer be an EU Member State but it would agree to be bound to apply the
Union’s rules to ensure the continuation of trade on current terms during this period. The EU
has opened this option by saying that the Union acquis must apply to the UK during the
transition period. The UK has accepted that EU rules and regulations should apply during this
period, although with considerable ambiguity around how that would be achieved if the UK
were at the same time to leave the single market and the Customs Union.
From the perspective of agri-food trade, an extension of the EU acquis, which would
also have to include the UK entering into a temporary customs union with the EU,
would ensure the continuation of the trade status quo for the duration of the
transition period. This solution would also avoid Governments and businesses, both in the
EU and the UK, having to change processes twice: once to reflect the terms of the transition
and again to reflect the terms of the new relationship. It would also avoid the need for any
border checks on the Northern Ireland border during the transition period.
There would need to be clarity around how to interpret the meaning of phrases such as “a
time-limited prolongation of Union acquis” (European Council), “the continuation of the whole
of the acquis communautaire which entails the full application of the four freedoms” (European
Parliament) and “continued access to one another’s markets on current terms” (UK Prime
Minister). For example, does the position of the European Council and European Parliament
imply that the UK must continue to operate its agricultural policy under the rules of the
Common Agricultural Policy during the transition period? Would the UK have to continue to
apply the rules of the Common Fisheries Policy? There are a wide number of Union policies,
including energy, climate, science and research, and environment, which are not directly
133 In response to a question following her statement to the House of Commons reporting on the outcome of the
European Council meeting 20-21 October 2017, the Prime Minister stated: “… the point of the implementation
period is to put in place the practical changes necessary to move to the future partnership, and in order to have
that you need to know what that future partnership is going to be” (Hansard, “European Council”, 23 October
2017). At face value, this seems to differ from the concept of a transition period put forward by the Prime
Minister previously which is intended to maintain trade “on current terms”. Because it seems more appropriate
to put more weight on the message in the considered statements that the Prime Minister has made, and because
it is unlikely that the details of the future trade relationship can be agreed by summer of 2018, the transition
period concept used in this chapter is that it is intended to maintain the status quo in trade as far as possible.
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linked to trade. 62F
134 While the UK, under its European Union (Withdrawal) Bill, intends to
replicate these policies into British law on Brexit Day, would the UK be able to make changes
to regulations in these areas during the transition period?
The European Parliament has already resolved that any future trade agreement should bind
the UK to respecting international norms and standards in a range of non-trade policy areas
such as environment, climate change, the fight against tax evasion and avoidance, fair
competition, and trade and social rights. Presumably this requirement would also attach to a
transition agreement. The UK might argue that, as a non-Member State at that point, it should
not be restricted in the policies it adopts which are not directly related to trade. At a minimum,
it would be necessary to ensure that giving the UK policy autonomy in these areas does not
risk that UK producers could be advantaged relative to EU27 producers within the single
market during the transition period.
As a hypothetical example, if the UK were free to determine its own agricultural policy during
the transition period, it could opt to re-introduce a form of the deficiency payments support
mechanism that it used prior to its accession to the EU. Deficiency payments are a form of
counter-cyclical coupled payments and would not likely be constrained by any Bound Total
Aggregate Measurement of Support ceiling that the UK may include in its schedule of WTO
concessions. Coupled payments are permitted in the EU under the CAP although they are a
voluntary option for Member States and are subject to conditions including a total expenditure
ceiling. If UK farmers were able to receive more generous coupled payments during the
transition period, EU farmers might view this as unfair competition. Norway is a member of
the single market through its EEA membership, and provides support to its farmers at a much
higher level than in the EU, but does not enjoy duty-free access for its agricultural exports to
the EU. Any greater policy autonomy for the UK during the transition period may need to be
accompanied by some agreement on state aid rules including agricultural support policies.
However, this option begs the question how the UK can be both outside the EU, as it will be
after 29 March 2019 according to the Prime Minister’s Florence speech, and also adhere to the
Union acquis?63F
135
It would not be sufficient just to ‘extend’ EU law to the UK after Brexit because, after that
date, the UK will no longer be an EU member. To take an obvious point, if the UK leaves the
EU on 29 March 2019, it will no longer be a member of the Customs Union. Article 28(1) TFEU
reads: “The Union shall comprise a customs union which shall cover all trade in goods and
which shall involve the prohibition between Member States of customs duties on imports and
exports and of all charges having equivalent effect, and the adoption of a common customs
tariff in their relations with third countries”. The UK, as a third country, would clearly not be
a member of this EU Customs Union. To remain in a customs union with the EU would require
a separate (even if temporary) customs union agreement. 64F
136
Any transitional agreement would have to be a trade or association agreement
between the UK and the EU27 because the UK, at that point, would be a third country.
A mandate would have to be given to allow the Article 50 TEU negotiations to negotiate a
transitional trade agreement under Article 207 or a transitional association agreement under
Article 217 TFEU (the EEA agreement was negotiated as an association agreement under
134 The distinction is essentially between Union legislation which has relevance to the European Economic Area and
legislation which does not, though it must be recognised that the line is not always easy to draw. 135 See Frantziou and Łazowski (2017) on the complications of the transition period although they do not seem to
recognise that the UK would be a non-EU third country during this period. 136 See Holmes, P., “Staying in the Customs Union: Neither Soft Nor Simple”, Scottish Centre on European
Relations”, 11 July 2017 and Stojanovic, A., “Five things to know about a customs union”, Institute for
Government, 5 July 2017.
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Article 217 although it might be hard to justify this route in the case of a transitional
agreement). Some legal scholars debate whether such a mandate would be legal until the UK
had actually left the EU and become a third country. Negotiating a transitional trade agreement
that effectively replicated the Union acquis would in itself be a mammoth task, it could hardly
be just cut and paste. “The UK and EU will need to design an agreement whereby all EU
Regulations and Directives continued to apply in the UK with complete certainty. This includes
all the mutual recognition of testing and certification elements of the Single Market and the
free mobility of labour”.65F
137
There is also an international dimension. This option assumes that during the transition
period the UK is no longer an EU Member State but would be part of a (temporary) customs
union with the EU27. As a part of a customs agreement the UK would be required to adhere
to the FTAs entered into by the EU with third countries. While the UK might be very happy to
do this, it presumably would require individual negotiations with each FTA partner to revise
the agreements to recognise the non-EU status of the UK after 29 March 2019.
Even if Article 207/217 TFEU negotiations could be managed, the status of such an agreement
under EU law is not certain. Because it might cover issues on which EU member states retain
competence, national parliaments may have to be involved in ratification of the transition deal
on the EU side.66F
138 The Commission might provisionally apply those aspects that fell within its
sole competence from Brexit Day, but the whole architecture of this construction has a very
uncertain feel.
For these reasons, there are doubts whether this option (a new transitional trade
arrangement to come into effect immediately after March 29 2019) is indeed
feasible. The UK and the EU27 would be negotiating both a highly complex international
agreement and their future relationship at the same time. As Frantziou and Łazowski (2017)
observe: “A good transitional arrangement would have to resolve so many of the sticking
points in the negotiations that it would be almost as difficult to achieve as a permanent
arrangement”. They conclude that, if most features of membership are maintained in that
transition, it would make more sense to extend the two-year period laid down in Article 50
TEU to a more workable timeline for finding a durable solution.
3.5. EFTA/EEA membership as an interim arrangement
One possible way in which the UK might be bound by the EU acquis during the transition period
would be if it sought temporary membership of EFTA and the EEA. The main argument for this
solution is that the EEA is an already existing trade agreement with non-EU countries and thus
can provide the appropriate text. It would be similar to the ‘Norway’ model discussed in
Chapter 2, but with the proviso that it would be intended as a temporary solution for the
transition period. However, there are formidable scoping, legal and practical problems to
adopting this solution.
Joining the EEA agreement would maintain tariff-free trade on non-agricultural goods between
the UK and the EU27. It would allow continued time-limited membership of the EU single
market. But significant adaptation would still be necessary. EEA membership does not involve
a customs union with the EU. The EEA states are free to establish their own trade policies with
third countries. Border checks are still necessary to check on origin and for tax purposes.
Significantly, the EEA does not cover agri-food trade and EEA countries are free to
137 Winters, Holms and Szyszczak, op. cit. 138 “Furthermore, any international agreement between the EU and the state which has withdrawn defining their
future relationship would require ratification in the remaining Member States, unless the agreement were only
to cover matters falling within the exclusive competence of the European Union” (Carmona et al, 2017, p. 7).
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adopt their own agricultural and fisheries policies. If the UK and the EU27 wished to
maintain essentially the same trade relations in the transition period as now, it would be
necessary to extend the EEA agreement by adding a temporary customs union as well as a
bilateral agricultural agreement maintaining tariff-free trade.
Objections to the EEA model as the long-term framework for UK-EU27 trade relations were
outlined in the previous chapter. They include the fact that the UK would be required to
implement EU rules and regulations over which it had no say, that it requires continued UK
budgetary payments to cohesion countries for single market membership, and that it requires
acceptance of the four freedoms, including freedom of movement of labour. When viewing the
EEA model as a way forward for the transition period, these implications might be – possibly
– acceptable to the UK. But there are other, legal as well as practical, difficulties in the way of
this approach.
One set of legal arguments revolves around the issue whether the UK would, in fact, remain
a member of the EEA even though it had left the EU. The basis for this argument is that the
UK (along with all other EU Member States) has separately ratified the EEA agreement. Thus,
it would remain a member and remain within the single market unless it formally withdraws
from the EEA using the mechanism laid down in Article 127 of the agreement. Litigation was
brought in the UK courts to test that very point, but the application for judicial review was
considered to be premature. 67F
139 Critics of this argument point out that Article 126 of the EEA
agreement limits the territorial application of the agreement to the EU and to the participating
EFTA states. “In short, once the UK leaves the EU – and absent any other agreement – any
attempt to enforce the agreement would encounter significant legal objections in terms of its
material and territorial scope”.68F
140
However, it is argued that it would still be open to the UK to join the EEA which, given Article
126 of the EEA Agreement, would also require it to seek admission first to EFTA. First, note
the considerable practical difficulties in this scenario. It would involve the UK (a) seeking
membership of EFTA (b) applying to accede to the EEA under the terms laid out in Article 128
of the EEA Agreement (which requires an agreement between the contracting parties and the
state joining the agreement and for the agreement to be ratified by the contracting states in
accordance with their own procedures). Moreover, to replicate current market access
conditions, it would be necessary in addition for the UK (c) to negotiate additional bilateral
agreements with the EU to create a temporary customs union as well as continued free trade
in agricultural products, all to avoid additional trade costs during a transitional period which
one side says would not last longer than two years.
The various negotiations leading up to these agreements would all involve points of substance
and disagreement which may not simply be resolved by cutting and pasting existing text, for
examples, issues around the UK’s budget contribution to the EEA Financial Mechanism,
whether the UK would be allowed to invoke some of the EEA limits on freedom of movement,
increasing the size of the EFTA Court to include a UK judge, etc. As a result, observers such
as Jean-Claude Piris, former Director General of the Legal Service to the Council of the EU,
have argued that the time this will take and the procedural obstacles to be overcome do not
make the EFTA/EEA option a suitable vehicle for a transitional arrangement. 69F
141
139 Monckton Chambers, “Single market challenge: Adrian Yalland and Peter Wilding v SSEU (Article 127 EEA)”, 23
January 2017. 140 Armstrong, K., “Staying in the Single Market: Not so EEAsy?”, Brexit Time, 8 September 2017. 141 Piris, J.-C., “Why the UK will not become an EEA member after Brexit”, E!Sharp, September 2017.
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This view would appear to be shared by the UK. In response to a question whether continuing
membership of the single market might be worse than membership of the EU, the Secretary
of State for Exiting the EU, David Davis, replied: 70F
142
“The simple truth is that membership of the European Free Trade Association, for example,
which would be one way to retain EEA [European Economic Area] membership, would do
exactly that: it would keep us within the acquis, and it would keep us within the
requirements of free movement, albeit with some limitations, but none of those have
worked so far. In many ways, it is the worst of all outcomes. We did consider it—I gave it
some considerable thought, maybe as an interim measure—but it seemed to me to
be more complicated, more difficult and less beneficial than other options” (bolding added).
Some legal scholars have tried to identify a possible legal pathway using the EFTA/EAA route
which, even if convoluted, might be feasible. Armstrong has pointed out that “there is nothing
in principle to prevent the EFTA Council preparing a decision unanimously approving UK
membership of EFTA that would come into force simultaneously with the UK’s withdrawal from
the EU. At the same time, the UK’s accession to the EEA Agreement could be agreed by the
EEA Council and signed by the contracting parties ready for formal ratification. Pending
ratification, an exchange of letters could secure its provisional application without the hiatus
that Piris anticipated”.71F
143
However, it may not be possible for the UK both to join EFTA (in order to accede to the EEA
agreement), and to be in a customs union with the EU. 72F
144 Article 56 of the EFTA Convention
deals with accession and association. Under Article 56(3), there is an obligation on an acceding
state to apply “to become a party to the free trade agreements between the Member States
on the one hand and third states, unions of states or international organisations on the other”.
This would mean that the UK would need to apply to join the 27 FTAs that EFTA countries
currently have with 38 countries. 73F
145 But the UK could not apply to join these FTAs if it were
at the same time in a customs union with the EU; a customs union with the EU would oblige
it instead to be a party to the EU’s FTAs with third countries. The conclusion is that, in principle,
it is not possible for an EFTA state to also be in a customs union with the EU, unless
the EFTA countries were prepared to waive this requirement for a temporary period to facilitate
the UK transition out of the EU.
3.6. A temporary customs union as an interim arrangement
As noted earlier, the UK proposed in its future customs arrangements partnership paper to
assist in transition “a new and time-limited customs union between the UK and the EU Customs
Union, based on a shared external tariff and without customs processes and duties between
the UK and the EU” (HM Government 2017b). This temporary customs union would be limited
in time, and could be one among a number of interim arrangements. If agreement on an
extension of the full Union acquis seems neither feasible nor practical during the Article 50
negotiations, this is a possible fall-back position on which both sides could agree.
The benefit of a temporary customs union is that it would avoid the requirement for
rules of origin checks on goods traded between the two parties. From the UK’s
perspective, it might be a way to give it continued market access to the EU’s FTA agreements
142 Davis, D., ”Membership of the European Economic Area”, House of Commons Hansard, 7 September 2017. 143 Armstrong, K., “Staying in the Single Market: Not so EEAsy?”, Brexit Time, 8 September 2017. 144 Hughes, K., “Scotland’s EU Single Market Options: Some challenges from the trade side”, Centre on
Constitutional Change, 15 January 2017. 145 EFTA, “Global trade relations”.
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in the absence of ‘grandfathering’. From the EU’s perspective, EU farmers would continue to
benefit from the preferential trade transfer on exports to the UK market.
However, a customs union on its own would not avoid the need for border controls.
They would need to be re-introduced to implement phytosanitary checks, check tax
compliance and enforce transport restrictions. A customs union would not cover trade in
services. It would also prevent the UK from implementing its own trade agreements with third
countries, although whether it would be able to negotiate these during the transition period
would be a matter for the Article 50 negotiations.
Whether such a temporary customs union would be inconsistent with WTO rules on customs
unions and free trade areas (set out in GATT Article XXIV and its interpretative note and
attached Understanding) has been debated. 74F
146 Article XXIV makes provision for “interim
agreements leading to the formation of a customs union or a free trade area” and specifies
that approval of such interim agreements is dependent on including a plan and schedule for
the formation of such customs union or free trade area within a reasonable length of time.
The idea here is to cater for agreements which might initially only cover a portion of total
trade between the partners, but which to be consistent with WTO rules should eventually cover
substantially all trade.
A temporary UK-EU customs union would not be an interim agreement in this sense, although
it would be intended as a temporary arrangement. It would presumably cover 100% of trade
from day 1 (the day after Brexit Day). The fact that the parties intended to replace it with a
free trade agreement within a short period of time is irrelevant to its compatibility with WTO
rules. One precedent is the customs union entered into by the Czech and Slovak Republics in
1993 following the breakup of Czechoslovakia. The EU made the customs union a condition
for transferring Czechoslovakia’s associated status with the EU to the successor states, and
the customs union was dissolved when both countries acceded to the EU (and the EU Customs
Union) in 2004.
From the agricultural point of view, the main drawback of a temporary customs
union is that it would not address regulatory barriers to trade arising from food
safety, veterinary and plant health checks. Here the UK has proposed a separate
agreement on “regulatory equivalence on agri-food measures, where the UK and the EU agree
to achieve the same outcome and high standards, with scope for flexibility in relation to the
method for achieving this….Providing the UK and the EU could reach a sufficiently deep
agreement, this approach could ensure that there would be no requirement for any SPS or
related checks for agri-food products at the border between Northern Ireland and Ireland”.
This proposal was put forward as a way of avoiding a hard border on the island of Ireland as
part of the long-term relationship. It could equally well be brought forward and included as a
part of a transition agreement. However, this solution would seem to be ruled out by the
insistence by the European Council in its guidelines and by the European Parliament that the
UK would be required to accept the entire Union acquis during the transition period. 75F
147
Although an agreement on regulatory equivalence on agri-food measures would avoid the
need for a high proportion of customs checks, there would continue to be a need for checks
on other products, including sensitive products such as chemicals, electronic goods, toys and
146 This view was expressed in The Economist in its commentary on the customs position paper: “Furthermore, the
idea of a temporary tariff-free deal is unconvincing: once Britain leaves the EU, non-discrimination rules mean
that the two can avoid bilateral tariffs only by scrapping them for all members of the World Trade Organisation. 147 Recall the European Council guidelines that “preserving the integrity of the Single Market is an absolute priority.
That excludes participation in any agreement with the UK on a sector-by-sector approach”.
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cosmetics. Therefore, in the context of avoiding a hard border on the island of Ireland, it has
been argued that, as well as a customs union with the EU, it would be beneficial if the UK were
to remain in the single market at least for goods alone. 76F
148 This solution would avoid borders
not only on the island of Ireland but for UK-EU27 trade generally, and would enable existing
supply chain arrangements linking companies in both the UK and the EU27 to continue
unaffected. While the UK might not be happy with this as a long-term solution (it would not
give it access to the single market for capital and services), it might be more attractive in the
transition period than a simple tariffs-only free trade agreement which would be the likely
alternative. While the UK would remain under the jurisdiction of the CJEU as regards trade in
goods and would likely be required to make a financial contribution towards economic and
social cohesion in the single market, it would be in a position to control immigration and it
would avoid the ‘cliff-edge’ scenario of full border controls after 29 March 2019 which it is
highly unlikely to be able to manage.
3.7. A free trade agreement as an interim arrangement
The most minimal step to avoid a ‘hard’ Brexit outcome after Brexit Day would be
for the UK and the EU27 to agree to establish a tariffs-only FTA, with the proviso that
the two sides would continue to discuss how to deepen and extend that FTA in the future to
include elements of regulatory cooperation at a later stage. A bilateral FTA could avoid the re-
introduction of MFN tariffs on UK-EU27 trade, but it would not avoid the need for extensive
customs clearance and health checks and the introduction of rules of origin. While a bilateral
FTA with 100% coverage of tariff lines might seem straightforward, given that the UK and the
EU27 start from the position where there are no tariffs, no other EU FTA (apart from the
Economic Partnership Agreements with developing countries) provides 100% tariff-free access
to the EU market for the agricultural sector. Instead, preferences are provided for limited
quantities of trade at reduced duties. The more that either party tried to ‘fine-tune’ a bilateral
FTA in this way, the longer the time it would take to negotiate and the greater the risk that it
might not be in place on Brexit Day. However, a tariffs-only FTA could be agreed by the Council
and Parliament alone, without the need for Member State ratification, because tariff policy is
exclusively a Union competence.
3.8. Rescheduling the phasing of Article 50 negotiations
Unless agreement to implement a transitional arrangement were reached (or agreement for
the UK to remain an EU Member State until the final trade agreement were concluded as in
the previous option) at the latest by early 2018 during the Article 50 TEU negotiations, traders
would be forced to undertake contingency planning and to invest in new systems and
personnel to cope with the increased possibility of a ‘cliff-edge’ Brexit. The additional
uncertainty arising from any further delay would impact negatively on trade flows, including
the possibility of adverse exchange rate movements from the perspective of EU exporters.
Traders will hesitate to enter into longer-term contracts with customers as long as there
continues to be uncertainty about future trade conditions after 29 March 2019.
The longer the time that it takes to start discussing and to reach agreement on the
nature of any transitional period, the less valuable it will be to businesses on either
side of the future UK-EU27 border. Uncertainty about the trade arrangements which might
be in place following Brexit Day is already having a negative impact on the decision-making
of businesses and firms that depend on the UK market, including food firms and farmers, not
148 This suggestion has been made by Kevin O’Rourke, “What if it was the Europeans picking the cherries?”, The
Irish Economy, 7 October 2017.
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least because of the depreciation of sterling and subsequent exchange rate volatility. 77F
149 Note,
however, that even quickly reaching an agreement on transitional arrangements would not
provide full legal certainty given the EU position that nothing is agreed until everything is
agreed. So traders entering commitments in 2018 on the assumption that the terms of any
transitional arrangement would apply after 29 March 2019 are making a bet on the successful
conclusion of the entire set of negotiations.
Under the European Council guidelines, discussions on the next set of negotiating directives
cannot start until satisfactory progress has been made on the three issues - citizens’ rights,
the financial settlement, and the Irish border - which make up the first phase of the
negotiations. It had been hoped that the European Council meeting in October 2017 might be
in a position to confirm that sufficient progress had been made and to issue a new negotiating
mandate. The European Council noted that progress had been made on some of the issues in
the first phase of the negotiations but concluded that, at this time, insufficient progress
had been made in the first phase of the negotiations to move on to the second.
Some argue that the current uncertainty works to the benefit of the EU27. The longer it takes
for the outlines of a deal to become clear, the greater the uncertainty, and the more likely
that UK firms will respond to the possibility of no deal or a bad deal by planning a redirection
of investment or even a relocation. For some governments, the prospect of attracting financial
firms currently headquartered in London may make this an acceptable risk. Others argue that,
because the UK has in relative terms more to lose from a disorderly Brexit than does the EU27,
the economic pressure created by the current phasing make it more likely that the UK will
come forward with acceptable offers on the three preliminary issues, most notably the financial
settlement.
If indeed these motives influence the EU negotiating position, they are extremely short-sighted
and have the potential to build up much more serious problems in the future. Even though the
UK has decided to leave the EU, cooperation between the two parties will be essential in
meeting many of the future challenges facing Europe, including security threats, terrorism,
migration, climate change and financial stability. Poisoning this relationship in the longer-term
by refusing to negotiate in good faith would make a very poor bargain.
There are other arguments in favour of a more pro-active negotiating stance by the EU. 78F
150 The
sequencing of the negotiations is not a legal obligation. Nothing in the text of Article 50 TEU
forbids discussing the withdrawal arrangement and the future framework simultaneously. The
sequencing is a tactical choice of the EU, which suggests it should be assessed on the basis of
its benefits and costs.
There are costs associated with maintaining the current phasing of the negotiations. In the
first phase, the UK is being pressed to make commitments, but it is getting nothing in return.
Negotiating the two phases in parallel would allow trade-offs and linkages between issues to
be made which would make it easier for the parties to reach a compromise agreement, not
least on the question of the Irish border. The European Council itself in its guidelines has said
that nothing is agreed until everything is agreed, so it is not the case that the UK could pocket
149 “Industry Groups Call for a Clear and Predictable Transitional Arrangement in the Brexit Process”, press release
from a group of industry associations representing global companies operating in both the UK and the EU27, 11
October 2017. It noted that “they are increasingly challenged by the regulatory and operational complexities as
well as the economic risk associated with Brexit”. 150 These arguments were put forward in Delhouse, F., “Why the sequencing of the Brexit negotiations should be
abandoned”, Egmont, 28 September 2017.
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concessions made, for example, on the transition period without fully meeting the EU27’s
expectations on citizens’ rights and the financial settlement.
Newspaper reports suggest that the EU’s negotiator, Michel Barnier, did ask the EU27 to give
him a new mandate to discuss transition arrangements at the October summit. In the event,
there was at least a blocking minority of countries that were opposed to this. 79F
151 However, the
Council has agreed that internal preparatory discussions in relation to the framework for the
future relationship and on transitional arrangements should be started. This is an important
signal which should be fully exploited.
This study makes the strong recommendation that the European Parliament should use its
influence to encourage the Council with the Union negotiator to rapidly bring forward
specific proposals for the transition with a view to clarifying what it believes would
be the minimum requirements to ensure that trade can continue to take place with
the UK as it does today in the single market for the duration of the transition period, and
what it sees as the appropriate balance of rights and obligations during this period. Not all of
the Union acquis is necessary in this regard.
A critical issue here is whether UK membership of the CAP and the Common Fisheries
Policy (CFP) will be deemed necessary as a prerequisite for continued free trade in
agricultural and fishery products during the transition period. With respect to an
obligation to respect CAP legislation, the EU’s previous trade agreements are ambiguous.
Norway and Switzerland do not respect CAP legislation and do not enjoy fully-liberalised trade
in basic agricultural products with the EU. With Turkey and Ukraine there is some presumption
that these countries will align their agricultural policies with the CAP and that this will facilitate
if not be an actual prerequisite for fully liberal agricultural trade. However, Georgia has fully
tariff-free agricultural trade with the EU despite having no intention of adopting the CAP
legislation. Even though the FTA agreement with Canada did not fully liberalise agricultural
trade, the reason for excluding certain tariff lines was due to the economic sensitivity of the
sectors concerned and not because of a demand that Canada should align its agricultural policy
with that of the CAP. On the basis of these precedents, an obligation to base its agricultural
policy on CAP legislation would not appear to be a requirement either for a future trade
arrangement with the UK or for a transition agreement. However, some agreement on state
aid rules including agricultural support would be necessary. On the fisheries side, Sobrino
Heredia (2017) note that acceptance of the CFP has not been a feature of the EU’s FTAs but
point out that fisheries governance would require a bilateral fisheries agreement to enable
preferential access to waters and resources.
Another issue which would require clarification, both in any future trade agreement
and in the transition, would be the status of the legal protection for EU27
Geographical Indications (GIs) in the UK (and vice versa). The UK, under the European
Union (Withdrawal) Bill, will implement the same legislative framework for GIs as the EU one,
but there will still be a need to ensure mutual recognition of protected GIs in each other’s
jurisdiction. One way to achieve this would be if the UK were to join the Geneva Act of the
Lisbon Agreement on Appellations of Origin and Geographical Indications (Matthews, 2015).
The preparatory work should also clarify whether these minimum requirements are likely to
include areas which fall within the competence of Member States, and thus whether a
transition agreement would also have to be ratified by Member States as well as the Council
and Parliament. These steps are in the interests of EU27 businesses and consumers as much
as they are in the interest of the UK.
151 “Brexit: stop the 'games' over the bill and get on with EU deal, says Denmark”, The Guardian 8 October 2017.
“Brexit talks stutter, but EU leaders might give May break”, Reuters, 9 October 2017.
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Ultimately, the terms of a withdrawal agreement under Article 50, including any
provisions it might contain with respect to transitional trade arrangements, must be
ratified by both sides. The EU procedure for ratification requires a qualified majority in the
Council and the consent of the European Parliament. In the UK, the Government will bring
forward a motion on the final agreement to be voted on by both Houses of Parliament before
it is concluded. Any new treaty that the UK would agree with the EU would also be subject to
the provisions of the Constitutional Reform and Governance Act 2010 before ratification.
However, the European Union (Withdrawal) Bill provides the UK Government with a further
limited power to implement the contents of any withdrawal agreement reached with the EU
into UK domestic law without delay, where this is necessary to ensure that the UK is ready to
begin the new arrangements from the date of exit (UK DExEU 2017). Some legal scholars
argue that a further referendum would be required under UK law to approve the agreement if
it provides that a EU body or institution can impose a requirement or obligation on the United
Kingdom (Kouroutakis 2017).
What would happen in the event of a failure to ratify by either side is uncertain, but it would
certainly increase the chances that the UK would leave the EU without an agreement and thus
a ‘hard’ Brexit.
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4. Protecting agricultural interests following Brexit
KEY FINDINGS
The EU has gained considerable experience in recent years in the management
of adverse shocks to agricultural markets which can be drawn upon in
designing possible responses to a negative Brexit shock. They include the use of
safety-net intervention; targeted aid; mobilisation of the crisis reserve; advancing
direct payments; making use of the income stabilisation tool; permitting flexibility in
state aids; and facilitating supply management.
Farmers and food businesses in the EU27 will need support to adjust to the
structural consequences of a ‘hard’ Brexit. This might include the provision of
adjustment assistance; greater use of financial instruments; a strengthened
promotion policy; and improved access to third country markets.
A specific market access concern is how UK TRQs will make provision for traditional
EU27 export flows, and vice versa for EU27 TRQs. Merely splitting the EU TRQs
does not go far enough to protect the interests of EU producers to access the
UK market in the event of a ‘hard’ Brexit.
The focus in this chapter is on possible responses to the negative impacts of a ‘hard’ Brexit
for the EU27 agricultural sector. These negative impacts were described in Chapter 2. They
include the re-introduction of tariffs on UK-EU27 agri-food trade, the loss of the preferential
trade transfer on sales to the UK market, the additional costs including indirect costs of
customs and regulatory checks at borders, the likelihood of immediate supply chain disruptions
because the necessary systems will not be up and running, and the potential for a further
sharp depreciation in the value of the UK currency. Responses to these negative impacts can
take two forms. The first consists of attempts to avoid the worst costs of a ‘hard’ Brexit by
shaping the Article 50 negotiations themselves; this response was examined in Chapter 3. The
second response examines the use that might be made of existing or new CAP instruments to
help offset the adverse consequences for the EU27 farming sector that might follow from the
outcome of the Article 50 TEU negotiations or from a failure to bring these to an agreed
conclusion. This is the focus of this chapter.
At the time of writing, there is no guarantee that the negotiating outcomes discussed in
Chapter 3, which would allow agri-food trade to continue in the same way as now and would
avoid the adverse consequences of a ‘cliff-edge’ Brexit, will be agreed. There is still the
possibility that the negotiations could fail to reach agreement, and that the UK would cease to
be an EU Member State without any agreement – a ‘disorderly’ Brexit, with all of the disruption
to trade that would imply. It is therefore also appropriate to examine the possibilities to use
instruments under the CAP to cushion producers from these adverse impacts.
As a general point, the relevant instruments to address an adverse shock would be
expected to differ depending on the nature of the shock and whether it is expected
to be temporary or represents a structural shift in external trading relations. In the
case of a temporary shock (such as a drop in market prices due to specific market conditions),
the primary focus will be on the safeguarding of producer incomes. For a structural shift, it is
more important to emphasise instruments which help farmers to adjust to this change rather
than to offset the impact of the change (which has the danger that it fossilises existing
production and marketing structures rather than encouraging farmers, processers and traders
to begin the necessary adjustments). A ‘hard’ Brexit is likely to involve both elements. The re-
introduction of additional trade costs, a further depreciation of sterling and reduced
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attractiveness of the UK market (due to unilateral decisions by the UK to reduce applied tariffs
or to enter into free trade agreements with third countries which strongly liberalise agricultural
trade) represent a structural change in trading relations which will require adjustment by EU
producers. The initial lack of preparedness will, in addition, cause temporary but potentially
severe disruption to trade flows and hence producer incomes.
Although the displacement of EU27 exports destined for the UK market in the event of a ‘hard’
Brexit is likely to have a negative effect on prices within the EU27 common market as a whole,
some Member States will be more exposed to disruption than others, particularly in the event
of a further depreciation of sterling, because a higher share of their agricultural exports and
agricultural output is currently sold on the UK market. The uneven distribution of the
negative price impacts suggests that general market support instruments may need
to be accompanied by more targeted measures in the immediate aftermath of a
‘hard’ Brexit.
4.1. Support in the case of market disturbance
The EU has gained considerable experience in recent years in the management of adverse
shocks to agricultural markets, specifically in the context of the response to the Russian
embargo on exports of certain EU foods to Russia and to the drop in milk prices in 2014-2016.
Use of safety-net intervention. The EU has the possibility to acquire stocks into
intervention, or to pay firms for private storage, in order to withhold product from the market
and to strengthen producer prices. This instrument is most effective when dealing with
temporary or cyclical market disruptions when there is a reasonable expectation
that market prices will recover within a short period of time. The difficulty with the use
of intervention is that the build-up of intervention stocks can act to depress market sentiment
and to delay the recovery in market prices, as arguably has been the case following the build-
up in skim milk powder intervention stocks in the past few years. It also acts to delay
adjustments in production where the shock is likely to be permanent (as would be the case of
a ‘hard’ Brexit) and where there is a need to facilitate and assist farmers to take advantage of
alternative opportunities.
Targeted aid. During the milk crisis the Commission made available national envelopes to
Member States to support the dairy sector, having particular regard to those Member States
which had been most affected by market developments. It later introduced a scheme of
conditional adjustment aid to be defined and implemented at Member State level using a menu
of measures proposed by the Commission (amounting to €350 million that Member States
were allowed to match with national funds, thus potentially doubling the level of support being
provided to farmers). The principles behind this arrangement – targeting of funds to
Member States most adversely affected, co-financing between the Union and
Member States, and flexibility of Member States to choose from a menu of measures
proposed by the Commission - would seem very suited to deal with post-Brexit
disruption.
Mobilisation of the crisis reserve. One of the innovations in the 2013 CAP reform was the
creation of a €400 million (in 2011 prices) crisis reserve, which is replenished annually by
withholding a fixed percentage of direct payments to farmers in receipt of payments above a
certain level. If the reserve is not used in any particular year, that money is added to the
direct payments that the affected farmers receive in the following year. To date, it has not
been necessary to make use of the crisis reserve because other sources of funding were
available within the CAP budget to fund the crisis measures implemented in recent years.
There is also reluctance among Agriculture Ministers to trigger payments from the reserve
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because it effectively represents a redistribution of payments from one group of farmers to
another. Nonetheless, the instrument exists and its use could be justified if there were
clear evidence that some groups of farmers in the EU27 are more adversely affected
by a ‘hard’ Brexit than others.
Advancing direct payments. The first instalment of direct payments is paid to farmers on 1
December in each year, although under existing rules Member States can pay up to 50% of
their direct payments envelope to farmers from 16 October, provided that the necessary
controls have been carried out. During the dairy crisis this percentage was increased to 70%.
The payment date for area and animal-related payments for rural development (such as agri-
environment, organic farming, areas of natural constraints, animal welfare) can also be
brought forward and during the milk crisis a higher percentage of the total payment was
allowed to be made in the first payment. These measures can provide some relatively
swift, but temporary, relief to farmers’ cash flow and could be considered again as
a possible response to the negative short-term fall-out from a ‘hard’ Brexit.
Income stabilisation tool. Member States/regions already have the option to include an
income stabilisation tool in their Rural Development Programmes. This risk management tool
supports farmers facing a severe drop in income (minimum 30% loss compared to the three
previous years). Only a few Member States have programmed this tool, but it could be
introduced by others with the next modification of Rural Development Programmes.
Agreement has been reached in the trilogues on the Omnibus Regulation to make the income
stabilisation tool a more attractive option. More widespread adoption could provide an
additional safety net for farmers in the event of a ‘hard’ Brexit.
Flexibility in state aid rules. Member States have the possibility of providing national
funding under the de minimis rules (below €15.000 for agricultural primary production or
€200.000 for marketing and processing activities over three years). For farm aid, there is a
national cap that total de minimis aid cannot exceed 1% of annual output. These rules were
relaxed during the milk crisis in two ways. Member States could give aids to farmers voluntarily
freezing or reducing production (compared to a reference period) up to €15.000 per farm per
year (without national ceiling) in the form of a grant, loan or guarantee (for the dairy, pig
meat and fruit and vegetable sectors). Member States could also introduce a state aid scheme
for access to finance to bridge a liquidity gap in the form of loans or guarantees (for the dairy,
pig meat and fruit and vegetable sectors). Temporary derogations could again be
considered in the context of a ‘hard’ Brexit, although it would be important to avoid
that aids to farmers in one Member State would be at the expense of farmers in
another. Both of the recent derogations were justified under Article 107(3) TFEU which
permits aid to facilitate the development of certain economic activities or of certain economic
areas, where such aid does not adversely affect trading conditions to an extent contrary to
the common interest.
Member States also have the possibility to provide national aids which meet the
criteria set out in the Agricultural Block Exemption Regulation. These generally cover
measures which are available within Rural Development Programmes (RDPs) and are co-
financed by the EAFRD (for example, aid for investments, for agri-environment-climate
schemes, for organic farming, or for the participation in quality schemes) which can also be
nationally financed. Under certain conditions, state aids can also cover promotion, the closure
of production capacity and, under strict conditions, rescue and restructuring aid for companies
in severe financial difficulties, etc.
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Supply management. In an early response to the Russian embargo which had a particularly
adverse impact on perishable crops such as fruit and vegetables, the Commission provided
support for the withdrawal of surplus volumes from the market with a view to providing short-
term relief. Depending on the market situation immediately after Brexit, the introduction of
similar measures could be justified on a temporary basis.
4.2. Support for adjustment
Provision of adjustment assistance. The EU created in 2007 the European Globalisation
Adjustment Fund (EGF) as a flexibility instrument in the EU budget for interventions in case
of mass redundancies caused by major changes in global trade. It aims to help dismissed
workers find new jobs through a package of tailor-made services. Eligible actions include:
tailor-made training; job-search assistance; entrepreneurship promotion; and measures
addressing the needs of disadvantaged or older workers. The EGF cannot be used for passive
social protection measures such as unemployment allowances or retirement pensions. Nor can
it fund the restructuring of a company or a sector. From May 2009 to December 2011, the
EGF was also able to support workers who had lost their jobs as a result of the financial and
economic crisis.
In proposing the continuation of the EGF for the period 2014-2020, the Commission proposed
that, under specific conditions, Member States would be able to request funding for agricultural
sectors, products or regions significantly affected by new trade agreements to help farmers
adapt to a different market situation. The objective would be to assist them to become
structurally more competitive or to facilitate their transition to non-agricultural activities. Up
to five sixths of the proposed budget could be used to this end.
This proposal was rejected by both the Council and the European Parliament. One major
objection was the linkage of assistance to the conclusion of trade agreements which could
have adverse effects for EU farmers. It was argued that the resources available were totally
inadequate relative to the potential costs of trade liberalisation, and that it could act as a fig-
leaf to encourage the Commission to negotiate trade agreements at the expense of the
agricultural sector. There was also criticism from workers’ representatives that the high
amount to be reserved for the agricultural sector would reduce the funds available for its
original purpose. 80F
152
Whether the EGF is the right institutional framework or not, making available personalised
advice, mentoring and coaching to farmers on their options in the event of a severe
drop in market prices due to a loss of access to the UK market, as well as training in
entrepreneurship and business creation, could be a useful addition to the policy
toolkit to address the impact of a ‘hard’ Brexit. Already, some farm advisory services
provide services of this nature. It could be valuable to extend the remit of the Farm Advisory
Service foreseen under the CAP Horizontal Regulation from its current focus on meeting cross-
compliance and greening standards to also include socio-economic advice.
Greater use of financial instruments. Adjustment measures on farms will require access
to capital. Financial instruments aim to create incentives for economic operators to provide
finance to final recipients such as farmers. They are intended to address an identified market
gap, i.e. areas where banks are unwilling to lend and/or where the private sector is unwilling
to invest, for instance in small farms or new agricultural businesses without sufficient credit
history or assets as collateral. Their main attraction is that they can leverage additional private
resources for investment projects when public funds are limited. The constraint on their use
152 Matthews, A. “Farmers and the European Globalisation Adjustment Fund”, October 25, 2011.
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is that the money is expected to be repaid, so they are only suitable for financially viable
projects, i.e. those which are expected to generate enough income or savings to pay back the
support received. Financial instruments can take the form of loans, guarantees or equity, and
may be managed by national or regional banks, international bodies such as the European
Investment Bank or the European Investment Fund, by financial intermediaries, and (for loans
and guarantees only) by RDP managing authorities.
Loans supported by financial instruments can make finance available to farmers where none
is offered commercially (e.g. from banks), or on better terms commercially (e.g. with lower
interest rates, longer repayment periods, or with less collateral required). Following the
disruption caused by a ‘hard’ Brexit, there is likely to be an increased demand for
this type of finance as farmers seek alternative opportunities and traders seek
alternative markets. Additional flexibility in the state aid guidelines may be needed to ensure
that financial instruments can be made fully operative for farmers.
4.3. Strengthened promotion policy
Information and promotion schemes. Support is available under the CAP through a range
of instruments towards the provision of information and promotional actions for agricultural
products. Following a debate initiated by a Commission Green Paper in July 2011 and a
Commission Communication in March 2012, a new Regulation (EU) No 1144/2014 was adopted
and became applicable from 1 December 2015. 81F
153 This legislation greatly enhanced the scope
of the CAP’s promotion policy by expanding the scope of measures, beneficiaries and eligible
products that could be funded and by significantly increasing the aid for information and
promotional activities from a budget of €61 million in 2013 to €111 million for 2016 and up to
€200 million in 2019. Among the objectives of this legislation is to help restore normal market
conditions in the event of serious market disturbance, loss of consumer confidence or other
specific problems. Each year, the Commission defines the strategic priorities for promoting EU
farm products and funding criteria in an annual work programme outlining the thematic
priorities for support including products and possible markets. Proposals submitted for funding
are examined by independent experts, following the award criteria defined in the annual work
programme.
Following a ‘hard’ Brexit, there would be a case to target support for promotional
activities outside the EU on those products and countries most adversely affected.
This might be done by reviewing the thematic priorities for support or by revising the award
criteria. Targeting on products is already a feature of the thematic priorities. For example,
around nine topics were identified for support in the 2017 Work Programme of which two
focused on products that were particularly affected by the Russian embargo (Table 4). The
value of this scheme was underlined by the response to the specific priority for milk and pig
meat products following the 2016 call, where the budget requested was four times higher than
the indicated budget in the annual work programme.
The award criteria stated for the 2017 Work Programme covered four elements unequally
weighted: Union dimension, technical quality, management quality, and budget and cost-
effectiveness. It could be decided to add criteria in future Programmes which in some way
take account of the vulnerability of different Member States to the adverse impacts of a ‘hard’
Brexit.
153 More information is provided in the European Parliamentary Research Service Briefing EU agricultural promotion
measures, June 2016.
Policy Department for Structural and Cohesion Policies
190
Table 15: Topics and actions for support in the 2017 Work Programme for
information and promotion measures for agricultural products
NO. TOPIC
1 Information provision and promotion programmes aiming at increasing the
awareness and recognition of certain Union quality schemes
2 Information provision and promotion programmes aiming at highlighting the
specific features of agricultural methods in the Union and the characteristics of
European agricultural and food products, and other quality schemes
3 Information provision and promotion programmes targeting one or more of the
following countries: China (including Hong-Kong and Macao), Japan, South Korea,
Taiwan, south-east Asian region or India
4 Information provision and promotion programmes targeting one or more of the
following countries: USA, Canada or Mexico
5 Information provision and promotion programmes targeting one or more of the
following countries: USA, Canada or Mexico
6 Information provision and promotion programmes targeting geographical areas
other than those included under Topics 3, 4 and 5.
7 Information provision and promotion programmes on milk products, pigmeat
products or a combination of those two targeting any third country
8 Information provision and promotion programmes on beef products targeting any
third country.
A Programmes increasing the awareness of Union sustainable agriculture and the
role of the agri-food sector for climate action and the environment
Source: Commission Implementing Decision of 9.11.2016 on the adoption of the work programme for 2017 of
information provision and promotion measures concerning agricultural products implemented in the internal market
and in third countries, C(2016) 7100.
Export market credit guarantees. Promoting EU products in overseas markets can help to
create a demand, but taking advantage of new outlets and entering new markets takes time
and causes great uncertainty and risks. Strengthening promotion policy under the CAP only
provides a partial solution to this problem, as it does not cover commercial risks. Often, the
private banking sector does not provide coverage of this kind of risk either. Certain Member
States have set up export credit insurance systems to support agri-food businesses, but there
are no export credit, export credit guarantee or insurance programmes operated at the EU
level. An Export Credit Group under the Council reviews the export credit support schemes of
Member States to ensure that under the EU's common commercial policy, Member States do
not undercut each other internationally and create unfair competition.
The Commission, together with the European Investment Bank, have been examining the
possible benefit and feasibility of setting-up an export credit guarantee facility at the EIB for
agricultural exports to new or risky markets. Commissioner Hogan made reference to the
conclusions of their study when reporting to the June 2016 AGRIFISH Council meeting. 82F
154 It
concluded that an export credit guarantee tool does not offer short term relief to supply in
crisis situations. It could possibly support the internationalisation of the EU agri-food sector
for those companies and export destinations for which access to trade finance is difficult.
However, Member States have been slow in providing a clear economic case to introduce such
154 Hogan, P., “Speaking note to AGRIFISH Council (June 27, 2016) in Luxembourg”, 27 June 2016.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
191
a tool for agriculture at the EU level. At a meeting of the Special Committee for Agriculture on
20 June 2016, Member States were asked to reply to two questions, on the value added of an
EU credit guarantee scheme, and on its operational management. 83F
155 To date, it does not
appear that the Committee has returned to address this issue. One way to advance this file
could be to establish European guidelines on the use of export credits to encourage
Member States to provide this kind of tool.
Promotion on the internal market. While promoting the export of EU products outside the
EU is an obvious response to the loss of access to the UK market in the event of a ‘hard’ Brexit,
the potential to stimulate domestic consumption should not be overlooked. This could be
particularly useful in the case of fruit and vegetables where average intake in the EU
appears to be below recommended nutritional levels. There may be scope under the School
Scheme for Milk, Fruit and Vegetables to increase the offtake of these products under this
Scheme.
4.4. Improved access to third country markets
Some may draw the conclusion from the experience of the Russian embargo and a ‘hard’
Brexit, if it occurs, that relying on third country markets is too risky and that the appropriate
policy response should be to reduce the dependence of EU producers on third country markets
and to concentrate on domestic, or even local, markets. Reducing exports to third country
markets would be very counter-productive and would further impoverish the
farming community. As it is, the vast majority of farm and food products supplied on the
EU market (mostly from domestic production but also from imports) are consumed within the
EU. Only 4.2% of agricultural products were exported outside of the EU in 2011, and only
6.9% of food, beverages and tobacco products. 84F
156 These are either high value products which
are sold at premium prices (e.g. products with a quality mark) or lower-valued products for
which there is limited consumer demand within the EU and where overseas markets yield a
higher return (e.g. certain poultry parts). If farmers were unable or discouraged from
producing these products, and instead had to substitute alternative products which could only
be sold on the EU market, the net impact would be lower returns to their labour, capital and
land inputs. Indeed, the only way to entirely remove the risk of depending on others is to
return to self-sufficient households. Even if this were deemed a practical option, that approach
magnifies the risks of depending on own production. Instead, the way to address risk on third
country markets is to strengthen the rules governing international trade and to diversify
markets to reduce the risks of over-dependence on any one buyer.
Free trade agreements. The EU is a strong supporter of the multilateral rules-based system
under the governance of WTO rules. The rules governing agricultural trade were strengthened
in the WTO Agreement on Agriculture signed at the conclusion of the Uruguay Round of trade
negotiations in 1994. Although another round of negotiations to further liberalise agricultural
trade, inter alia, was launched in Doha in 2001, these negotiations are bogged down and are
not likely to result in an agreement to further liberalise market access in the near future.
Instead, the EU has sought to open additional market access through bilateral free
trade agreements with countries willing to go further in liberalising trade. Notable
FTAs recently concluded include those with Korea, Vietnam, Singapore and Canada, while FTAs
are under negotiation with the US, Mercosur, Japan and India and are scheduled to start with
Australia and New Zealand. Trade agreements only open up market opportunities, these must
155 Summary Record of the 1530th meeting of the Special Committee on Agriculture (SCA) held in Brussels on 20th
June 2016. 156 Calculated from Eurostat, Input-output tables at current prices, 60 branches, EU aggregates, domain
[naio_17_agg_60_r2].
Policy Department for Structural and Cohesion Policies
192
then be realised by the relevant business actors. Assistance can be provided, and
Commissioner Hogan has scheduled a number of promotion visits to third countries where
important opportunities exist for EU agriculture and to help open doors for new exports.
In many markets, the major barrier to access is not the level of tariffs imposed but non-tariff
barriers and, in the case of agricultural and food products, particularly SPS measures. The
Commission (DG SANTE, DG AGRI, DG TRADE) has been working for some time to resolve a
number of SPS issues with third country partners, with some success. More focus could be
brought to this work by drawing up an annual priority list of the trade barriers that
the EU hopes to remove.
While these efforts should continue, the negotiation of trade agreements and the removal of
SPS barriers are lengthy and arduous processes and so these are not a relevant response to
the immediate problems likely to be caused by a ‘hard’ Brexit.
4.5. TRQs for UK-EU27 trade
It was argued in Chapter 2 that splitting the EU TRQs between the UK and the EU27 would
mean that the UK TRQs would make no specific provision for existing UK-EU27 trade, and vice
versa. While this might not have any practical implications if the UK and the EU27 create a
bilateral free trade agreement covering agricultural products on Brexit Day, this omission has
significant implications for EU producers if tariff barriers are erected.
In the case of beef TRQs, for example, virtually all EU TRQ amounts are allocated to specific
countries with the small exception of a 1,500t TRQ for frozen edible offal of which 700t is
allocated to Argentina and the remaining 800t is available to other countries. There is a
pigmeat TRQ of 10,159t with a reduced rate of duty of which 4,624t are allocated to Canada
but the EU27 could compete with other countries for the remaining erga omnes quota of
5,535t. Other pigmeat TRQs remain open to any exporter. In the case of the major sheepmeat
TRQ of 283,715t, almost all of this is allocated to specific countries (with New Zealand being
the largest beneficiary with a quota of 227,854t), leaving only an MFN quota of 200t for which
all EU27 exporters would have to compete after a ‘hard’ Brexit. New Zealand also has a butter
TRQ of 74,693t with a very favourable in-quota tariff, while the EU27 would have to compete
for the MFN quota of 11,360t with a higher in-quota tariff in the event of a ‘hard’ Brexit. Two
Cheddar cheese quotas allocate 14,711t TRQs to Australia, New Zealand and Canada while
the EU27 would have to compete with all other countries for a share of the MFN TRQ of
15,005t.
Various EU27 countries have been traditional exporters to the UK market for decades if not
longer. When schedules of concessions were being drawn up at the formation of the WTO in
1994, there was no need to create current access TRQs for these exports because, at that
time, they had completely unrestricted access to the UK market under EU rules. It would seem
odd that the UK would now seek to introduce TRQs in its own schedule of concessions at the
WTO to maintain the market access of what were previously third countries, but not to provide
TRQs to maintain the access of existing exporters that happen to be now EU27 members. Of
course, the UK could make the same argument for EU TRQs for its current exports but, given
the balance of agricultural trade between the two parties, an exchange of TRQ concessions of
this kind should be welcomed by EU producers.
Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
193
Is there a case for pursuing such an exchange of TRQ concessions? This is a matter for legal
scholars to determine, and the answer may not be straightforward (Downes, 2017 reviews
some of the arguments). In principle, the established practice under GATT Article XIII, which
deals with quantitative restrictions, is to extrapolate quota shares from a representative period
(typically three years) of import data. The relevant requirement in Article XIII(2) is to ensure,
in applying import restrictions to any product, that WTO Members “shall aim at a distribution
of trade in such product approaching as closely as possible the shares which the various
contracting parties might be expected to obtain in the absence of such restrictions”.
As Downes explains, basing new TRQs on existing levels of trade might not be deemed to
comply with this requirement given that exports from non-EU exporters were restricted by
TRQs while EU suppliers had preferential access.
Representing countries with substantial supplying interests within the meaning of Article XIII,
the EU27 has the right to make its claims heard when the UK is determining the size and
allocation of its agricultural TRQs. Of course, this right cannot be enforced at the expense of
the holders of existing TRQ quotas. It would be up to the UK, in consultation with other WTO
Members, to reconcile the EU demands as substantial suppliers with those of other third
countries (Downes, 2017). The political acceptability to other WTO Members of allowing EU27
access to the UK would probably be dependent on any TRQ access offer by the EU27. While
the balance of advantages to the EU27 would need to be further explored, the
current bilateral negotiations in Geneva to merely ‘split’ the EU TRQs do not go far
enough to protect the interests of EU producers to access the UK market in the event
of a ‘hard’ Brexit.
Policy Department for Structural and Cohesion Policies
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Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
195
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Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues
197
ANNEX 1. EXAMPLES OF CUSTOMS CLEARANCE COSTS
Many of the published examples of customs clearance costs refer to clearing sea containers at
ports. This is the normal way for food products to arrive from non-EU countries into the EU.
Food transport between the UK and the EU27 is more likely to take the form of roll on – roll
off (RoRo) traffic, and the figures quoted below should be taken as illustrative of the costs
that might be incurred.
Customs clearance and inspection costs as well as health checks are normally on a per
consignment basis and thus do not vary according to the value of the consignment. They have
the same effect as a specific tariff in that they bear more heavily on low-value produce than
on high-value produce. This should be borne in mind when comparing cost estimates
expressed as a percentage of the value of trade. The UK House of Lords Select Committee on
the European Union collected evidence on the costs of administering tariff and non-tariff
barriers.85F
157 The Agricultural and Horticultural Development Board estimated that the
transactional costs for customs and health checks between the UK and the EU27 would be “in
the region of 8% to 10%, and perhaps a bit more than that.” The Food and Drink Federation
estimated these costs at “a further eight per cent”, and added that the increase in transactional
costs for ‘composite products’ was “likely to be higher”.
Evidence from an Irish firm of chartered accountants specialising in customs issues was that
the cost for customs clearance, either in the payment of a clearance agent or the recruitment
of staff in addition to logistics related costs, would be €100 per movement. 86F
158
Article 13d of the Plant Health Directive requires Member States to charge for the import
inspections required by the Directive. As an example, in the UK three separate fees are paid
for each consignment. A document check fee (to cover the cost of checking the consignment’s
paperwork) amounts to £5.71 (€6.37). An identity check fee to cover the cost of the inspectors
checking the assignment, also amounts to £5.71 (€6.37) for small consignments (the size of
a truck or railway wagon) or £11.42 (€12.74) if bigger. A physical inspection fee must also be
paid which depends on the type of plant material being imported. Where risk targeted checks
have been set for trade in a particular commodity from a particular country, on the basis of
the compliance record of that trade, a reduced fee is charged. If the consignment arrives
outside normal working hours, a higher fee can be charged. 87 F
159
As another example, Keurpunkt is an approved inspection site for imported fruits and
vegetables at the Port of Antwerp. On its website, it offers administrative and document
assistance at a cost of €35/container, physical inspection of potatoes, fruits and vegetables at
a cost of €37.50/container plus additional contract costs, and phytosanitary inspection of wood
packaging material at €65/container.88F
160
Grainger (2017) quotes costs in the range of a few pounds to £25 (€28) to £50 (€56) for
declaring a sea container; costs can be significantly greater, if further compliance related
services are needed. Other direct costs can include inspection fees, demurrage, storage
charges, handling charges, laboratory fees, amongst others. He quotes from a previous study
157 House of Lords Select Committee on the European Union, “Chapter 6: Costs of administering tariff and non-tariff
barriers”, Brexit: Trade in Goods, HL Paper 129, London. 158 Lynch, C. Partner in BDO Customs and Trade Practice, Evidence to the Oireacthas Joint Committee on Finance,
Public Expenditure and Reform, and Taoiseach inquiry into Brexit: Matters relating to Customs, Trade and Tariffs,
25 May 2017. 159 Details of the current UK rules for importing plants and plant products from outside the EU are given on the
DEFRA web site. 160 https://www.keurpunt.be/en/.
Policy Department for Structural and Cohesion Policies
198
he authored which examined the direct compliance costs incurred by businesses when
importing meat from non-EU countries into the UK. The costs of mandatory port health controls
ranged between £382 (€450) and £673 (€793) per container. He notes there are also indirect
costs of customs clearance. These tend to be less tangible, but may be much more significant
than the direct costs. They include missed business opportunities and failure to take advantage
of international trade opportunities, loss of business competitiveness, failure to meet
contractual obligations because of delays at ports and borders, and safeguard measures –
such as by holding additional stock in warehouses and factories to help buffer against
unforeseen delays at ports and borders.
There will also be cash flow implications arising from changes in VAT legislation. At present,
EU importers moving products into the EU from the UK are exempt from having to make
upfront payments of import VAT on their goods. This does not apply to goods outside the EU
customs area. EU importers must pay import VAT upfront, for example, on goods coming from
Turkey, even though it has a customs union relationship with the EU. Although these payments
are eventually recoverable, the introduction of import VAT on all goods being imported from
the UK could represent a major cash flow burden for importers (BRC, 2017). Importers of EU
products into the UK would face a similar burden assuming the UK continues to apply EU rules
after Brexit.
DIRECTORATE-GENERAL FOR INTERNAL POLICIES
POLICY DEPARTMENT
BSTRUCTURAL AND COHESION POLICIES
Role
The Policy Departments are research units that provide specialised advice
to committees, inter-parliamentary delegations and other parliamentary bodies.
Policy Areas
• Agriculture and Rural Development
• Culture and Education
• Fisheries
• Regional Development
• Transport and Tourism
Documents
Visit the European Parliament website:
http://www.europarl.europa.eu/supporting-analyses
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