William Norton was Legal Director of Vote Leave. Among numerous articles, papers and books, he is the author of Monument and Bank: Capitalism and the Anglo-Saxon Mind. The first piece in our ‘What would WTO mean?’ series was published on Monday, and the second was published yesterday.
Agriculture in the post-Brexit environment throws up a number of questions, of which the most immediate is what the UK intends to implement to replace the EU Common Agricultural Policy (CAP). Some people would argue that the answer should be “nothing”. Whatever the intellectual merits of that stance, it isn’t going to be the approach of the next government. I would expect their answer to be “exactly the same, but with a Union Jack on it”.
Son of CAP
Devising “Son of CAP” could be a complicated business, with various special issues groups all shouting at once, and Whitehall no longer having Brussels to blame. (Live animal exports, anyone?) This is undeniably a consequence of Brexit. But it is not a consequence of failing to reach a post-Brexit deal with the EU. It’s a consequence of being responsible for your own agricultural policy. Sorting out the WTO paperwork is something which the UK will have to do whether there is a deal or not. Reaching a deal doesn’t necessarily make life any easier afterwards, and failing to reach one doesn’t necessarily make things any harder.
The only way to avoid any complication at all is to have a deal in which the UK stays within the CAP – which would be a Brexit with all the hardness of a melted butter mountain.
Either way, the UK will have an agricultural policy, and we will have to ensure it complies with our international obligations. WTO members are bound by the Agreement on Agriculture, part of the parcel of treaties that came into force on 1st January 1995. This created a special regime for “agricultural products”, defined quite widely to also include most food and drink (but nothing derived from fish) and animal and plant derivatives such as essential oils and starches, hides and raw silk.
In contrast to the approach taken for industrial products, member states are permitted to deploy subsidies for domestic producers. Instead, the Agreement places a ceiling on the amount of such subsidies and requires greater market access for imports via reduced tariffs. The cornerstone is the “Total AMS Commitment”, or the maximum financial support which any country is permitted to spend on domestic agricultural products in any year. This is ultimately derived from what that country spent on agricultural support in a base period of 1986-88, and was successively scaled back until it reached a fixed limit from 2000.
Each country has to file with the WTO a report for each “marketing year”, detailing how much it has spent. Subsidies for “agricultural products”, whether direct cash or market price support, quantified according to the provisions of the Agreement, are divided into categories:
- “The Green Box”: general services such as research, disease control, training, information, inspection, marketing and infrastructure; emergency food stockpiles; food aid to the needy; “decoupled income support” for farmers (minimum income not linked to output); “income safety-net programmes” (compensation for losses); relief for natural disasters, nuclear accidents and wars; “structural adjustment assistance” for the retirement of producers or for modernisation; environmental or conservation programmes; and regional aid. These payments do not count as subsidies for Total AMS purposes.
- “The Blue Box”: production-limiting payments, i.e. set-aside type schemes based on fixed areas and yields, or fixed head of livestock. These payments do not count as subsidies for Total AMS purposes.
- “The Amber Box”: anything else. These do actually count as subsidies, but payments may still be disregarded if they fall below de minimis thresholds (specific product support does not exceed five per cent of the output value of that product; or general support does not exceed five per cent of the value of total agricultural output) or if they are emergency responses under the “special safeguard provisions” (i.e. there is a sudden jump in imports, or a sudden collapse in domestic price), as when in 2015/16 the EU levied an extra duty on imported frozen chicken carcasses.
It is a sign of the pitilessness of neo-liberal globalisation that in 2013/14 the EU had a combined Total AMS Commitment of €72.4 billion, and whilst it managed to spend €79.3 billion on its 28 members (i.e. more), only just under €6 billion, about 7.5 per cent, actually counted as utilising that subsidy allowance. Perfectly aware that the rest of the world does not like the CAP, the EU has been consistently redesigning its support measures to game the rules.
There is no reason why the UK’s “Son of CAP” should not do the same, and have plenty of capacity to scope WTO-friendly means for throwing money at producers who would be inconvenienced by foreign tariffs. Remember: “agricultural products” include such yokel staples as Scotch whisky and the wool from which Mr Burberry makes his rather fetching coats. Not even Defra is capable of screwing up with a margin of error of 92.5 per cent to play with. (Well…)
The WTO paperwork
The UK was a founder member of the WTO in its own right. So, all it has to do is to start filing its own annual reports on agricultural support. This is not a terribly onerous task. For instance, the EU filed its most recent report, for 2013/14, as late as 23rd January 2017. With a two-year leeway, starting from when Brexit completes, there is plenty of time for us to work out how to fill in the forms correctly.
The one fly in the ointment is that the UK was already a member of the EU when the WTO commenced in 1995. So, the UK has never had its own standalone Total AMS Commitment, but signed up for the Agreement on Agriculture as part of a combined EU-12 figure. And we want a slice of the original commitment because, bluntly, it’s so bloody big.
Although the EU files a single joint report on the CAP, it does not, technically, have a Total AMS Commitment of its own, but submits notifications in respect of 17 limits: the original EU-12 plus the individual commitments of the later 16 members. Every country which has joined the EU under post-1994 enlargement was already a member of the WTO, and the EU Commission has simply added their existing commitment to its running total. If any of those countries were to exit, it would be a relatively simple adjustment of reclaiming whatever figure had been set with the WTO already. But it is not immediately obvious how to handle the departure of one of the EU-12.
Agreeing the numbers
The challenge lies not in the mechanics of calculating a UK figure – that’s pretty easy, at least conceptually (although it might require someone to do an awful lot of reading and typing). I’ve already looked at it for Civitas, earlier in the year. You end up with an answer in the region of €5 billion, give or take.
No, the real sticking-point is over the exchange rate. After Brexit, the UK will calculate its agricultural support in sterling, and will report on that basis to the WTO. It would be silly to do otherwise. But historically, and until then, the data is all in ecu/euros.
You could pretend that the UK had never been in the EU at all: go back to the files for 1986-88 and work out what the UK commitment would have been on signing the Agreement on Agriculture, had its participation in the CAP been a purely domestic arrangement. That’s probably the technically purist approach, which might make the WTO happier.
Following this route, to be strictly consistent, you ought to work out what commitment the UK would have signed up to in sterling. Here’s the sting. In 1986-88, the base period for the Agreement on Agriculture, an ecu was worth around 67p. From the day after the referendum until the end of March, €1 has averaged 86p. That’s a very material difference if you want to carve out a slice of a total priced in euros and convert it into sterling.
Alternatively, you could treat the matter as a divorce, and apportion current CAP support among the core EU-12, on the basis of their relative agricultural product. That’s a bit rough and ready, but it does reflect the extent to which UK producers enjoy protection at the moment. It would make it easier to justify using a post-June 2016 exchange rate. However, it is also a transparent attempt to game the rules even further, and some other government might try to create difficulties through the WTO Committee on Agriculture.
Exchange rates make a material difference to the post-Brexit position, but perhaps not really a significant one in practice. If “Son of CAP” mirrors the CAP, then it will score against the WTO subsidy rules to the same extent. We may be worrying about the difference between having spare subsidy of 92.5 per cent or only 90 per cent.
Ultimately, this is a technical matter for the UK to thrash out with the WTO. It has nothing to do with the EU. Of course, the EU Commission has now got the equal and opposite problem, of working out by how much their combined subsidy limit has been reduced. So, you might think, a post-Brexit deal could include this point and enable both parties to go to the WTO with a mutually agreed answer. Perhaps. At best, that means the UK has an argument in Brussels instead of one in Geneva. We still end up having at least one argument with someone.
Recognition and negotiation
There are other issues involved in the export and import of agricultural products. Brexit makes no difference to our exporters having to satisfy the local standards of any third country destination. The UK was also a party in its own right to the 1994 Agreement on Sanitary and Phytosanitary Measures (i.e. food safety and animal and plant health regulations), the overarching legal framework which prevents the use of such requirements as covert protectionism. Such specific issues are best considered as part of the wider discussion of international standards, a topic which Lee Rotherham explored on Monday.
There will also be a lot of paperwork involved in apportioning EU-wide import quotas, such as that for New Zealand lamb, between the UK and the rump EU. Under WTO each member commits to import thresholds for certain products before levying a tariff, and of course at present the UK is part of the EU aggregates. The obvious answer is to carve out the quota on the basis of what the UK has actually imported of each product over the recent past. The sticking-point is that, post-Brexit, the UK and the EU-27 will count as “foreigners” utilising part of each other’s divided quotas. Expect lots of haggling, as much between each side and their own farmers. There is a risk that third countries could be squeezed, with a particular quota now being too low, and raise difficulties through the WTO. But a shrewd government could use that as a platform for talks towards a new third country trade deal.