Shanker A. Singham is CEO of Competere and Director of the International Trade and Competition Unit, Institute of Economic Affairs.
Last week, we have heard from Liam Fox about no-deal planning with regard to food prices. While tariffs on industrial goods are relatively low – so that the UK falling back on the Common External Tariff is less of an economically significant event – this is not true of agriculture.
Since the UK is a major importer of agriculture from the EU (the EU-27 has an approximately £23 billion surplus in agricultural trade with the UK), No Deal would mean falling back on the Common External Tariff. Some agricultural tariffs are very high (for some products over 70 per cent). That could mean significant food price inflation.
Right now, the major developed countries generally trade agricultural products using a system of tariff rate quotas; an import quota where there is a lower tariff for a certain volume of imports, and then, if imports exceed that amount, the tariff kicks up to a much higher and usually prohibitive level. This is highly managed trade. At the moment, there are no tariffs or other quota-based restrictions to our imports from the EU-27. But this will change if we leave without a deal.
There are only two trade policy ways to curb food price inflation in the event of No Deal, hence the Secretary of State’s statements. Either the UK would apply a zero rate unilaterally to all countries (it must be for all countries – because otherwise we would be violating the WTO’s rule that any tariff reductions should be applied to all members); or else it would have to open up those agricultural quotas to all comers on a first come, first served basis.
There have been reports of increasing worry – that either of these methods would put EU farmers in direct competition with the most efficient farmers in the world, and they would rapidly lose market share.
EU farmers are well aware of this, which is why they are starting to kick up a fuss about the damage that would be caused by No Deal. They also know that, absent the protectionism afforded by the common external tariff and the regulatory barriers imposed on agriculture from non-EU countries, and they would not be competitive.
They would not only lose market share overnight, but the supply chains which have reoriented to more competitive suppliers would not come back. They would be permanently disadvantaged.
It gets worse for the EU-27. It so happens that the producers who would lose out the most are in highly political sensitive areas: Bavarian dairy farmers, Northern Italian textiles and dairy, French wine, and beef – critically, Irish beef which accounts for fully 67 per cent of the UK market now.
The impact of the Irish beef industry losing market share overnight to the lucrative UK market (where beef prices are among the highest in the world) cannot be understated. This is the risk that Leo Varadkar is taking in refusing to allow the backstop to be modified. If the UK puts its counter-offer on the table, and allows the pressure from these producers to build up on member states, then a deal is more likely. If the UK does not fully exploit this pressure, a deal is less likely.
But all sides want to have a deal. And so we turn to what sort of agricultural policy the UK would want to have in the event of one.
It is possible for the UK to have a new and improved policy that works for consumer, farmers and our trading partners if we make changes to our tariff policy, our subsidy policy and our regulatory policy.
First, we should open up our market so we gradually reducing tariffs and open up our import quotas. Ultimately, consumers will benefit if the protections afforded to producers are slowly lowered.
This change does not have to be done overnight, and it is connected to the second area of reform – which is how we would use WTO-compatible direct payments to help British farmers, not only with the Brexit transition but beyond. At the moment, our direct payments are based on the size of landholdings. This is patently unfair. The two biggest beneficiaries of this funding now are English Heritage and the RSPB, worthy entities both, but hardly farmers.
We should instead focus direct payments more on actual farmers, and support their environmental remediation efforts as well as their stewardship of land, fully recognizing that their primary goal is to produce our food. The beauty of our countryside helps support a £127 billion tourism industry, and farmers play a role in it.
Third, we can improve our regulatory system so we are not needlessly putting compliance burdens on farmers, and depriving them of access to new technologies provided the science shows us that they are safe. At the moment, there are many areas where farmers cannot use new technologies, such as synthetic biology or gene editing. These are the technologies that will increasingly feed not only our consumers but most especially the world’s poorest ones.
UK farmers can have a bright future, and the UK and EU can agree a deal with an alternative version of the backstop which works for all parties. In the strange world of Brexit, these two issues are now joined at the hip.