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

3. Evidence Review Summary

3.1 Introduction

This Chapter summarises the key findings from the Evidence Review (see Annex II) conducted during the early stages of this study (i.e. January to March 2022). The key findings of an examination of 109 pieces of evidence on the potential impact of Free Trade Agreements (FTAs) concerning both EU and non-EU countries on UK and Scottish agriculture. It is broadly split into three parts, as follows;

1. Impact of Brexit on UK and Scottish farming: looks at the findings from previous studies (and literature reviews) into the overall (macro) effect of Brexit on the UK, and especially Scottish, farming industry. This is done to inform the extent to which the UK's exit from the EU could affect its agri-food trade. This provides an indication of the scope for the reorientation of trade away from the EU and towards non-EU countries.

2. Potential impact of new UK FTAs with non-EU countries: focuses on trade deals that the UK has recently agreed or is in the process of negotiating/finalising with the selected non-EU countries i.e., Australia, NZ, Canada, and the Gulf Cooperation Council. This review looks at both UK and non-UK perspectives (e.g., Australian and NZ-based studies).

3. Impact of other FTAs: examines FTAs elsewhere (i.e., do not directly concern the UK) but could have an impact on the sectors within the scope of this study. For instance, the proposed EU-Mercosur FTA, which could have indirect impacts on Scottish beef.

3.2 Key Findings

3.2.1 Brexit Impact Studies

• The direct impact of the UK-EU FTA (TCA) on prices and Scottish farm incomes is relatively small. There are effects from the additional costs of doing trade with the EU but, as the UK is generally a net importer from the EU, this increases prices for many commodities. Whilst there have been some effects on trade during 2021, the findings from these studies suggest that longer-term trade effects are relatively small. The effect of any subsidy changes is the key issue. Significant drops in farm income are seen if farm support is reduced or withdrawn.
• A unilateral liberalisation of trade causes UK prices to fall across all commodities as UK producers are forced to compete with cheaper prices from non-EU producers. Notably, whilst this did not occur as a result of Brexit, because the TCA was eventually agreed, similar effects could also arise if the UK agrees numerous trade deals elsewhere. This would also have a significant adverse effect on farm incomes.
• In studies that have incorporated labour effects, this is generally seen as detrimental to farm incomes, with limits on free movement of labour increasing UK costs. This effect has been seen during 2021 and became more pronounced due to Covid restrictions on movement and subsequent post-Covid labour market shortages.
• The extent to which any sector, in particular beef, can realise gains in income as a result of Brexit is contingent on the protection afforded to sectors in future trade deals. An increase in non-EU competition is liable to impact the performance of Scottish agriculture^[15].
• The success of some sectors of Scottish Agriculture (e.g. beef, lamb, dairy products) will be partly contingent on their ability to safeguard domestic sales and to reorientate trade from EU towards Non-EU markets and to find high-end niches in these markets. In some sectors, there are physical barriers to this (e.g. liquid milk, where a lot of milk is processed in other parts of the UK).

3.2.2 FTAs with Non-EU Countries

• The impact of future FTAs that the UK agrees with non-EU countries on a given sector depends heavily on the comparative advantage that each country/trade bloc has in terms of the goods produced.
• It is evident that trade impacts will be driven by geographic proximity (i.e. the gravity model of trade)^[i]. An FTA is not a guarantee of increased trade, particularly with nations like Australia and Canada where trade may be geared towards nations where there are pre-existing FTAs (e.g., Australia-China or Canada-USA-Mexico).
• That said, geopolitical considerations need noting. For Australia in particular, given the recent AUKUS defence pact and the tensions that it gave rise to with China, any diversification towards wealthy countries with a strong food import demand (i.e., the UK) will offer some attraction.
• Research into the impact of FTAs on UK agriculture, let alone Scottish agriculture, is still in its infancy and as such evidence with a UK/Scottish focus is lacking.
• Based on the UK FTA agreements with Australia and NZ, it is evident that the biggest impacts on Scottish agriculture will be in the beef, lamb, and dairy sectors. Import competition will increase whilst export opportunities to these countries will be very niche.
• Although the impact of individual FTAs with Australia, NZ and even Canada (i.e., the enhanced FTA) could be relatively small, the aggregated impact would be more pronounced. Arguably more importantly, such trade deals will create important precedents for future FTAs with major global players such as the US and Mercosur (including Brazil and Argentina). These could have an even greater effect on UK and Scottish agriculture.

3.2.3 Other FTAs

• A 2021 study by EU Joint Research Centre (JRC)^[16] examined the cumulative impact of 12 FTAs on EU agriculture (including with Australia, NZ, Canada). It finds that even under an ambitious scenario where 98.5% of tariffs were liberalised and the remaining 'sensitive' products reduce by 50%, the effect on EU production value would be small. Beef and sheepmeat are projected to decline by around 3%; however, the value of EU dairy production rises by a similar magnitude whilst barley production records a minute (0.5%) increase in value.
• An Irish Government impact assessment^[17] of the EU-Mercosur trade deal highlights the potential impact of the trade deal on its agri-food sector, particularly beef. Red meat imports from Mercosur to the EU are projected to grow by over 40% with the value of Irish beef output declining by around €50 million. However, Ireland's production output is projected to decline by a much smaller amount. This means that more Irish produce would need to be exported elsewhere (e.g., the UK). This would mean greater price pressure for Scottish producers from Irish imports, at a time when competition from Australia and NZ would also be increasing.
• The Irish Government study implies that a potential UK-Mercosur FTA in the long-term could have a similar (or possibly more pronounced) impact on Scotland, particularly if it is accompanied by a lowering of standards.
• Due to the gravity model of trade, the application of new regional trade agreements covering Asia-Pacific (e.g., Regional Comprehensive Economic Partnership (RCEP)) or North-America (United States-Mexico-Canada Agreement (USMCA or CUSMA)) are projected to lead to greater trade between geographically proximate countries. This lessens the potential impact of FTAs that the likes of Canada or Australia and NZ (both RCEP signatories) could have on the UK.

3.2.4 Other Issues

• Farm Support: as previous studies on Brexit have noted, significant changes to farm support can have a much more pronounced impact on Scottish farm incomes than Brexit (or future trade deals). As Scotland is in the process of formulating future agricultural policy, details have yet to be finalised and support is set to remain at current levels until 2024 at least. With limited detail available, for the purposes of this study, farm support is assumed to remain unchanged.
• Labour: the ending of Free Movement resulting from the UK's departure from the EU coupled with the impact of Covid-19 have led to significant increases in labour costs and greatly reduced labour availability across UK and Scottish agriculture. Whilst the Seasonal Workers' Scheme (which has replaced the Seasonal Agricultural Workers' Scheme) offers 30,000 places with the potential to increase by 10,000, this is deemed insufficient for the UK agri-food industry as a whole. Particularly, as many sectors (e.g., meat processing) are not seasonal. Accordingly, and as discussed in Chapter 8, labour will have a notable impact on future Scottish agri-food output and competitiveness.
• Regulation: aside from trade-related regulation, covered by non-tariff measures in this study, farm-level regulation, as well as agricultural technology legislation are also important determinants of competitiveness. There is widespread acceptance of the regulatory burden placed on agriculture and the need for reform to enable farmers to get on with the business of farming whilst the sector still retains an appropriate level of oversight. Two often-cited examples in the agricultural technology sphere are the regulation of genetic modification technologies and plant protection products (pesticides). This study assumes no substantive changes to on-farm regulation or to agricultural technology legislation that will be large enough to have an economic impact. It is notable that the Scottish Government has a long-standing policy of opposing the cultivation of GM crops in the open environment. That said, major innovations in this area have the potential to significantly influence the long-term competitiveness of Scottish agriculture.

3.3 Concluding Remarks

Due to the fast-paced nature and infancy of UK trade negotiations, this Evidence Review finds the availability of information, particularly relating to Scottish agriculture, limited. In the two most progressed trade deals with the UK; Australia and New Zealand, the evidence suggests that the hardest hit sectors will be grazing livestock. This is primarily due to Australia and New Zealand having a comparative advantage in the production and export of beef and sheepmeat.

Where a sector can demonstrate a comparative advantage, and there is some evidence that UK is competitive vis-à-vis Canada in dairying, then this sector is more likely to see a positive impact as a result of an enhanced FTA with Canada. That said, the Canadian dairy market is highly protected and is considered to be highly difficult for overseas suppliers to access, even with an FTA in place.

The Evidence Review clearly shows that the degree of impact resulting from any free-trade agreement will depend upon more than just tariffs and TRQs. NTM arrangements are also vital as is the geographic proximity of both trading parties.