CULTURE, TOURISM, EUROPE AND EXTERNAL RELATIONS COMMITTEE AGENDA. 12th Meeting, 2016 (Session 5) Thursday 24 November 2016

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1 CTEERC/S5/16/12/A CULTURE, TOURISM, EUROPE AND EXTERNAL RELATIONS COMMITTEE AGENDA 12th Meeting, 2016 (Session 5) Thursday 24 November 2016 The Committee will meet at 9.00 am in the Robert Burns Room (CR1). 1. The implications of the EU referendum for Scotland: future trade relationships: The Committee will take evidence from Professor Clive Church, Emeritus Professor of European Studies, University of Kent; Professor Matthias Oesch, Chair of Public Law, European Law and International Economic Law, University of Zurich; and then from Professor Gordon Masterton, Chair of Future Infrastructure, University of Edinburgh and former President of the Institution of Civil Engineers, Institution of Civil Engineers; Peter Hardwick, Head of Exports, Agricultural and Horticultural Development Board; David Branch, Head of Business Development, Cochran UK; Derek Elder, Chair, Engineering Policy Group Scotland; Ken Sutherland, President, Toshiba Medical Visualization Systems Europe; David Lonsdale, Director, Scottish Retail Consortium; Tim Reardon, Policy Director, UK Chamber of Shipping. 2. The implications of the EU referendum for Scotland: future trade relationships (in private): The Committee will consider evidence heard earlier in the meeting.

2 CTEERC/S5/16/12/A Katy Orr Clerk to the Culture, Tourism, Europe and External Relations Committee Room Tower T3.40 The Scottish Parliament Edinburgh Tel: The papers for this meeting are as follows Agenda item 1 Note by the Clerk PRIVATE PAPER PRIVATE PAPER SPICe Briefing: Options for the United Kingdom s future trading relationship with the European Union. CTEERC/S5/16/12/1 CTEERC/S5/16/12/2 (P) CTEERC/S5/16/12/3 (P) Types of trade agreement. Briefing paper by Professor Michael Keating.

3 Rechtswissenschaftliches Institut Relationship Switzerland EU Evidence given to the Culture, Tourism, European and External Relations Committee of the Scottish Parliament Professor Matthias Oesch November 24, 2016

4 Rechtswissenschaftliches Institut I. To begin with: Switzerland II. European Integration / Bilateral Treaties III. Autonomous Adoption of EU Law IV. Popular referendum Stop Mass Immigration V. Excursus: CUs and FTAs with Third Countries 2

5 Rechtswissenschaftliches Institut 1) Geography 2) Interdependence 8.3 million inhabitants (2 million foreigners, 1.3 million from the EU/EFTA) 4 th most important trading partner of the EU; 53% of Swiss exports go to the EU; 72% of Swiss imports come from the EU frontier workers (cross-border commuters) 3) Traditions of sovereignty, neutrality, direct democracy, federalism, autonomy in external trade relations (figures from 2015) 3

6 Rechtswissenschaftliches Institut I. To begin with: Switzerland II. European Integration / Bilateral Treaties III. Autonomous Adoption of EU Law IV. Popular referendum Stop Mass Immigration V. Excursus: CUs and FTAs with Third Countries 4

7 Rechtswissenschaftliches Institut OEEC/OECD (1948) European Free Trade Association (1960) Council of Europe (1963) GATT (1966) Free Trade Agreement (1972) OSCE (1975) Insurance Agreement (1989) Bretton Woods (1992), WTO (1995) No to the European Economic Area (1992; 50.3%, 16 Cantons) 5

8 Rechtswissenschaftliches Institut Bilateral Agreements I (1999) (freedom of movement of persons, agriculture, public procurement, conformity assessment, civil aviation, overland transport, scientific and technical cooperation) United Nations (2002) Bilateral Agreements II (2004) (taxation of savings income, anti-fraud, Schengen/Dublin, processed agricultural products, pensions, statistics, environment, media, vocational training, youth) cohesion billion (2006, Act on the Cooperation with Eastern Europe) cooperation with Europol (2004), with Eurojust (2008), with the European Defence Agency (2012) and between competition authorities (2013) 6

9 Rechtswissenschaftliches Institut In particular: Free Trade establishes a free trade area between Switzerland and the EU for industrial products and some processed agricultural products prohibits customs duties and similar measures for covered goods as well as quantitative restrictions (incl. quotas) contains provisions on flanking policies (competition law, prohibition of state aid) supplemented by some 130 additional protocols/decisions/exchanges of letters/etc. note beside: Switzerland introduced, unilaterally, the Cassis de Dijonprinciple in

10 Rechtswissenschaftliches Institut In particular: Free Movement of Persons entitles Swiss and EU citizens, under certain conditions, to choose workplace and residence freely within the territories of the Contracting Parties valid employment contract being self-employed (natural persons) to provide services (up to 90 days per year) economically inactive persons: proof of financial independence and health insurance coverage. prohibits discrimination flanking policies protect employees (compliance with pay and working conditions in Switzerland) refers to EU secondary law (e.g., social security matters, recognition of professional qualifications) 8

11 Rechtswissenschaftliches Institut In particular: Civil Aviation grants commercial flying rights prohibits discrimination enables Switzerland to participate in the European Aviation Safety Agency (EASA) refers to EU secondary law (e.g., compensation/assistance to passengers in the event of cancellation/delays of flights) 9

12 Rechtswissenschaftliches Institut In particular: Schengen abolishes identity checks at the Schengen internal borders guarantees security due to cross-border cooperation (Schengen Information System, SIS II) enables Switzerland to take part in the common visa policy for stays up to 3 months (Schengen visa) enables Switzerland to participate in the European Border and Coast Guard Agency (Frontex) refers extensively to EU secondary law (e.g., Schengener Borders code) 10

13 Rechtswissenschaftliches Institut In particular: Dublin coordinates national responsibilities for asylum procedures, incl. access to the EURODAC fingerprint data bank refers extensively to EU secondary law (e.g., Dublin III-regulation) 11

14 Rechtswissenschaftliches Institut Institutional Setting implementation, surveillance, interpretation, dispute settlement «two pillar-principle» (exception: Agreement on Civil Aviation) mixed committees lack of an ultimate (judicial) arbiter in the case of disagreement up-dating periodic adoption of new EU secondary law no explicit provisions (exception: Dublin- and Schengen-Agreement) 12

15 Rechtswissenschaftliches Institut Negotiations on a Framework Agreement since 2008, the EU has predicated negotiations in areas like energy or services (market access) on the conclusion of an institutional framework agreement major points ongoing (dynamic) adaption of the agreements to the EU acquis consistent interpretation of the treaties in Switzerland and the EU (independent) mechanisms for the surveillance and the legal implementation of the treaties (independent/international) mechanism for the settlement of disputes negotiation mandates (CH: December 2013; EU: May 2014) 13

16 Rechtswissenschaftliches Institut Adoption of new EU law (mandate of the Swiss Federal Council) «The chosen solution contains no automatic adoption of EU law. Switzerland must have the option of deciding, subject to all national processes (such as a referendum), whether to adopt any new EU legislation by means of a bilateral agreement.» Dispute Settlement (mandate of the Swiss Federal Council) «Questions regarding the interpretation of EU legislation forming part of a bilateral agreement may be brought before the Court of Justice of the EU (ECJ) by Switzerland or the EU as and when required. The ECJ s interpretation of EU law is binding. Differences will be settled amicably on this basis by the two parties. If agreement cannot be reached, appropriate compensatory measures, up to and including the partial or full suspension of the bilateral agreement concerned, may be taken.» (own translations from the press release) 14

17 Rechtswissenschaftliches Institut I. To begin with: Switzerland II. European Integration / Bilateral Treaties III. Autonomous Adoption of EU Law IV. Popular referendum Stop Mass Immigration V. Excursus: CUs and FTAs with Third Countries 15

18 Rechtswissenschaftliches Institut Policy of autonomous adoption of EU law / euro-compatibility of Swiss law Our goal has to be to secure greatest compatibility of our legislation with the legislation of our European partners in the areas of cross-border significance (and only there). ( ) This pursuit of parallelism is not motivated by the introduction of an automatism to adopt European law, but by the prevention of unwanted and unnecessary legal differences, which hamper the aspired mutual recognition of legislation on a European level. (own translation from the «Integrationsbericht», 1988) deviations in case of cogent (political, economic) reasons leads to a systematic adoption of EU law: Europe reflex of the legislator 16

19 Rechtswissenschaftliches Institut I. To begin with: Switzerland II. European Integration / Bilateral Treaties III. Autonomous Adoption of EU Law IV. Popular referendum Stop Mass Immigration V. Excursus: CUs and FTAs with Third Countries 17

20 Rechtswissenschaftliches Institut February 2014: adoption of Articles 121a/197(11) of the Federal Constitution (50.3%, 14 ½ Cantons) autonomous control of immigration instruments: annual quantitative limits, quotas, giving priority to Swiss citizens; taking into account Switzerland s general economic interests renegotiation of treaties incompatible therewith within three years Options Renegotiation of the Free Movement of Persons Agreement (AFMP) Termination of the AFMP AFMP-compatible implementation Second referendum on the Constitution 18

21 Rechtswissenschaftliches Institut To conclude The Economist, September 24,

22 Rechtswissenschaftliches Institut I. To begin with: Switzerland II. European Integration / Bilateral Treaties III. Autonomous Adoption of EU Law IV. Popular referendum Stop Mass Immigration V. Excursus: CUs and FTAs with Third Countries 20

23 Rechtswissenschaftliches Institut CU with Liechtenstein (1923) 28 FTAs with 38 partners (in addition to the FTA EU-CH of 1972) source: 21

24 Rechtswissenschaftliches Institut Selected reading MATTHIAS OESCH, Europarecht, Band I: Grundlagen, Institutionen, Verhältnis Schweiz-EU, 2015 THOMAS COTTIER et al., Die Rechtsbeziehungen der Schweiz und der EU, 2014 THOMAS COTTIER/MATTHIAS OESCH, International Trade Regulation: Law and Policy in the WTO, the EU and Switzerland, 2005 CHRISTA TOBLER, Grundzüge des bilateralen (Wirtschafts-) Rechts Schweiz-EU, 2013 STEPHAN BREITENMOSER, Sectoral Agreements between the EC and Switzerland: Contents and Contexts, CMLR 2003, 1137 RENÉ SCHWOK, Switzerland EU: an impossible membership?, 2009 Government:

25 House of Lords: EU EXTERNAL AFFAIRS SUB-COMMITTEE RESPONDING TO BREXIT: FUTURE TRADE IN GOODS BETWEEN THE UK AND THE EU Call for written evidence: Submission from the Agriculture and Horticulture Development Board (AHDB) 20 October 2016

26 AHDB The Agriculture and Horticulture Development Board (AHDB) is a statutory levy board, funded by farmers, growers and others in the supply chain. Our role is to inspire change, stimulate innovation and identify opportunities for businesses to become more profitable. We do this by being the centre for the generation and sharing of knowledge, best practice and providing independent evidence, information and services. We exist because we can deliver greater value collectively than levy payers can do on their own AHDB raises levies from the meat and livestock sector (cattle, sheep and pigs) in England, horticulture, milk and potato sectors in Great Britain and the cereals and oilseeds sector in the UK. The AHDB s remit covers 75% of total UK agricultural output. The funds raised from each commodity sector are used only to the benefit of the sector from which they were raised. Levy is invested in a wide range of activities including R&D, marketing, exports and market intelligence. Because the levy is statutory, AHDB is classified as a Non-Departmental Public Body and comes under the sponsorship of the Department for Environment, Food and Rural Affairs. Enquiry questions and AHDB s response 1. What is the importance of EU trade to your industry? What is the percentage of UK businesses (value added) in your sector either directly trading with the EU or producing for other businesses that are trading with the EU? How many jobs in your industry depend on trade with the EU, how many jobs are there in your industry? 2. The UK exported 18bn worth of food and drink in 2015, of which 10.7bn was to the EU. However, the UK imported over 38.5bn worth of food and drink of which 27bn was from the EU. EU trade is therefore key to the UK agriculture/food and drink sectors. 3. Although not all businesses in food supply chain will export most sell outputs at prices that are determined by commodity markets. As such the value of exports from the UK will influence the domestic prices that farmers and wholesalers achieve. 4. Nearly two thirds (62% by value) of UK agricultural exports are to the EU, with seven tenths (70% by value) of agricultural imports from the EU. The UK is a particularly high net importer for dairy products, pig meat and vegetables. Over 90% of beef and lamb exports and 70% of pig meat exports go to the EU (see chart below sourced using UK HMRC data for further detail) 5. Ireland, France, Germany and the Netherlands are the main EU nations that the UK trades with. UK imports and exports, 2015 Sheep meat 6% Oilseeds 23% Fruit Potatoes Cereals Vegetables Beef Plants/cut Poultry Dairy Pig meat Imports from EU as % of total imports 96% 91% 43% 93% 72% 58% 74% 82% 77% 61% 86% 93% 87% 90% 95% 77% 99% 72% 100% 70% Exports to EU as % of total exports

27 6. Based upon the fact that nearly 2/3 of UK exports by value are to the EU it can be assumed that many jobs in the UK are currently dependent on trade with the EU. However, AHDB is not able to quantify this. 7. According to the Defra June Survey, in 2015 a total of 476,000 are employed in agriculture of which: 294,000 are farmers, business partners, directors and spouses, 183,000 are regular, salaried or casual labour 67,000 are seasonal, casual or gang labour. 8. According to ONS 2014 figures, a further 400,000 are employed in the food and drink manufacturing sector. 9. It is not possible to state how many jobs depend on trade with the EU but as outlined above UK-EU trade is significant and many jobs in agriculture and food and drink will be connected to it. 10. What are the most important elements of the current UK-EU relationship for the success of trade by your sector? What are your sector s main concerns? What would be the best case and the worst case scenario post-brexit? 11. We have identified four key areas of concern for the food supply chain. These are Trade, Farming support, Regulation and Access to migrant labour. 12. From a purely EU trade perspective, remaining in the Single Market would be the best case scenario for agriculture and the wider supply chain in the short term. This would ensure there were no barriers to EU trade, either in the form of tariffs or non-tariff barriers. 13. If remaining in the Single Market is not an option having tariff free access for agricultural and food products will be important. In this case, there are likely to be increased costs of trade and increased bureaucracy and compliance costs with trading. AHDB published a Horizon research report 1 which highlights the external trade tariffs for importing to the EU. If the UK were subject to these tariffs it would make our exports uneconomic. Where we are a net exporter this would most-likely cause domestic prices to fall. 14. Further details can be found in the attached AHDB Horizon research report entitled What will an UK/EU trade relationship look like post-brexit? 15. A worst-case scenario for UK agriculture in the short term would be that barriers for imports are reduced at the same time that barriers to exports are increased. For instance, the UK would be subject to the EU external trade tariffs if a preferential trade agreement is not reached. If the UK chose not to place reciprocally high tariffs on EU imports domestic production would be adversely affected. 16. Are tariff barriers important to your sector and if yes, in which areas? Would they apply to the whole product or to parts of it (supply chain)? What would be the likely impact of UK exports to the EU, and UK imports from the EU, being subject to tariffs? 17. The EU s external tariff barriers are particularly important in the agriculture and food arena. Tariffs are high for commodity products, and higher for processed products. Beyond any agreed quotas, these effective restrict access to the EU for low cost production. 18. Further details can be found in the attached AHDB Horizon research report: What might Brexit mean for UK trade in agricultural products? 19. Whether TRQ s would continue to apply to imports to the UK will be determined during the negotiations over Brexit. The split of TRQs between the UK and the rest of the EU will also form part of any agreement. 1 AHDB Horizon report What might Brexit mean for UK trade in agricultural products 12 October 2016

28 20. A list of current tariffs for key agricultural products can be seen in the attached document. Tariffs into the EU do differ significantly by product being as high as 87% for frozen beef down to 3.8% on whole, fresh sweet potatoes and so if a free trade deal was not reached, then the imposition of these tariffs would be significant for some sectors. 21. Tariffs affect the whole supply chain as they would cover both imported product ready for retail consumption through to inputs costs such as machinery, feed and fertilisers. 22. Which non-tariff barriers (NTBs) are most important in your sector? What role does mutual recognition play? What role do rules of origin play? What role do labelling requirements play? What other issues with customs/market access could arise with Brexit? 23. As part of Single Market there are no issues trading with the EU with regard to non-tariff barriers but non-tariff barriers currently effect trade with the rest of world. The principal risk would be if UK the UK sets its own rules with regards to rules of origin, labelling and other criteria this will lead from divergence from EU standards leading to additional technical barriers and paperwork when exporting to the EU. 24. With regard to trade with non-eu countries then non-tariff barriers exist and include sanitary and phytosanitary (SPS) measures and technical barriers to trade. In practice these measures are often the hardest to agree in trade agreements, as seen in the recent Transatlantic Trade and Investment Partnership (TTIP) where issues such as antimicrobial treatments and hormone-treated beef are highly contentious. The EUs broad approach is to ensure a level playing field, regulating and restricting imports of products where regulation prevents production within the EU. 25. Technical barriers to trade can also become obstacles but they are often deemed necessary for a range of reasons, from environmental protection, safety, national security to consumer information. Therefore the same basic question arises again: how to ensure that standards are genuinely useful, and not arbitrary or an excuse for protectionism. Examples of technical barriers to trade include country of origin labelling and restrictions on importation of genetically modified products. 26. How would supply chains in your industry be affected by changes to the framework for UK-EU trade? How likely is it that supply chains would be interrupted/sourcing would be changed because of the imposition of tariffs on components? Would supply chains be more affected by tariff barriers or by NTBs? 27. The effect on supply chains would depend on the nature of the future trade agreement with the EU. The imposition of tariffs for importing from and exporting to the EU could have a significant impact on input costs e.g. feed, fertiliser and machinery. The effect of supply chains of tariffs or NTB s will depend on the relationship for trading with the EU. Further details can be found in the attached AHDB document: What might Brexit mean for UK trade in agricultural products? 28. What is the significance of standards elaborated by the EU (even if transposed into UK law) in your sector? What is the significance of standards elaborated by UK bodies? What about international standards (even if transposed by EU / national law)? If EU standards were no longer mandatory, would you regard this as an advantage, or would you comply with them anyway to trade with the EU? 29. We expect that EU standards will be key to trading with the EU. The UK would need to comply with them in order to trade with the EU. Such standards relate to a number of areas covering food labelling, food safety and animal health. Any divergence could lead to increased paperwork, certification and limited opportunities to trade with the EU. In order to export agricultural goods from the UK, an Export Health Certificate (EHC) is usually required. These are frequently issued on the basis that EU sanitary, phytosanitary and veterinary standards equivalent to the UK standard. Where agricultural products are produced from different production systems these often cause non-tariff barriers to trade. Complying with EU standards

29 is also important to non-eu market access as trade agreements may be underpinned by these. This could therefore result in the loss of market access for key markets. 30. In your sector, do you think there would be a difference in the impact on small and medium sized enterprises in comparison to large companies of a change to the EU-UK relationship? If yes, what would it be and why? 31. The impact of a change in the relationship would impact firms of all sizes. EU rules and regulations affect businesses across the whole supply chain. Although not all businesses will be directly involved with exporting, access to the Single Market influences domestic prices. If a future EU/UK relationship created additional barriers to trade the effect of these would be felt greatest by businesses involved with exporting and importing from the EU. 32. What would be important for the Government to consider when revising its anti-dumping and countervailing duties regime and import tariffs? 33. It would be important for the Government to consider the level of support in other countries where production may be heavily subsidised when considering tariffs. These producers would have a price advantage over domestic supply due to increased subsidies, lower levels of regulation, application of science which may currently be banned in the EU e.g. hormone use in beef production and GM in crops, particularly with regards to the environment and animal welfare. 34. What are the potential opportunities and challenges for your sector from leaving the EU in terms of Intellectual Property law (in particular the Unitary Patent/Community Trademarks). 35. AHDB is not able to provide a response to this question. 36. How would you assess the likely impact of Brexit on your access to labour? What percentage of the workers in your industry come from within the EU? Do you expect there to be a difference in the impact of Brexit on high-skilled and low-skilled labour from the EU? 37. The impact of Brexit would have a significant impact on labour if there was no free movement of labour. The agricultural sector and associated food processing sectors are reliant on relatively lower-skilled labour. 38. The seasonal nature of demand and falling unemployment in the UK have resulted in the UK agricultural industry becoming increasingly reliant on a supply of labour from Europe. Employers in the UK agricultural and horticultural sectors, along with those further up the supply chain (i.e. food processors), hire both permanent and seasonal migrant workers. Maintaining this supply of labour is an important factor influencing the competitiveness of the agricultural industry, and the wider economy post-brexit. It is a major component of the industry s total cost of production. Figures from Defra s agricultural accounts put the value of paid labour at 2.5 billion in 2015, equating to around 14% of total financial inputs. 39. Based on figures from the June Census, the number of regular employees in UK agriculture, excluding seasonal, casual and gang labour, is 115,000. If we include seasonal, casual and gang labour, the total rises to 182,000. If we include farmers, directors and their spouses the figure for employees in agriculture would rise to 476, It is challenging to accurately measure the number of these workers who are EU migrants. A good starting point is the Government s official figures provided by the Office for National Statistics (ONS). These show there were more than 22,000 EU-born migrants working in agriculture in These numbers have increased steadily in recent years, rising 41% since It is important to highlight these figures are likely to underestimate the true extent of EU and other migrant workers. While they will capture those migrants who have settled in the UK and

30 are working in permanent roles, these figures will not capture seasonal workers coming to work in the UK for short periods of time. Given this, it is not unreasonable to view the 22,517 EU nationals as accounting for around 20% of the 115,000 regular employees in the sector. 42. Accurate figures for seasonal migrant labour in agriculture are not captured. However, it is clear that EU migrants are likely to be filling the majority of these roles. 43. According to an NFU study in 2015, horticulture was already experiencing labour shortages. Looking ahead, the results of the study also show an anticipated worsening of labour availability by ONS figures show migrant workers are important in related sectors of the economy. In 2014 migrants accounted for 38% of the workforce in food manufacturing, the highest percentage of any sector. Of these, 14% were recent migrants, again the highest for any industry. 45. Agriculture has one of the highest proportions of hard to fill vacancies. Manufacturing, including food processing businesses, has a similarly high share of such vacancies, with both over 45%. 46. If migration is restricted and no exceptions made for agricultural labour, it seems likely that the industry will go through structural change. By changing the relative cost of factors of production, it could divert businesses into less labour-intensive production systems and change the nature of UK agricultural production. Horticultural businesses would be particularly vulnerable to a reduction in affordable, seasonal labour. 47. Restricted access to migrants would push up wages to attract UK workers and increase costs of production resulting in product being uncompetitive on domestic and export markets. Alternatively further mechanisation of processes could reduce requirements. However, many parts of the sector do not lead themselves to east automation. 48. Further details can be found in the attached Horizon research report from AHDB entitled The impact of Brexit on the UK agricultural workforce. 49. What proportion of your industry s raw material imports currently come from the EU? How much of your industry s raw material imports are covered by FTAs between the EU and third countries, or by preferential agreements the EU has with African Caribbean Pacific (ACP) states and Least Developed Countries (LDCs)? 50. The UK is reliant on imports from other nations particularly with regards to machinery, fuel, feed and fertiliser. The attached AHDB research report How will Brexit affect the UK s trade outside the EU? highlights current patterns of food and drink trade outside the EU. The UK currently imports over 0.5bn of food and drink imports from Sub-Saharan Africa. 51. How would trade in agricultural products between the UK and the EU be affected by the UK leaving the EU s common agricultural policy (CAP)? 52. This would depend on the nature of the support scheme adopted by the UK government and trading relationship with the EU. Many UK farmers are heavily reliant on support through the CAP, particularly, beef and sheep, cereals & oilseeds, potatoes and dairy farmers. The level of support given by the UK government following the exit from CAP would be key in determining farm incomes. Further details can be found in the attached AHDB Horizon research report: Agricultural policy models in different parts of the world. 53. How would the renegotiation of tariff-rate quotas between the UK and the EU in the WTO affect your industry? Which countries would take an interest in this renegotiation and try to influence it? 54. EU annual Tariff Rate Quotas exist for Australian and New Zealand lamb. In 2015 the UK imported 68,800 tonnes of New Zealand and 13,900 tonnes of Australian product at zero tariff. These two countries are likely to wish to maintain access to the UK market, post-brexit.

31 55. For cereals a number of EU TRQ exist. For wheat, just over 307,000 tonnes can be imported from any country at a tariff of $16 per tonne. An additional 250,000 tonnes can be imported duty-free from Ukraine. A separate TRQ for malting barley enables 51,000 tonnes to be imported at a duty of 8 per tonne. For maize a total of 280,000 tonnes can be imported into the EU duty from non-eu countries. Ukraine has a separate TRQ and can import up to 400,000 tonnes of maize into the EU duty free each year. 56. Other highly relevant TRQ s include butter and cheese. New Zealand s butter and cheese may enter the EU at 74,693 tonnes for butter and 11,000 tonnes for cheese per annum. In 2014, the UK was the main importer for this butter importing 11,631 tonnes out of the EU total of 50,000 tonnes imported. Other important TRQs exist for beef and sugar. 57. If the UK is no longer able to have access to product via an EU TRQ at tariff free or reduced tariff rate then this is likely to lead to an increase in the UK price as it can no longer benefit from importing at a reduced price. 58. What impact do you expect Brexit will have on the protection of UK geographical indications? 59. Under the EU quality system, a named food or drink originating either from the EU or from outside the EU, once registered at European level, will be given legal protection against imitation throughout the EU. Any individual food producer or group of food producers can apply for EU protected food names. This is, however, a demanding process as it entails making a detailed and well-argued draft product specification and nomination of an inspection body. 60. To date, there are 77 UK registered products which have a sales value of EUR 1,059 million. 15 applications are still in the pipeline. 61. In principle, non-eu products can benefit from EU protection. Already registered protected food names should be able to benefit from EU protection against imitation provided there is a reciprocal agreement between the UK and the EU. When it comes to future applications, UK products would need to be already protected under a UK protected food name scheme, so as to be able to apply for the EU protection. 62. Once the UK will stop being an EU member, it will no longer be possible for UK protected food names to be promoted in the EU or abroad with the financial support of the EU. However, UK agricultural producers might still see some potential in using EU protected food names as a valuable marketing tool to differentiate their products on the EU/International markets and thus improve their competitiveness and profitability.

32 HORIZON Market Intelligence 8 July 2016 What will an UK/EU trade relationship look like post-brexit? 1

33 SCENE SETTING The nature of the future relationship that the UK government will seek to negotiate with the rest of the EU has not yet been defined, following the 23 June referendum decision to leave. It is expected that negotiations will commence once the UK gives formal notice to leave the EU under Article 50 of the Lisbon Treaty, which is not expected before a new Prime Minister is chosen. Negotiations will take place over a two-year period, which may be extended by agreement of all 27 remaining EU Member States. Until the moment the UK leaves the EU it remains a full Member State of the Union and therefore bound by all Treaty obligations, legislation and policy. Nearly two thirds (62% by value) of UK agricultural exports are to the EU, with seven tenths (70 per cent by value) of agricultural imports from the EU. The UK is a particularly high net importer for dairy products, pig meat and vegetables. 90 per cent of beef and lamb exports and 70 per cent of pork exports go to the EU. UK agricultural trade with the EU 1 Sheep meat Oilseeds Potatoes Cereals Beef Poultry Dairy Pig meat 6% 23% 58% 96% 91% 72% 74% 82% 86% 93% 95% 77% 98% 72% 100% 70% Imports from EU as % of total imports Exports to EU as % of total exports This document sets out five potential trade relationship options post-brexit and explores the pros and cons of each. It is the first of a series of analyses from AHDB looking at the implications of the EU exit. When published, these will be available at 1 Eurostat

34 CONTENTS What are the options for a UK/EU relationship post-brexit? 3 The Norway option 4 The Swiss option 4 The Turkish option 5 The US/Canada option 6 The WTO option 6 Which option is likely to be chosen? 7 WHAT ARE THE ALTERNATIVE OPTIONS FOR A UK/EU RELATIONSHIP POST-BREXIT? At his address at the AHDB Outlook Conference 2016, Alan Matthews, Professor of European Agricultural Policies at Trinity College Dublin, identified five examples of alternatives to full EU membership, three of which already exist within Europe. It is an unprecedented event for a Member State to leave the EU. The country-specific models set out in this paper have emerged in the context of a historical timeframe of EU evolvement and therefore cannot be viewed by the UK as off-the-peg solutions. The chart below compares how much power the UK has to regulate itself against the costs associated with trade for each of these options. Alternatives to full EU membership Low Regulatory autonomy High EU Membership Norway option Swiss option bilateral agreements Turkish option customs union US/Canada option WTO option Low Trade costs High Not to scale 3

35 THE NORWAY OPTION Tariff-free access to the EU s Single Market but freedom to control own external trade policy Inside the Single Market, although some agricultural products are exceptions Outside the EU Customs Union Operate own external trade policy Subject to most EU rules and regulations for exports into the EU Pros Continue to trade with EU without any barriers, as part of the Single Market Cons Continue to follow majority of EU rules and regulations which act to bind the Single Market together Integration without representation as would no longer have voting rights on the rules and regulations Able to negotiate trade deals with partners outside the EU May take up to 10 years to set up trade deals with third parties that EU already has agreements with Reduced contribution to EU budget (approximately 20 per cent per capita lower) Still required to contribute towards EU budget Able to introduce own agricultural policy Uncertainty on level of UK government support for agriculture within future policy Migrant workers from EU able to work in agriculture due to free movement of people THE SWISS OPTION Bilateral agreements giving greater autonomy than Member States or Norway on adopting EU rules and regulations but compliance to maintain trade links Outside the Single Market Outside the EU Customs Union Free trade agreements with individual EU Member States Compliance with many EU rules and regulations 4

36 Pros Able to trade with the EU via multiple Free Trade Agreements with EU Member States Reduced contribution to EU budget (approximately 60% per capita lower) Not part of EU Customs Union so able to negotiate own trade deals with other parts of the world Able to introduce own agricultural policy Migrant workers from EU able to work in agriculture due to free movement of people Cons Must continue to follow many EU rules and regulations Still required to contribute towards EU budget May take up to 10 years to set up trade deals with third parties that EU already has agreements with Uncertainty on level of UK government support for agriculture within future policy Increased bureaucracy involved with having multiple bilateral agreements. EU currently not agreeing further bilateral agreements with the Swiss. THE TURKISH OPTION A stripped-back Customs Union operating outside the EU framework of treaties and institutions Outside the full Single Market Inside the EU Customs Union for some goods Free from most EU rules and regulations Pros Customs Union arrangement allows free movement of goods with the EU with no requirement to adopt many EU regulations linked to the Single Market Contribution to EU budget likely to reduce UK able to introduce own agricultural policy Cons Required to adopt EU external trade policy for imports but not able to access existing and future EU trade deals with third countries for exports While Turkey does not fund EU budget (as the deal it agreed was linked to joining the EU in future) the UK would be required to do so Uncertainty on level of UK government support for agriculture within future policy Likely that migrant workers from EU would find it harder to work in agriculture due to no free movement of people with the EU 5

37 THE US/CANADA OPTION Seek trade agreements tailored to national interests Complete breakaway from EU UK sovereignty over policy and regulation Pros Power to agree future trading arrangements with EU and others Cons As a smaller entity than the EU, may have less bargaining power within trade discussions Free trade agreements unlikely to remove all trade barriers, some tariffs likely No longer party to any trade agreements negotiated by the EU with third countries No contribution to EU budget Not required to follow EU rules and regulations Differing standards and rules may become non-tariff trade barriers with the EU or others Likely that migrant workers from EU would find it harder to work in agriculture due to no free movement of people with the EU THE WTO OPTION Rely on the multilateral trading system through UK membership of the World Trade Organisation (WTO) rather than negotiating own agreements Pros No contribution to EU budget Not required to follow EU rules and regulations Trade barriers may raise food prices which would benefit domestic producers Cons Tariffs will act as a barrier to UK exports to EU and elsewhere No longer party to any trade agreement negotiated by the EU, with third countries Likely that migrant workers from EU would find it harder to work in agriculture due to no free movement of people with the EU Differing standards and rules may become non-tariff trade barriers with the EU or others 6

38 WHICH OPTION IS LIKELY TO BE CHOSEN? At present, the UK has not defined the type of relationship it intends to seek in the negotiations and when this does happen it is far from certain whether the EU will be agreeable. During the referendum campaign, senior Leave campaigners signalled that the UK should continue to access the Single Market at the same time as leaving the EU. It is unclear from this whether their intention is/was to retain the UK s trading status within the Single Market or seek access on a bilateral trading basis. Though this distinction may seem subtle, it is fundamental to determining whether the UK would be bound by EU principles, especially free movement of goods, labour, services and people. If the UK seeks to negotiate on a similar basis to Norway as a full trading partner in the Single Market it will benefit from free movement of goods but must also accept free movement of labour and also EU regulatory burdens that bind the Single Market together. Some Leave campaigners hinted at a preference for a bilateral trading model similar to the trade agreement that Canada has negotiated with the EU, albeit with much greater market access. This may enable greater control over free movement from the EU, which has also been a central pillar of the Vote Leave manifesto. In the course of the obligatory two-year negotiation period to determine the new UK/EU relationship, the importance of the UK as a destination for EU trade means, on balance, individual EU Member States are likely to want terms which will not strongly disadvantage their own UK trade relationship. Author David Swales Head of Strategic Insight T: E: david.swales@ahdb.org.uk 7

39 While the Agriculture and Horticulture Development Board seeks to ensure that the information contained within this document is accurate at the time of printing, no warranty is given in respect thereof and, to the maximum extent permitted by law, the Agriculture and Horticulture Development Board accepts no liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered directly or indirectly in relation to information and opinions contained in or omitted from this document. Reference herein to trade names and proprietary products without stating that they are protected does not imply that they may be regarded as unprotected and this free for general use. No endorsement of named products is intended, nor is any criticism implied of other alternative, but unnamed products. Agriculture and Horticulture Development Board Stoneleigh Park Warwickshire CV8 2TL Agriculture and Horticulture Development Board 2016 All rights reserved 8

40 HORIZON Market Intelligence 19 July 2016 How will Brexit affect the UK s trade outside the EU? 1

41 SCENE SETTING The referendum decision on 23 June has raised a number of questions around the approach the UK Government(s) will take to areas of policy which were previously decided at EU level. One of these areas is trade. In a previous edition of Horizon we explored how UK trade with the EU could change post-brexit. This edition explores issues relating to UK trade with non-eu countries, reviewing the extent to which the UK s current trade arrangements with other parts of the world are dependent on membership of the EU. While we have presented this as a separate analysis, it is important to acknowledge there are interconnections with the UK/EU relationship. For instance, if the UK were to negotiate a relationship with the EU which involves staying within the Single Market and the EU Customs Union, it would have to adopt current EU tariffs and would not have the flexibility to negotiate its own trade deals with partners outside the EU. Within the analysis we present in later sections we make the assumption that the UK will join the World Trade Organisation (WTO), will set its own external trade policy and will not be part of the EU Customs Union post-brexit. While this is not certain, during the referendum campaign senior Vote Leave campaigns argued that securing autonomy in this area and increasing our trade with the rest of the world would be a benefit of leaving the EU. Until the moment the UK leaves the EU it remains a full Member State of the Union and therefore bound by all Treaty obligations, legislation and policy. CONTENTS Current UK trade outside the EU 3 Trade agreements explained 4 What approach will the UK take on trade policy post-brexit? 6 Existing EU trading structures and their possible influence on UK trade post-brexit 8 Conclusions 9 2

42 CURRENT UK TRADE OUTSIDE THE EU Current patterns of food and drink trade outside the EU ( millions) North America Asia and Oceania Middle East and North Africa Sub-Saharan Africa Latin American and Caribbean Western Europe exc EC Eastern Europe ,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Export Import Source: HMRC 2014 The UK s main exports to the US are beverages and spirits, processed cereal and cheese. The UK s main imports are beverages and spirits, fruit, vegetables and oilseeds. For Asia and Oceania, UK imports are dominated by meat, particularly sheep meat, from Australia and New Zealand. UK exports are mainly spirits and beverages to Hong Kong, China, Australia and Singapore, and livestock products, notably offal, to China and Hong Kong. While the EU is the UK s most important trading partner, non-eu trade is becoming increasingly important, having grown from 34% (around 5.5 billion) in 2010 to 40% (around 7.3 billion) in Agriculture and global market reports identify that these markets offer the greatest predicted increase in demand for agricultural products. UK food and drink exports ( millions) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Source: Defra EU Non EU 3

43 Main export destinations of UK food and drink outside EU Food and drink exports in total vs raw agricultural exports ( millions) US Hong Kong UAE Canada Australia China Singapore South Africa South Korea Japan Switzerland Norway Nigeria Mexico Saudi Arabia Egypt Brazil India Turkey Russia Source: HMRC/Comtrade Total food and drink Raw agricultural products Looking at UK food and drink trade with specific countries, the US is by far the most important market at present, with Hong Kong, UEA, Canada, Australia, China, Singapore, South Africa and Taiwan also significant. In value terms, UK food and drink exports are dominated by processed products rather than raw commodities. UK exports are also diverse, encompassing milk powder, truffles, oysters, natural honey, beer, gin, cider, flavourings and specialist ingredients. Although raw commodities only make up a small proportion of total food and drink exports, for the farming industry exports of specific commodities such as cereals to North Africa (worth 75.5 million in 2014) and seed potatoes to Egypt (worth 25.5 million in 2014) are critical in underpinning market prices. TRADE AGREEMENTS EXPLAINED The role of the EU in trade Trade relationships outside the EU are coordinated through the Common Commercial Policy. Within the European Commission, a Trade Commissioner leads negotiations in multilateral and bilateral trade talks. As a result of these, the EU currently has Free Trade Agreements (FTAs) with Mexico, South Africa, Chile and South Korea. Trade talks are also ongoing with other parts of the world as shown on the map page 5: 4

44 Current EU trade agreements The state of EU Trade, June 2016 EU and customs union European Economic Area Preferential trade agreement in place Preferential agreement awaiting adoption or in negotiation Source: European Commission Why are trade agreements important? Free Trade Agreements (FTAs) are designed to reduce the barriers to trade between two or more countries. These barriers are usually in the form of tariffs (a charge placed on each unit of the good imported) or quotas (a limit on the amount of good that can be imported) and are in place to help protect local markets and industries. Trade negotiations are lengthy and complex, taking many years to reach agreement. Many suggest that the EU s negotiating weight has enabled it to achieve better results in international negotiations than individual Member States would on their own. However, it can also be said that being part of the EU has limited the UK s ability to prioritise its own interests, with trade agendas being driven by the interests of other Member States. Brexit may provide an opportunity to pursue bilateral trade on a global basis, expanding markets such as the US, China and Russia, where much of the predicted growth in demand for agricultural produce lies. A list of pros and cons for international trade post-brexit is outlined on page 6. 5

45 International trade: Pros and cons of being outside the EU customs union Pros The UK would be free to negotiate new trade deals based on domestic priorities. The UK would have more flexibility in its negotiations and its decision-making processes, which could make negotiations simpler and less protracted. The UK Government can choose to prioritise its own industries in line with domestic policy and set trade objectives accordingly. The current Government has placed a greater emphasis on food exports, setting a target to increase exports by 20% 1. Cons As a smaller entity, the UK may not have the same leverage as the EU in negotiating international trade deals and may have less influence in global trade discussions. The UK may lose access to existing EU free trade agreements, as this issue will form part of UK/EU negotiations. The UK will face negotiating a number of free trade agreements with its global partners across a large number of export markets. Estimates suggest it could take 10 years to gain access to markets with which the EU currently has preferential agreements. This would leave the UK subject to World Trade Organisation (WTO) terms and tariffs for a period of years after formal Brexit. In future, agricultural trade may be less of a priority for the UK than it was for the EU as a whole. WHAT APPROACH WILL THE UK TAKE ON TRADE POLICY POST-BREXIT? Trade theory Put simply, free trade allows countries to specialise and exchange goods, creating economic growth and greater choice for the global consumer. However, few countries pursue a policy of completely free trade. The following section will attempt to explain some of the reasons why governments may wish to restrict trade. The questions facing the UK Government post-brexit will be: 1. Should they aim for freer or more restricted trade? 2. In which sectors should restrictions be tightened or relaxed? 1 Defra Export Action Plan 2014 to

46 Pros and cons of protectionist trade policy: Benefits of protectionist trade policy to UK agriculture Pros Protects vulnerable sectors from cheap imports. Maintains a degree of food selfsufficiency. Spreads risk of price fluctuations. Maintains rural landscapes and communities. Prevents importation of harmful goods. May help achieve environmental policy objectives. Cons Reciprocal policies may limit UK potential export markets. May raise prices of imported inputs to the agricultural sector. Makes production less efficient as price mechanism is distorted. Reduces economic growth. Reduces choice to the consumer. Raises prices to the UK consumer. Risks of protectionist trade policy to UK agriculture For the agricultural sector, economic arguments for trade restrictions include: 1. To spread the risk of fluctuating markets a diverse UK agricultural industry spreads the risk of price fluctuations, a feature of agricultural markets. 2. Preventing the importation of harmful goods agricultural goods produced outside the UK may not have been produced to the same standards with regard to use of pesticides, herbicides, antibiotics, etc. thus posing a potential health risk to the UK consumer. In addition, non-economic arguments for trade restrictions include: 1. Maintaining a degree of self-sufficiency for agricultural produce, a policy pursued post-world War II. 2. Restricting trade with countries with which the UK disagrees politically. 3. Maintaining rural landscapes, communities and traditional ways of life. 4. Environmental considerations and policy objectives. Methods of restricting trade include the use of tariffs on imports, ie a fixed amount or percentage of the price of the product added to make them more expensive to UK buyers, or quotas, ie a limit on the quantity of a good that can be imported. In addition, non-tariff barriers are frequently used, such as sanitary and phytosanitary standards (SPS) and animal welfare standards. The issue surrounding a protectionist trade policy is primarily that it will distort trade and is highly likely to be reciprocated. As a result, it may limit economic growth, push prices up for UK consumers and potentially limit consumer choice. The UK Government needs to decide to what extent it wishes to support the UK agricultural industry via trade policy and at what cost to the UK consumer. This also needs to be seen in the wider context of UK trade policy as a whole. 7

47 EXISTING EU TRADING STRUCTURES AND THEIR POSSIBLE INFLUENCE ON UK TRADE POST-BREXIT Post-Brexit trade negotiations will depend very much on the relationship the UK will have with the EU following the negotiations. The UK could remain inside the Single Market, inside of the Customs Union or choose to be outside one or both. Based on our previous assumption that the UK will be outside the Customs Union, it may find itself having to renegotiate the FTAs currently in place on a bilateral basis. The UK is already in a legal relationship with the partner countries having separately ratified these agreements. Nonetheless, at a very minimum, Brexit would imply textual changes to these agreements to recognise that the agreement is now with the UK directly and not through the EU. This would imply a process of ratification both by the UK and by each of the individual trade agreement partner countries. This could be a lengthy process, especially given that the skill set for trade negotiations within the UK is limited, with most of the expertise in this area having been based in Brussels and negotiating on our behalf from within the EU. Also, under the WTO agreements, countries cannot normally discriminate between their trading partners. They cannot grant someone a special favour such as a lower customs duty rate for one of their products without doing the same for all other WTO members. This is also known as the most favoured nation principle. This would imply that it may not be easy to maintain the market access granted under the EU s trade agreements without negotiations to reach parallel agreements with these countries. While signing new agreements outside the EU is certainly feasible, whether details can be agreed before the end of the withdrawal period from the EU remains to be seen. In order to export agricultural goods from the UK, an Export Health Certificate (EHC) is usually required. These are frequently issued on the basis that EU sanitary, phytosanitary and veterinary standards are equivalent to UK standards. Below is a list of some of the countries for whom the UK has an export licence. This is not exhaustive, but intended to indicate areas where trade takes place: Country Beef Lamb Pork Dairy Cereals Potatoes US 1 Yes Yes Yes Yes Yes No Hong Kong Yes Yes Yes Yes Yes Yes UAE No Yes Yes Yes Yes Yes Canada Yes Yes Yes Yes Yes No Australia No No Yes Yes Yes No China No No Yes Yes Yes Yes Singapore Yes Yes Yes Yes Yes No South Africa Yes No Yes Yes Yes No Taiwan No No Yes Yes Yes No South Korea No No Yes Yes Yes No Japan No No Yes Yes Yes No Saudi Arabia No No No Yes Yes Yes Source: Animal and Plant Health Agency, SASA 1 Although an export licence for beef to US exists, the US has not completed plant inspections, which are required before trade is possible. 8

48 Membership of the EU has meant that, up until now, EU laws on sanitary and phytosanitary standards (SPS) of production were acceptable to third parties as part of EU trade agreements or arrangements currently in place on a bilateral basis. Whether other countries will accept UK standards as being equivalent to EU standards post-brexit is not known. It may be that they are simply transferable. For instance, China tends to conduct its trade on a bilateral basis and inspects each plant in each country that it intends to trade with. Indications suggest that for China, this is unlikely to be an issue. Otherwise, the UK will either have to adopt all existing EU laws on standards of production or renegotiate each trade relationship on a bilateral basis. If SPS are not easily transferable, this could have serious implications for the continuity of trade on a technical basis. CONCLUSIONS Leaving the EU will affect UK agricultural trade in a number of ways. Having been a member of the EU in its various forms for over forty years, UK trade is closely intertwined with EU trade policy and agreements. Extracting ourselves from this relationship will be both complex and time consuming. Establishing external trade relationships on a standalone basis will be challenging. The key issues are: 1. In size terms alone, the UK will not have the same bargaining power in negotiating trade deals as it benefited from as part of the EU. However, the UK will benefit from greater flexibility, and the ability to focus on its own priorities, rather than an EU collective set of priorities. 2. What level of priority will UK agriculture be given in negotiations? Agriculture is only one sector of the economy to consider when trade agreements are negotiated. It appears unlikely that the UK Government will place as much priority on agriculture as has been provided at an EU level although the current Government has placed greater importance on agriculture and food exports than enjoyed in recent years. 3. The complexity and time trade negotiations take. For existing EU Free Trade Agreements (FTAs), the negotiation process will determine what share of these agreements the UK will be entitled to. For agricultural trade outside of FTAs, what sort of continuity on technical issues will be possible? Transferring EU sanitary and phytosanitary standards (SPS) to UK equivalents may be straightforward or complex. AHDB will be continuing to monitor developments closely. A great deal will depend on how liberal the new UK Government wishes to be on trade and how agricultural trade features in the bigger trade picture of a post-brexit UK. Authors David Swales Head of Strategic Insight T: E: david.swales@ahdb.org.uk Sarah Baker Senior Analyst T: E: sarah.baker@ahdb.org.uk 9

49 While the Agriculture and Horticulture Development Board seeks to ensure that the information contained within this document is accurate at the time of printing, no warranty is given in respect thereof and, to the maximum extent permitted by law, the Agriculture and Horticulture Development Board accepts no liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered directly or indirectly in relation to information and opinions contained in or omitted from this document. Reference herein to trade names and proprietary products without stating that they are protected does not imply that they may be regarded as unprotected and thus free for general use. No endorsement of named products is intended, nor is any criticism implied of other alternative, but unnamed products. Agriculture and Horticulture Development Board Stoneleigh Park Warwickshire CV8 2TL Agriculture and Horticulture Development Board 2016 All rights reserved 10

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