15 July 2019

Dr Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex and  Julia Magntorn Garrett is a Research Officer in Economics at the University of Sussex. Both are Fellows of the UK Trade Policy Observatory. 

A favourite band (of at least one of the authors of this blog) from the 1980s was the Cocteau Twins (See, or rather listen to…Sugar Hiccup) – well-known for the dreamy unintelligibility of their lyrics.  Which of course leads to the dreamy unintelligibility of some of the promises being made around Brexit. Supporters of Brexit have argued that the UK need not be overly concerned with a ‘No deal’ Brexit. This ranges from positions that ‘No deal’ would not be “as frightening as people think” although there would be “some hiccups in the first year” (David Davies), and that although there may be “some disruption” Britain would “survive and prosper without a deal” (Jeremy Hunt), to arguments that the idea that ‘No deal’ would have a negative impact were “a fantasy of fevered minds” (Jacob Rees Mogg).

But how big could those disruptive hiccups be? We cannot know for certain, but Jeremy Hunt thinks they are big: on 1st July, he pledged £6 billion to help farmers and the fishing industry in the event of no deal. This is a sector which comprises circa 1% of the UK economy, yet may need £6 billion in support.

Leaving aside the WTO legality of any such action (see here for a discussion), let’s try and put these numbers in context. First, we consider how much agriculture and food-processing (agri-food) trade would be directly affected by the tariff changes arising in the event of ‘No deal’. Second, we assess how big the impact might be when we simulate the impact of the UK government’s proposed tariff changes in a more formal economic model.

How much agri-food trade would be affected?

Agricultural tariffs, for products such as sugar, meat and dairy,[1] can be particularly high so any changes may have relatively large consequences. In a ‘No deal’ scenario the resulting tariff changes directly impact on both exports and imports, and the tables below provide some summary statistics.

Table 1: UK total agri-food trade (average 2017-2018)
Partner country	Total Exports, £bn (% of total UK agri-food exports)	Total Imports, £bn (% of total UK agri-food imports)
EU	14.5 (62%)	35.6 (71%)
FTA & GSP countries1	3.2 (14%)	8.2 (16%)
Rest of the World	5.8 (25%)	6.1 (12%)
Total	23.6	49.8
1 Covers countries which the UK, through its membership of the EU, currently has Free Trade Agreements (FTAs) with or which are eligible under the EU’s Generalised Scheme of Preferences (GSP), including countries under Everything But Arms (EBA).
Source: UN Comtrade, HS2017 6-digit. Values have been converted from USD to GBP using the average OECD exchange rate for years 2017-2018. Agri-food is defined as all products in HS chapters 01-24

Table 2: UK affected agrifood trade (average 2017-2018)
Partner country	Affected Exports, £bn (% of total UK exports of ‘affected’ products)	Affected Imports, £bn (% of total UK imports of ‘affected’ products)
EU	11.4 (71%)	7.6 (71%)
FTA & GSP countries	*	*
Rest of the World	n/a	3.1 (9%)
Total
* Although not included in this analysis, some of UK’s exports and imports from FTA countries will also be affected if the existing agreements are not rolled over.
Source: UN Comtrade, HS2017 6-digit. Values have been converted from USD to GBP using the average OECD exchange rate for years 2017-2018. Agri-food is defined as all products in HS chapters 01-24

Exports: On average, around 62% of all UK agri-food exports go to the EU. In a ‘No deal’ outcome, the UK would face tariffs on exports to the EU, and also other countries who have not agreed to roll over existing free trade agreement (FTA) arrangements. The value of UK agri-food exports to the EU that could face new tariffs is around £11 billion, accounting for over 71% of UK exports of these affected products.[2] The imposition of EU (and FTA country) tariffs will make it more difficult for these products to be exported from the UK.

Imports: Here there are two effects:

• The UK’s ‘No deal’ tariffs, announced in March 2019, would lower or eliminate tariffs on a range of agri-food products. Indeed, tariffs would be eliminated on 88% of those agri-food products where there are currently positive Most Favoured Nation (MFN) tariffs.[3] This means that countries currently exporting those products to the UK on the basis of the EU’s MFN tariffs could export to the UK at lower, or zero, tariff in a ‘No deal’ scenario.
• However, since the UK would not eliminate all agri-food tariffs, EU exporters (who currently trade with the UK tariff free) would now face some tariffs in the UK market.

On average across 2017-2018, around 9% (£4.5 bn)[4] of UK’s total agri-food imports faced tariffs. In the event of ‘No deal’, the UK’s proposed tariffs mean that just over £3 billion of these imports would no longer face tariffs. This will increase the competitive pressures on UK producers as they would no longer be shielded by tariffs.

However, as mentioned, some agri-food imports from the EU will face new tariffs, for example on a range of meat and fish products. In total, imports from the EU worth over £7 billion would face new tariffs if there is ‘No deal’. This increased protection could help UK farmers expand their domestic sales, thus mitigating some of the negative impact from possible export losses, albeit potentially at the expense of higher consumer prices.

Thus, the total value of agri-food trade in those sectors which would be affected one way or another by a ‘No deal’ Brexit is around £22 billion.

How big might the impact be?

Looking at the values of trade affected can give a sense of the magnitudes involved, but it doesn’t tell us what the overall impact could be. Therefore, our second approach is to look more formally at how big the changes in exports and imports could be, and consequently what the impact may be on output in the agri-food sectors. For that we have used a Partial Equilibrium model developed at the UKTPO, for more information on the model see our Briefing Paper on the overall impact of UK’s ‘No deal’ tariffs here. In addition to tariff changes, in the model we are also assuming that leaving with ‘No deal’ will increase the non-tariff barriers of trade with the EU, and we work at a broader and more aggregate level of trade than the earlier summary statistics – for example we do not capture fishing in the model, though we do include some elements of fish processing. The numbers are therefore not strictly comparable.

Nevertheless, if we take all those agri-food sectors that are vulnerable to a negative output shock, we find that the combined impact of these changes on the UK agri-food sector is a loss in the value of output of up to £3.4 billion.[5] These are the losers from the policy change, and the ones which Jeremy Hunt is intending to provide support for. Note that there are some sectors for which the protection offered by the new tariffs increases output (such as meat) and so the total negative effect on the agri-food industry will be smaller.[6]

On the face of it, Jeremy Hunt’s promised amount appears greater than these possible losses.  However, while the time scale of Hunt’s figure is not entirely clear, it is presumably intended as a one-off (temporary) payment, but the decline in trade is annual, and so the £6 billion only covers the expected loss in output for the first years, while the actual output losses given above are annual figures.

It is also useful to compare this with the total losses across the rest of UK manufacturing. The sum across the remaining manufacturing industries which could see a negative impact is around £18.5 billion.[7] Hence, to the extent that resources do not move from declining sectors to elsewhere, the total possible loss of output for the negatively affected agri-food and manufacturing industries combined could be close to £22 billion. It is important to stress that this does not take into account any impact on any of the service industries which account for over 70% of the UK economy. Thus, if Hunt wanted to compensate all the losers, even only in the first year, and not just those that farm or fish, he would need to shake the magic money tree somewhat harder.

The £6 billion spending pledge for farmers is some indication of how costly a ‘No deal’ Brexit would be for Britain, but agriculture is only one part of the story. Manufacturing industries, as well as services sectors will also be negatively impacted. This cannot be described as a few ‘hiccups’, in the words of Liz Fraser, it would be more of a ‘toss and tumble’.

Footnotes

[1] For example, in 2017 the EU’s Ad Valorem Equivalent (AVE) MFN tariff was 178% on sugar beet (HS 121291), 173% on whey and modified whey (HS 040410) and over 70% on some frozen bovine meat products (e.g. HS 020230 and 020210) and some milk and cream products (e.g. HS 040140).

[2] Note that this figure is approximate as it has been calculated at the 6-digit level whereas tariffs apply at a more detailed product level. In addition, UK will also face tariffs on exports to those FTA partner countries where the existing agreements have not been rolled over, which has not been included in this analysis.

[3] Calculated at the 8-digit level using EU’s 2017 tariff schedule as a comparison. MFN tariffs are the tariffs that countries levy on imports from those WTO countries with whom there are no preferential trading arrangements.

[4] This calculation is based on imports of agri-food products where the current 6-digit EU MFN tariff is positive, and excludes imports from the EU, all the countries that have an FTA with the EU, and all the current GSP countries. This figure is approximate since some of the FTA agreements might exclude some of these agri-food products.

[5] This is based on applying the simulated percentage change in output from our model, to the level of Gross Value Added as reported in the Annual Business Survey (ONS), and in Agriculture in the United Kingdom (Defra).

[6] It is also important to note that the loss of output is not the same as the loss of welfare, as for that we also need to take into account the impact on consumers and also tariff revenue.

[7] Note: As earlier, some industries may see a gain because increase protection raises domestic output. These are not included in this calculation, although the net effect is only very slightly smaller if these are taken into account because the gains are relatively small.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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