This article was written by Ramon Garcia-Gallardo, Coral Garcia Guadix and Scott Bouvier.
The proposed exit of the UK from the EU brings many associated uncertainties, especially in relation to the timing of the breakup, and the future UK-EU arrangements that may be put in place in advance of the split occurring. For the UK to leave the EU it has to invoke an Article 50 of the Lisbon Treaty, which gives the UK and EU two years to agree the terms of that split.
Nevertheless, it seems likely that the UK’s dependence on agricultural imports from the EU will be reduced due to trade barriers, and this will open up opportunities for other nations to export agricultural products to the UK.
In the case of Australia, however, the UK currently accounts for only approximately 1.5% of Australian agricultural exports, and it seems unlikely that even in the post-Brexit era, this will increase to any great degree.
Three major implications for Australian agriculture
Notwithstanding the above, it is reasonable to assume that there will be three major implications with potential effects for Australian agriculture:
- Agricultural trade between EU nations and the UK will no longer be free of any tariffs or restrictions.
- The movement of people (especially workers) between the UK and the EU will face increased restrictions.
- The large subsidy that UK farmers currently receive from the EU each year will cease but it may be at least partly replaced with subsidies from the UK Government.
Implications in terms of imports
Major UK agricultural and food imports include:
- wine and spirits;
- fruit and vegetables; and
- a wide range of semi-processed and processed foods.
Nowadays, imports are dominated by products sourced from EU nations, given the free trading environment.
Imports from the UK: Australia also imports agricultural and food products from the UK – predominantly alcoholic beverages (whisky) and a variety of processed foods. Those imports have been increasing over recent years in line with the general growth in the value of food imports to Australia.
Imports from the EU: Australia’s agriculture and food imports from the EU were valued at approximately A$3.8 billion in 2015, and consisted predominantly of wine and processed foods, as well as canned vegetables and pork sourced from Denmark and the Netherlands.
Figures on exports
The UK is a significant exporter of a number of agricultural and food products – specifically: whisky, lamb and dairy products.
More than two-thirds of UK agriculture and food exports are destined for EU nations.
By 2015, Australia’s agricultural exports were predominantly destined for North Asia (Japan, Korea and China, which collectively accounted for more than 40% of total exports), followed by South-East Asia (20%), the Americas (14%), the Middle East (7%), and Europe including the UK (5%). Australian agricultural and food exports to the UK in 2015 accounted for around 1.5%. Principal among these was wine, lamb and beef.
The value of Australian wine exports to the UK has declined, as other suppliers such as New Zealand, Argentina and the US have become more prominent in export wine markets.
In contrast, Australian beef exports to the UK have been growing as a result of both higher beef prices and some increases in quota access under EU agricultural trade arrangements.
Australia also has significant two-way agricultural trade with the EU, even though it has a trade deficit with the EU, part of the explanation for which is the restrictions that are applied by the EU to agriculture and food imports from Australia.
Australian beef exports to the EU are mainly shipped under two major quotas:
- HQB Hilton quota (preferential tariff of 20% ad valorem duty). Australia’s share of this quota is 7,150 tonnes shipped weight/year, which has a utilisation average from 90% to a 100%.
- HQB Grain Fed quota (0% ad valorem duty limited to 48,200 tonnes on a first come first served basis). Nowadays, Australia, Canada, New Zealand, Uruguay and Argentina are entitled to export under this quota.
Source: European Commission - DG Agriculture and Rural Development Report “Beef and Veal market situation”, 20 July 2016
Other principal exports to the EU include canola (as a consequence of demand driven by the EU biofuels mandate), wine, fruit and nuts, and wool. Those exports (excluding the UK) were valued at approximately A$2.3 billion in 2015 and have been relatively static over recent years. The tariffs that are currently applied to imports of agricultural products by Australia and the EU respectively are shown in the following table:
Source: Australian Farm Institute, 2016
Applied tariffs are those that are estimated to be currently applied, whilst bound tariffs are the maximum tariffs each trading partner is legally able to apply under World Trade Organisation (WTO) agreements on a most favoured nation (MFN) basis. Over all agricultural products, Australian import tariffs average 1.2%, while EU tariffs average in excess of 12%.
Potential consequences of Brexit
On a very simple analysis, as the UK would no longer be a member of the EU, agricultural exports from the UK to the EU (predominantly whisky and lamb) would therefore presumably face the same tariff rates that Australian agricultural imports to the EU face. This could result in a reduction in the value of UK agricultural exports to the EU, and a diversion of these exports to other markets.
The UK, meanwhile, would have greater autonomy in being able to set tariff rates on agricultural imports, and could conceivably increase tariffs on agricultural imports from the EU to a level equivalent to current EU agricultural tariffs.
This would increase the price of EU agricultural exports to the UK, with the potential result being a loss of market share by EU agricultural exporters, and an increase in UK agricultural imports from non-EU sources such as Australia.
However, the impact of potential future changes in agricultural tariffs and market access arrangements can be negated or magnified by changes in exchange rates, which have already been observed in response to the Brexit decision. The exchange rate of the British Pound has depreciated against most major currencies including the Euro. This has the effect of making imports to the UK more expensive, and exports from the UK more competitive in international markets.
Potential opportunities for Australia and New Zealand
From an Australian and New Zealand perspective (ignoring exchange rate fluctuations), the potential opportunities that are likely to emerge as a consequence of the Brexit decision are fairly limited.
There may be increased opportunities for Australian exports of beef and wine to the UK (depending on how much of the current EU beef import quota is transferred to the UK), but this will depend largely on decisions that the UK makes about the tariff regime that will be adopted post-EU membership.
Higher value products – including red meat, wine and some horticultural products – can be competitively exported from Australia to the EU or the UK, however Brexit is more likely to result in a shift in market destinations (for example more Australian beef to the UK and less to the EU) rather than an overall increase in demand.
Compounding factors in relation to the impact of Brexit on both the UK and ultimately Australia are the impact of issues such as the future of farm subsidies in a post-Brexit era.
UK farmers, as a likely consequence of Brexit, will no longer receive the generous EU agricultural subsidies that are associated with EU membership. Under the current EU Common Agriculture Policy (CAP) the average farmer in England and Wales receives direct subsidies of A$412 and A$314 per hectare each year. It is estimated that these payments are equivalent to 55% of the total income from farming generated in the UK (NFU 2015) each year. This obviously has implications for UK agriculture, given that it is widely acknowledged that UK agriculture is not internationally competitive, and would decline significantly in the event that subsidies were removed.
This would mean additional opportunities for competitive agricultural exporters such as Australia, although the nature of UK agricultural imports (predominantly fruit and vegetables, pork and poultry meats, and wine) means that Australian would only gain small additional benefits from a reduction in UK farm subsidies.
However, in the event that the UK subsequently negotiates some form of trading agreement with the EU post-Brexit, then if the pattern established by Norway and Switzerland is applied, the UK will be required to make some contribution to the EU budget in return for specific market access arrangements. Some estimates put the potential future required contribution to the EU budget by the UK at 60% of current levels.
Impact on FTAs – agriculture trade
Australia has already initiated discussions with the EU about an Australia-EU free trade agreement, and it seems likely there will be some downward movement in the level of agricultural tariffs imposed on agricultural imports by the EU.
The EU is Australia´s third-largest trading partner, after China and Japan. The bloc exported products worth $ 35.6 billion to Australia last year – representing more than three-quarters of total goods trade between the two economies (Source - European Commission - Directorate General on Trade: http://ec.europa.eu/trade/policy/countries-and-regions/countries/australia/ and http://madb.europa.eu/madb/statistical_form.htm).
Actual EU FTA negotiations should start in 2017, at least as a way of providing Australia beef exporters with continued preferential access to the EU market due to uncertainties around HQB Grain Fed Quota. The EU remains the highest value market for Australian beef on a per tonne basis, averaging A$10,550/tonne in 2014 (Source - European Commission - DG Agriculture and Rural Development: http://ec.europa.eu/agriculture/market-observatory/meat/beef/statistics_en.htm). Australia’s access to the HQB ‘Hilton Quota’ and Grain Fed HQB quota ensure that the majority of cuts exported to the EU are high quality and subsequently of high value.
Nevertheless, Australia´s decision to impose dumping duties on imports of Italian canned tomatoes may prompt an EU challenge at the World Trade Organisation and jeopardize the future trade negotiations. Recently, the EU's trade commissioner, Cecilia Malmstrom, warned that such sanctions could have serious implications - "The Commission has made Australia aware that the imposition of these measures has the potential to develop into a significant trade irritant given its systemic implications and may even undermine support for a future free trade agreement with Australia".
From an agricultural perspective, it would also be advantageous to initiate trade negotiations with the UK, although that nation represents a much smaller market than the EU.
Finally, for Australia and New Zealand, who have long advocated for the removal of agricultural trade barriers, it will need to increase its focus on ensuring that the benefits of recently negotiated trade agreements are not eroded by the adoption of non-tariff trade restrictions.
Note: The authors acknowledge the report prepared by the Australia Farm Institute entitled “The impact on Australian agriculture of Britain leaving the EU”, August 2016 (which can be accessed here - http://www.farminstitute.org.au/newsletter/2016/August/feature) for much of the data in this article.