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A Review of Post-Brexit UK Horticulture

Presentation
Outlook for Veg Workshop, Monday 6th February 2017

On 6th February we held Outlook for Veg, one of 8 workshops that formed part of our Peas Please project.  The purpose of this workshop was to explore how we can build a thriving and sustainable horticulture sector in the UK which produces quality, nutritious produce.  It specifically explored proposals for consideration by the government for support to horticulture for when the UK has left the European Union.

For this purpose, David Hallam, former Director of Trade from the Food and Agriculture Organisation, gave a presentation under Chatham House Rule on the potential scenarios for British horticulture in a post European Union landscape.  David has kindly allowed us to host the notes he prepared for this presentation, which formed the bases of a rich discussion from the room on the potential of horticulture in the UK.

 

Introduction

This presentation provides a broad-brush treatment of what I see as the key economic and policy issues facing the sector post-Brexit. My objective is to provide a basis for discussion.

So far, the government has made very little clear in terms of detail of the likely economic and policy environment post-Brexit but it does seem that we can map out the broad parameters of this enough to allow some discussion of what likely outcome will be and to consider strategic options. What we do have is Theresa May’s speech which sets out her priorities for Brexit and which is reflected in the White Paper, so I’ll begin with looking at that and identifying the most relevant bits for the horticulture sector. These have significant implications for horticulture and even more for agriculture more generally. I’ll then look very briefly at some key defining features of the horticulture sector which have most significance for the Brexit discussions. Then I’ll look at how the post-Brexit environment might take shape in terms of what policy options might materialize and what implications might be for horticulture. Finally, I’ll make some suggestions about what policies might be most conducive for the survival and development of horticulture sector.

There are certain broad background issues which also need to be kept in mind when considering the post-Brexit situation of a particular sector. These might be just as important as the sector-specific matters. These are: macroeconomic impacts of Brexit  – especially the exchange rate but also prices, incomes and employment; the level of uncertainty for decision-makers during once Article 50 is triggered and during any transition period; the dynamics of adjustment to a new economic and policy environment; and the limits on the freedom of action of the UK imposed by the politics of Brexit, the UK’s long membership of the EU, EU interest in negotiation, and the UK’s various international commitments, notably under the WTO.

This is all new territory. There have not been any similar examples of a major economy separating from a customs union as significant as the EU.

 

Theresa May’s speech and the White Paper

May’s speech and the White Paper tell us more about what the Government hopes will not happen than what might happen in that it excludes certain options. EU negotiators will obviously have their own list of priorities.

The likely priority to be given to agriculture in general in Brexit is indicated by the fact that May only mentioned agriculture once – in connection with EU exports to the UK and the likely wish of the EU to protect those markets. Her speech also has an implicit emphasis on trade relations outside the EU – and creating a “truly global Britain” – so although the EU will continue to be vitally important, trade patterns and hence the competitive environment will likely change.

There are twelve objectives/principles: 1) certainty; 2) control of own laws; 3) strengthen union; 4) common travel area with Ireland; 5) control of migration; 6) rights for UK and EU nationals; 7) protection of worker’s rights; 8) free trade with European markets; 9) new trade agreements with other countries; 10) science and innovation; 11) crime and terrorism; 12) smooth, orderly Brexit.

There are four objectives of most significance for UK horticulture:

1) Certainty. This implies converting the “acquis” into UK law for later review so presumably all the Brussels “red tape”, presumably including such things as standards and labeling requirements, will continue to apply at least in the short-run.

5) Control of immigration. There is much talk about welcoming highly skilled immigrants but where do less-skilled migrant labourers fit in? It is clear that they will not be a priority. Given the apparent importance of control of migration in Brexit, the government has to deliver a strong result on this.

8) Free trade with European markets. The government aims to pursue a “bold and ambitious FTA” with the EU so this rules out membership of the single market and the Norwegian and Swiss options (mainly because of what these brings with them) but also to seek a new customs agreement with the EU which would minimize transactions costs in trade.

9) New trade agreements with other countries. China, Brazil, Australia, New Zealand and United States are mentioned specifically. The government does not want to be bound by the EU’s Common External Tariff (CET) but rather wants to establish its own tariffs at the WTO. However, this will be similar to a new WTO accession which could take years, and trading partners would exact concessions.

 

UK horticulture and the European Union

UK horticulture has a good record of growth in production values of fruit and vegetables. Vegetable production worth £1.3bn in 2015 and fruit production worth £695million. This level of economic importance is might not secure political attention and special treatment of horticulture, but the regional importance of the sector on local economies cannot be understated, particularly with regard to the areas such as East Anglia (Norfolk), East Midlands (Lincolnshire).

Horticulture is labour-intensive and migrant labour very important with some 80,000 seasonal workers in fresh produce sector. The last SAWS data for 2012 (abolished in 2013) shows horticulture heaviest user of migrant labour, especially for salads, vegetables and soft fruit.

The UK is a net importer of both vegetables and fruit: self-sufficiency ratio (SSR) for vegetables was 57% and 18% for fruit in 2015.  There are variations in self-sufficiency between products: we are self-sufficient in carrots but only 20% SSR for tomatoes.

Vegetable imports were worth £2.1bn and fruit imports £3.1bn in 2015. Vegetable exports were worth £97.5 million and fruit exports were worth £101.3million in 2015. So, the UK’s exports are really not that significant but imports are. including out-of –season products and products that cannot be grown in UK. So, fruit and vegetables has a different situation from other sectors of UK agriculture in not being a significant exporter. UK is strongly integrated in trade with EU – a net importer from the EU of fruit and vegetables.

The importance of trade with EU and dependency on EU suppliers can be illustrated by the current “crisis” with iceberg lettuce and courgettes etc . 58% of UK vegetable exports are to the EU and 93% of fruit exports (fruit exports are actually a lot of re-exports of bananas and citrus which raises some difficult questions because the primary import is often under preferential trade arrangements). 77% of UK imports of vegetables are from EU and 42% of fruit imports. It is interesting to note that nearly 40% of UK vegetable imports are from Poland, Ireland (mushrooms) and Netherlands (tomatoes and peppers): states with relatively similar environmental conditions to the UK. Vegetable imports are mainly from the EU but fruit imports are mainly from third countries. Similar patterns can be found in processed value chains – 73% of UK exports of preparations of vegetables and fruit are to EU and 85% of UK imports are from EU.

Ultimately, what matters for the sector is its ability to sell its produce at a profit, so a healthy market is important. Unfortunately, fruit and vegetable consumption has been declining even though it is government policy to increase it. According to Family Food (formerly NFS), purchases fell by 10% between 2007 and 2014 and consumption levels are lowest among lower income groups and young people. The latter does not bode well for future demand if there are vintage effects in food consumption behavior.

Post-Brexit policy towards the horticulture sector is unlikely to stray too far from the current policy arrangements. Horticulture is largely neglected by EU policy compared to cereals, dairy, meat production etc. This partly reflects difficulty of defining a common policy given the diversity of characteristics of products and national interests found in the EU. Horticulture only gets about 3% of CAP aid mainly under pillar 2. There is some support to producer organisations but these seem to have been declining in membership. The internal market is protected from third country imports by tariffs, but in general for most of over 300 Fresh F&V tariff lines and 300 Processed F&V tariff lines these are low compared to meats, sugar, dairy, cereals etc. and zero under many preferential trade agreements.  (There are some complex parts of the EU trade regime involving minimum import prices and variable levies for certain products but these don’t impact much on the UK horticulture sector.)

Sanitary and Phytosanitary Measures and Technical Barriers to Trade (SPS and TBT) measures are important and will remain so in any future trade with the EU, as are EU marketing standards for quality and labelling. Although private standards might be more challenging.

 UK support to R&D is perhaps major government support and is important for increasing competitiveness.

Horticulture also affected by a lot of environmental regulations originating from the EU, but these are part of UK law so presumably will stay

 

Post-Brexit scenarios

What will change? Agricultural support (CAP), labour, trade policy and macro economic factors (especially exchange rate).

Especially for trade, there is a need to separate transitional arrangements from hoped-for eventual arrangements – but how long is transition going to be? How “smooth” and “orderly” will Brexit be? The sheer volume of legislation to consider and the complexity of trade negotiations suggest it will be neither.

Although horticulture has not been a major beneficiary of the CAP, it is part of the agriculture sector so how food and farming are regarded post-Brexit is potentially important in terms of overall spending on agriculture and horticulture’s share of it.

There are conflicting messages on this.  Agricultural support and the CAP have long been politically unpopular and a key part of hostility towards the EU even though the CAP is now much-reformed. The CAP provides £3.5bn in CAP payments to UK, 55% of farmer’s income. It has been announced that the Treasury will replace any shortfall in EU funding to farmers that might arise between now and 2020. However, it seems likely that Brexit will prompt further reform and reduction in funding for agriculture after 2020 and Andrea Leadsom MP, Secretary of State for Environment, Food and Rural Affairs, said at the Oxford Farming Conference that the Government would be consulting on the future shape of farm support. It may also be that after Brexit and the removal of the UK’s contribution, the CAP itself will have to be further reformed.  George Freeman MP (chair of Prime Minister’s policy board) recently pointed out the likely unpopularity of farming support compared to funding hospitals. Some see Britain’s departure from the CAP as an opportunity to cut or even eliminate agricultural support. Policy attitudes to agriculture generally are likely to be less positive and reduction in support is likely when taken out of the EU political economy context. George Eustice, DEFRA Minister of State, said at Oxford Farming Conference that he wanted to support agriculture to where it becomes more profitable and competitive so there is expanding food production but also to deliver environmental goods. This echoes the Treasury/DEFRA view from 2005 so it’s a long held view.

Regardless to these views on CAP: CAP support doesn’t add up to much for horticulture and where there has not been much in the past it’s difficult to imagine any will be introduced.

Labour market issues are also likely to be important given the widespread reliance on migrant labour and May’s apparent leaning towards restricting free movement and away from market access: there is little chance of relaxations on any restrictions of movement of labour. Control of immigration will restrict supply of unskilled migrant labour and this will reduce the available labour supply at critical times and hence productivity. There will be competition with other sectors where work is less arduous for unskilled migrant labour that might be available (see Migrant Observatory (Oxford) report). Arguably labour productivity will fall since migrant workers found to have higher productivity at the agricultural minimum wage.  Scope for substitution by domestic workers limited since local labour not available or unwilling. Mechanization to save labour will take time; and investment might not be forthcoming in an uncertain business environment.

Labour supply will likely then diminish and costs will rise.  These are all strong messages from the inquiry being conducted by the Home Affairs Select Committee Inquiry into Immigration. Nevertheless, restrictions seem inevitable. Any relaxation will be for skilled workers and it is not likely that there will be some kind of reinvention of the SAWS. It is worth recalling that at the closing of the SAWS in 2013 that the ministerial statement explicitly ruled out any “special treatment from a migration policy perspective for horticulture”.

Trade.  Although horticulture does not export much to the EU, it may be carried along with other agricultural sectors in determining the overall agricultural trade policy. Current policy and indeed future policy is basically determined by EU (CAP) and WTO commitments. Regarding the latter, disentangling domestic agricultural support commitments which are agreed at EU level would be very complex but these are not particularly relevant for horticulture. The same would probably apply to Tariff Rate Quotas.

In thinking about future trade scenarios, it’s important to consider trade with EU and trade with third countries. Different scenarios are possible:

Continuation of membership of the single market has been ruled out by the May speech and White Paper – while this may have been the preferred outcome for horticulture (and EU) it is not consistent with the requirement to control immigration and own laws.

The same goes for the so-called Norwegian and Swiss solutions which both involve politically unacceptable’ obligations. Under the Norwegian solution, the UK would ‘have rejoined EFTA and remained in the EEA. However, this entails agreeing to free movement of labour and maintaining of EU employment legislation. Under the Swiss solution, the UK would be in EFTA but not EEA but UK would still have to accept EU laws without being able to influence them.

So, if the UK has no access to single market, which is ruled out,  the trade regime has got to change. Any trade policy regime has got to be consistent with WTO rules. This is very complicated because the UK has been part of the EU for several decades and the EU takes responsibility for negotiating trade policy – not just tariffs but also SPS and TBT, although presumably SPS and TBT rules will stay for a while.

 

Regarding tariff policy, two basic scenarios are possible:

  1. A Free Trade Agreement (FTA) with the EU is the preferred option but there is no comparable precedent for this. Plus FTAs or Most Favoured Nation agreements (MFN) with third countries.

 

  1. Trade under WTO rules with MFN treatment on each side, with the UK subject to EU CET and presumably vice versa at least initially. Trade with third countries might be under FTAs or also be MFN.

 

A variant on the second would be where UK liberalised by reducing tariffs – the ‘Economists for Brexit option’.

A successful negotiation of a FTA with the EU or MFN are the most likely outcomes. A FTA with EU would be the least disruptive of feasible solutions. But how quickly could this be negotiated and established? This would have to be consistent with WTO rules and specifically GATT article XXIV. Even with FTA, trade transactions costs might be expected to rise so prices of imported fruit and vegetables would rise (+5-8%?), unless a new customs agreement can also be negotiated but this might seem to the EU to be too close to continuing membership of the single market without the other obligations.

If no FTA is agreed with the EU then trade would be under WTO rules and tariffs would be MFN.  UK would have to set its own tariffs on imports but it would in practice not have a free hand: initially at least tariffs would probably have to be the current EU CET level – they could not be higher because of WTO bindings but they could be lower. After Brexit, the UK might renegotiate all its trade measures in the WTO like a new acceding state. This is a very lengthy and complex procedure involving every WTO interested member and in which the UK might have to make concessions less favourable than exist as a member of the EU.

Would horticulture get less protection? Trade negotiations (not only with EU) would need to get a balance between different UK and EU interests – e.g. cars and white goods versus financial services (although these are mobile). UK is not a major player in international agricultural trade so would agriculture be sacrificed? Under this scenario and maybe under the FTA scenario, UK would also lose out on EU trade preferences such as the Everything but Arms agreement, Economic Partnership Agreements, etc.: so would the UK have to apply the MFN tariffs to all countries until it negotiated new trade preferences? Presumably, the UK would want to maintain these since they are part of development policy but negotiating so many new trade preferences would take some time.

The easiest way forward for the UK would be to just continue EU tariff bindings so that there can be no complaint of countries – EU or third – being left worse off and hence no justifiable claim for compensation. However, in the case of re-exports such as fruit, countries could argue that the “quality of access” is worse and demand compensation through lower tariffs.  (In the extreme version of the WTO/MFN solution, Economists for Brexit recommended abolishing tariffs so there could be no argument on any grounds).

Will withdrawal from EU lead to a reverse trade diversion effect and a new competitive environment with a new trade agreement? Trade deals with non-EU countries may require free access for horticultural products. A web of trade agreements with different countries might shift trade patterns considerably.

Given the trade balance and perhaps to a lesser extent the importance of chemicals and energy, exchange rates will be important. Exchange rates – what are predictions concerning future £? What will impacts be? Likely scenario will see UK penalised for import dependency, offered a boost to exports

What do all these possibilities add up to in terms of prices and costs? You need a model to look at all the possible changes simultaneously. MFN tariffs against EU and third countries would put up prices depending upon the tariffs and trade costs. FTA and WTO/MFN scenarios both lead to higher UK prices which might encourage an increase in production of tradeables but would depress demand. If the MFN scenario was accompanied by liberalization then this would lead to a fall in UK prices. Increasing import prices might be offset to some extent by shifting trade patterns in favour of importing from countries where costs and export prices are lowest.

Trade policy changes need to be looked at against the likely negative effects of macroeconomic factors  and labour market changes– a weaker pound, increasing inflation and costs, slower income growth and increasing import prices would all impact negatively on fruit and vegetable demand.

 

Policy asks

 Overall, Brexit is probably bad for UK agriculture although effects less pronounced on horticulture.

What are the threats and opportunities? There is an opportunity to raise SSRs for some fruit and vegetables but there will be a new competitive environment, labour constraints, higher costs and flat demand. Nevertheless, what Netherlands, Poland, Ireland can produce, the UK can presumably also produce.

What does the horticulture sector need? What is politically realistic to ask given economic importance and the competing interests to satisfy? The government approach will be conditioned by the past as an EU member. The CAP support doesn’t add up to much for horticulture and where there has not been much in the past so there can be no realistic expectation of significant support to the sector being introduced. The various standards and requirements will probably also not change much. Most temperate net-importing countries have a pretty light regime

Our trade environment may change with opening of markets to different countries as part of a trade deals so UK horticulture has got to be competitive – need R&D and investment support especially in light of labour constraints and the uncertainty of the investment climate. There is a need therefore to maintain and increase R&D funding.

If producers are to increase production they will need to be profitable. They need to get a bigger share of the value chain revenues. Support to producer organisations has not apparently been successful in this. Are there other possibilities to try?

The market for UK produce also needs to grow. It is an objective of government policy to promote consumption of fruit and vegetables on nutritional grounds. Policies to achieve this- eg taxes and subsidies, consumer information etc. – need to be maintained and adequately funded.

Additional material by Robin Hinks