Brexit Update July 7, 2016 12:00 am As the dust begins to settle on the Brexit decision, some further thoughts on where we are, and where we might be going. To stretch the metaphor however, a massive amount of dust (and possibly some rocks!) has been thrown up by the Brexit detonation, and it will take months and years for things to settle down into a new equilibrium. Below we outline some of the key issues to emerge so far. Domestic Politics The Conservative leadership election is in full swing. Until this is concluded, very little seems likely to happen in Government circles – either with politicians or civil servants. For example, George Eustice, speaking to the press at the Livestock Show, continually reiterated that the views he was giving on Brexit were his personal ones, and he might not be in post under the new Prime Minister. Some see an ulterior motive in all this. As long as the UK can credibly claim that ‘we are still sorting ourselves out’, it has an excuse not to invoke the now-famous Article 50 to trigger the formal separation process. A delay is seen as beneficial to the UK; as soon as Article 50 is invoked the two-year countdown begins. This can only be extended by unanimous agreement of the remaining 27 Member States. Therefore, once the Article has been triggered the balance in the negotiations are weighted heavily against the leaving country (probably not by accident). The ideal for the UK would be for an outline of a deal to be agreed (i.e. Heads of Terms) before triggering Article 50. Not surprisingly, many in the EU (see below) do not seem keen on this. There has been some debate about what is required from the UK side to actually issue the Article 50 notice. Some lawyers believe that a Parliamentary vote will be required. This could be difficult as the majority of MPs are pro-Europe. Whether they would go against the expressed wish of the British people is another issue. A (larger) body of legal opinion thinks the Government can simply enact Article 50 under Royal Prerogative. A Parliamentary vote may be thought politically expedient in any case. There are other legal mechanisms being touted to achieve Brexit (such as the repeal of the 1972 European Communities Act). But as this seems to go outside the European ‘rules’ it would not endear the UK to the remaining Members and is probably a non-starter. The Negotiations It should be noted that the withdrawal arrangements under Article 50, and the talks about future trading relationships are separate. Indeed the EU Trade Commissioner has been quoted as saying ‘First you exit, then you negotiate’. In reality they are likely to proceed in parallel, but there well may not be nice neat ‘package’ at the end of two years that covers both the exit arrangements and what happens next. A trade deal is likely to be both complicated and contentious, and could well take longer than the exit talks. Therefore, for a period of time the UK could be out of the EU but without any formal trading relationship – we wouldsimply revert to WTO trading rules. An added complication is that the exit deal is decided by Member States only on a simple majority. A trade deal requires the approval of all Member States plus the European Parliament – potentially a much bigger hurdle, especially if the deal being offered to the UK is seen as being ‘too generous’. In terms of negotiating exit there are grave concerns about the capacity of the UK Government. According to reports, an internal review of Whitehall found just 20 active trade negotiators in the entire British government. This compares with an estimated 600 trade specialists in Brussels. This is not, in itself, surprising, as the UK has effectively outsourced trade negotiations to the EU over the last 40 years. The ability of the UK to get a deal, and get a good deal, will be driven by the quality of its negotiators. Apparently New Zealand has offered to lend the UK some if its trade negotiators. This capacity question leads onto the issue of whether there really will be a ‘bonfire of regulation’ on exit. There is a widely quoted figure of ‘80,000 pages of EU Regulation’ (although it is not clear who has counted all these). There is not going to be enough time to review, re-write or delete all of these. Therefore the UK is likely to implement a ‘Retain and Reform’ model regarding EU legislation. Existing EU-derived rules will be rolled-over into a post-Brexit world, and these would gradually be changed over time. However, this system would be unlikely to be adopted wholesale for the Common Agricultural Policy – not least because the funding will disappear on Brexit. EU Politics A split in opinion has been opened-up in Europe as a result of Brexit. In one camp are the European Parliament and the European Commission (the Civil Service). As might be expected these institutions are vehemently pro-Europe. Therefore, they want the UK out quickly and to be given a harsh deal to punish us for abandoning the European project. On the other side are the Member States (operating through the European Council). To a greater or lesser extent, their own populations have turned against the EU in recent years (there but for the grace of God etc . . . ). This sympathy is boosted by practical considerations of wanting to retain trade flows and UK ‘engagement’ in areas such as military cooperation, foreign policy etc. Therefore, Member States (or at least the northern members) are more relaxed about the timetable. In theory the Commission should lead negotiations. But the Council wants to remain in charge of the process. It has set up a special taskforce headed by Belgian diplomat Didier Seeuws. The taskforce will include negotiators from both the Council and the Commission. On the UK side, Oliver Letwin has been appointed to lead the ‘Brexit unit’. Like much of Government, from the outside it appears that very little is actually being done in this unit until the new leader is in place. Despite the disagreements in Europe, there is a clear consensus on one point. The UK will not be able to have Europe ‘a la carte’. This means that if it wants tariff-free access to the Single Market then it is likely to also need to agree to most of the following; implementing EU regulations where they affect the Single Market, accepting free movement of people (i.e. EU immigration), and paying in to the EU budget. This, of course, is not what most people thought they were voting for if they opted for Brexit. If the political ‘establishment’ comes back with a deal that appears to break the promises made during the campaign, the disillusionment with politics will just become greater. On the other hand, business and the markets will be banking on a deal that preserves trade. The future of Scotland staying in the UK (plus the Irish issue) may hinge on retaining Single Market access. Itwill take some political skill to find an acceptable outcome on all this. We hope the winner of the leadership election is up to it. Farming’s Response The NFU has launched what it is billing as the largest consultation exercise in a generation amongst its members. This will take place over the summer and will result in an agreed NFU position that will be presented to government in the autumn. The NFU’s policy is to be informed by the following principles; the best possible access to EU markets negotiating trade deals with non-EU countries restricting food imports which are of lower standards than domestic production retaining access to migrant labour farm support on a par with EU competitors rural development policy that enhances competitiveness and re-invigorates agri-environment a science-led approach to approving technology Whilst all this is fairly uncontentious, the devil, as ever, will be in the detail. For example, whilst calling for a generic ‘level playing field’ in terms of support is easy, what form precisely should this support take? Simply a roll-over of direct payments or something quite different. There will be a vast range of views on this in an industry as diverse as farming. Given the capacity of DEFRA to cope with the change it would be a huge positive if the farming industry itself could come together and draw up and agreed, detailed, costed, plan to present to Government as to what a British Agricultural Policy should look like. With all the various competing organisations (and egos) involved though, this may be a forlorn hope. Ideas are already starting to emerge as to future support arrangements. George Eustice has spoken about risk insurance models to replace direct payments. The Tenant Farmers Association (which, to be fair, was one of the few organisations to do some post-Brexit thinking prior to the referendum) has come up with a support model also based on moving away from direct payments. Its proposal is based around support in three areas – agri-environment; grants for investment; and food chain/research/efficiencies programmes. See – http://www.tfa.org.uk/wp-content/uploads/2016/04/16-June-30-Post-Brexit-Agricultural-Policy.pdf Economics Whilst all this political manoeuvring is going on the Pound has continued to fall against the Euro and the Dollar. It is now down by around 10% against the Single Currency compared to pre-vote levels. The fall against the Dollar has been rather greater with a drop of around 12% (and up to 14% at some points). As previously stated, this is actually good news for UK farming in the sort-term. A weaker Pound increases our competitiveness on export markets and should allow domestic prices to rise. It does push up the cost of imports though, and input prices will rise. Overall, for most sectors the effect will be generally positive, especially if the weakness lasts until September when the Basic Payment conversion rate is set. Different farming sectors will be affected to different degrees though. In the soft fruit industry, for example, sale prices are not greatly affected by import or export values. It does import many inputs from Europe however. In this case, a weak Sterling is generally a negative. One final thought at the end of this long article. Despite all the uncertainties and difficulties outlined above, the sun is still rising in the morning. (Although the vote for Brexit hasn’t yet improved the British summer weather, which may well have been one of the promises made during the referendum campaign . . . ). We are still an industry that is lucky enough to operate in a stable rich-world economy with over 60 million affluent consumers on our doorstep. The British agricultural industry will adapt to change, as it has done in the past, and the best business will fine a way to make money and find enjoyment in farming.
