EU Agrees Mercosur and Vietnam Trade Deals

On 28th June, twenty years to the day that negotiations started, the EU and Mercosur reached a political agreement on a substantial free trade deal.  The EU estimates that, when fully implemented, the deal will reduce tariffs its exporters face by approximately €4 billion.  On a busy weekend for Cecilia Malmström, EU Trade Commissioner, the EU also signed the free trade agreement with Vietnam which had been largely negotiated in 2018.  Both deals are meant to send a message that, with the backdrop of the US-China trade dispute and the increased friction likely to result from Brexit, that the EU is open for business and keen to conclude trade deals with other global partners.   These announcements follow similar recent deals with Japan and Canada.  From an agri-food perspective, the Mercosur deal is attracting most attention as it could have significant implications for sectors such as beef, poultry and sugar.

EU-Mercosur Trade Deal

The details of the Mercosur deal are complex.  In summary, the South American trade-bloc, consisting of Brazil, Argentina, Uruguay and Paraguay, would see tariffs removed on 92% of all its imports to the EU over a period of 10 years.  Focusing on the agri-food sector, tariffs will be cut on 82% of imports coming from Mercosur, with remaining agri-food imports subject to more partial liberalisation.  Notably, this includes beef where a quota of 99,000 tonnes will be permitted to be exported to the EU at preferential rates.  This will be implemented over a five-year period.  Additional volumes of imports will also be allowed of poultrymeat (180,000 tonnes) and pigmeat, (25,000 tonnes), with import restrictions on sugar and ethanol also eased.

From an EU export perspective, tariffs will be eliminated on 91% of its total exports and 95% of agri-food exports.  The dairy sector in particular will benefit from improved market access, with a quota of 30,000  tonnes for cheese, 10,000 tonnes for skim-milk powder and 5,000 tonnes for infant milk formula (Mercosur tariffs are currently at around 28% for dairy products).  These volumes will be phased-in over 10 years.   Whilst improved market access for dairy was welcomed in some quarters, market experts opined that demand for dairy products in the Mercosur market is quite lethargic and is hampered by high inflation, sluggish economic growth and a volatile political environment. 

Mercosur has also committed to protecting the Geographical Indications of 357 EU food and drink products.  The EU is also keen to point out that its food standards on Sanitary and Phytosanitary (SPS) matters would not be compromised in any way.  The EU-Mercosur deal also has a Sustainable Development chapter which commits both parties to upholding their Paris Climate Accord commitments

European beef, poultry, sugar and ethanol producers are expected to come under increased pressure from cheaper imports from South America as a result of this proposed deal.  The agreement has already attracted condemnation from the EU’s farming lobby with organisations such as Copa-Copega and the Irish Farmers’ Association (IFA) complaining that agriculture had been sold out to facilitate a wider deal.  Tellingly, the EU Commission also announced a €1 billion fund to help farmers to adjust to the market disturbances that could be potentially caused by the EU-Mercosur trade deal which indicates that there will be a significant impact on European farmers.

The feedback from the EU farming and food industry points to trouble ahead because, as our previous article on 26th June noted, the agreement thus far has only been at the political level and a number of hurdles remain.  Firstly, it will be translated into legal text before being put forward for ratification by EU Member States and the European Parliament.  Like the EU-Canada (CETA) agreement, there can still be several twists and turns in the process and the deal could be scuppered by a Member State or by a regional Parliament such as Wallonia.  Already, there is significant pressure being exerted on the Irish Government not to back the deal and it is anticipated that there will be similar calls elsewhere.

Any on-farm effects from this deal remain some way off, and in any case would be phased in over several years.  By the time this happens, the UK is likely to have left the European Union, so the impact of this particular deal might be negligible.  That said, the EU-Mercosur deal increases the competitive threat of South American products in European markets.  It is also likely to offer a template for any future trade deals between the UK and Mercosur which the UK is likely to prioritise post-Brexit. 

EU-Vietnam Trade Deal

This pact will eventually see duties removed on 99% of the EU’s imports from Vietnam.  Whilst the formal text has been approved by the European Commission, it still requires ratification by the European Council (representing the EU Member States) and by the European Parliament.  This is expected later this year.

From an agri-food export perspective, Vietnam with its population of around 95 million represents a fast-growing South East Asian market.  Its dairy industry is valued at approximately £5 billion and it currently imports 80% of this demand.  Average incomes have also been rising thereby driving demand for beef and pork products in particular, although the US and New Zealand account for the vast majority of these imports.

As with Mercosur, the UK’s pending exit from the EU means that it may not benefit significantly from this deal.  That said, much will depend on the length of the transition (implementation) period arising from the eventual Brexit deal and the UK’s access to third country market that have free-trade deals with the EU as part of this.  However, the South East Asian market is lucrative and the UK needs to prioritise the development of such markets as it resumes its independent trade policy.

This article is from Andersons’ AgriBrief Bulletin, a subscriber-based publication which provides readers with expert, concise and unbiased commentary on the key issues affecting business performance in the UK agri-food industry and what it means for you and your clients. For further information, including a free trial, please visit:

https://agribrief.co.uk/.

How Has Farming Changed Since the UK was Last Outside the EU?

UK farming will soon be operating outside the European Union for the first time since we joined the, then, EEC in 1973. In preparation for its round of Spring Seminars, Andersons the Farm Business Consultants have looked into the archives to compare UK farming 46 years ago with today’s sector. The table below shows some key indicators for the agricultural sector. (All financial figures are in real terms at 2017 prices.)

At the farm level, the industry is smaller in monetary terms and less profitable (although land values are much higher). However, the wider food chain has done an impressive job in boosting food exports and feeding households cheaply. Food self-sufficiency has not changed greatly. For those advocating a completely free-trade approach to food after Brexit, it is interesting that food self-sufficiency was close to 30% in the 1930s – the last time it was tried. The industry is also doing ‘more with less’, in terms of people, land and animals.

Clearly, UK farming is a very different industry to that of the early 1970’s. However, there is also an argument that being part of the Common Agricultural Policy for 40 plus years has held the sector back from what it might have achieved. The next decade or two seems set to unleash even greater change.

There is some trepidation about what the future might hold for farming. One of the ways to reduce uncertainty is to gain the best understanding of the current situation and possible future direction. Andersons are running a series of Seminars at thirteen venues around Great Britain in March, looking at the prospects for UK agriculture in greater detail. This includes the opportunities post-Brexit and the issues the sector needs to tackle, whatever sort of Brexit emerges. For more information please go to www.theandersonscentre.co.uk/Seminars

Ends

No. of words: 444

Author: Richard King

Date: 13th February 2019

This news release has been sent from Andersons, the Farm Business Consultants Ltd, Old Bell House, 2 Nottingham Street, Melton Mowbray, Leicestershire LE13 1NW. For further information please contact Michelle Turnbull on +44 (0) 1362 688761 or +44 (0) 7904 436288.

Impact of WTO Trading on NI Beef and Sheep meat

Switch to WTO trading conditions could devastate Northern Irish farming

If the UK fails to agree a post-Brexit trade deal with the EU and has to instead revert to World Trade Organization trading conditions, Northern Ireland beef and sheep meat output could decline by 21%, with exports to the EU collapsing by over 90%. These are the findings of a new 124-page report commissioned by the Livestock and Meat Commission for Northern Ireland (the LMC).

The report, produced by farm business consultancy The Andersons Centre with support from Oxford Economics, gauged the impact on the Northern Irish beef and sheep meat industry of moving from EU to World Trade Organization (WTO) trading conditions under two scenarios: 1) “WTO Equivalence” (where the UK and EU impose reciprocal tariffs on each other’s imports based on the current EU Common External Tariff, as well as an assumption that there would be mutual recognition of veterinary and other technical standards) and 2) a unilateral “Open-Door” trade policy whereby the UK reduces its tariffs on imports from major agricultural producers but without any reciprocal agreements in place. 

The report’s key findings were:

  • If the UK adopted a unilateral Open-Door trade policy, Northern Irish beef and sheep meat output would decline by 21%, as exports to the EU collapsed by over 90%.
  • However, even under WTO Equivalence, whilst output could rise marginally in the short-run (as domestic consumption displaced EU imports) gains would be eroded by declining consumption in the longer-term due to higher prices, and exports to the EU would still fall by over 90%.

The report also found that:

  • Tariffs for meat sales are substantial, ranging from 40% to around 100%.
  • Non-Tariff Barriers (NTBs) are estimated to amount to a 3% tariff equivalent under WTO Equivalence and 5.7% under an Open-Door trade policy. These estimates are based on a thorough examination of NTBs and their impact on the red meat sector rather than relying on generic estimates, which is a drawback with previous studies on this issue.
  • Farm profits decline in both scenarios particularly when combined with reductions in farm subsidies.

The report concludes that if an Open-Door trade policy was adopted, the viability of beef and sheep farming across large swathes of Northern Ireland would be seriously threatened, with grave consequences for the wider Northern Irish rural economy.

The report makes six recommendations for policy-makers:

  1. Agree interim Single Market (EEA) and Customs Union membership for at least 5 years post-Brexit to negotiate the finer details of the eventual deal and develop the required infrastructure, with a mid-way review to examine whether enough progress has been made (e.g. technology to facilitate frictionless cross-border trade)to affect timeframes.
  2. Set up an Agri-food Workers’ Scheme to permit continued access to labour for Northern Ireland processors, coupled with incentives for locally-based staff.
  3. Bolster efforts to get Northern Irish products approved for sale in non-EU countries, including gaining mutual recognition of veterinary standards.
  4. Formulate a long-term strategy for food and farming.
  5. Ensure that food imports meet the same rigorous standards as domestic produce.
  6. Adopt EU Official Controls of animals and meat products at slaughter houses, meat plants and collection centres for live cattle within the UK and Republic of Ireland to permit frictionless cross-border trade.

If WTO trading did come to pass, the report suggests several further recommendations, including as a last resort considering a “Cyprus-type model” for cross border trade if no other agreement is possible.  This is because the island of Cyprus is within the EU, but only the southern half is recognised as within the Single Market.  Consequently, there are special rules regarding the trade of goods between the southern half and the Turkish Republic of Northern Cyprus. However, the report also notes that whilst a Cyprus-type model could help to facilitate trade reasonably close to existing levels, potential obstacles remain.

The report’s other recommendations in the event of WTO trading coming to pass include setting bilateral Tariff Rate Quotas to mirror historic trade flows between the UK, EU-27 and non-EU countries, as well as Northern Irish beef and sheep meat exporters capturing more of the domestic UK market and opening-up new markets.

Michael Haverty, lead author of the study, said: “An Open-Door trade policy would have a devastating impact on the industry both domestically and internationally. Whilst a Cyprus-type model highlights the need for contingency planning, the ideal outcome remains avoiding WTO trading conditions by agreeing interim Single Market and Customs Union membership for 5 years post-Brexit, incorporating a mid-way review, to negotiate and implement a more considered long-term agreement.”

The report is available via:

https://theandersonscentre.co.uk/wp-content/uploads/2019/06/LMC-Final-Report_31_Aug_17.pdf

Brexit Bills in Queen’s Speech

On 21st June, the Queen launched the Government’s programme, devoid of its most controversial manifesto commitments, which included eight Brexit Bills on:

  • Agriculture – to replace the CAP
  • The Repeal – of the European Communities Act 1972 and copy and paste the contents into UK law
  • Customs – to replace EU customs rules and allow the UK to impose its own tariffs (significant for agricultural exports and imports)
  • Trade – to operate our own trade policy (this may face opposition from soft Brexit MPs wanting to keep the UK in the EU customs union)
  • Immigration – to allow the UK to set its own immigration policy (vitally important for the fruit & veg, poultry and processing sectors).
  • Fisheries – to take control of UK fishing waters and to set fishing quotas.
  • Nuclear safeguards – to set up a nuclear safety regime (currently regulated by Euratom)
  • International sanctions – to allow the UK to apply its own international sanctions

Of particular interest to InsideTrack readers is the Agriculture Bill.  This is the first chance for a British Government to design a wide-ranging reform of agriculture policy since 1947 (the last substantive Agriculture Act).  It presents a once in a generation opportunity to shape and sustain a profitable farming sector without (we assume) CAP levels of direct support and EU border protection arrangements.

The Government’s says that:

“The Bill will ensure that after we leave the EU we have an effective system in place to support UK farmers and protect our natural environment. The Bill will:

  • provide stability to farmers as we leave the EU;
  • protect our precious natural environment for future generations;

We will see.

Hogan uncompromising on EU standards

The need to develop agri-food exports in non-EU markets is more important than ever for EU farmers to help to mitigate the risk posed by Brexit. That was the view expressed by Commissioner Phil Hogan at a recent global trade conference in Dublin.

Unsurprisingly, little was given away on what the EU’s negotiating strategy on Brexit might be as Article 50 has not yet been triggered. He did claim that an agreement on the terms of exit would need to be concluded before an agreement on the future trading relationship would be finalised. However, this does not preclude exit negotiations and trade negotiations proceeding in a broadly parallel fashion as indicated previously by Michel Barnier, the EU Commission’s lead Brexit negotiator.

Commissioner Hogan did pose the question whether British farmers and food standards would become “sacrificial lambs” on the altar of free trade for a global Britain? He was clear that the EU will not compromise its food standards in the pursuit of trade deals although there was also an acknowledgement that any potential trade deal between the EU and Mercosur would require careful management.

What appears implicit in Commissioner Hogan’s views is that if the UK wants a deal with the EU on agriculture, existing (EU) standards would need to be adhered to. If the UK pursues free trade deals with the US for example and permits hormone treated beef to be sold in Britain, could this mean that more rigorous checks are imposed for UK-EU agricultural trade?

Trump’s farming policy remains uncertain

A few weeks into the new US administration and the key word emanating from agricultural circles is ‘uncertainty’. There are concerns that Trump does not see farming as a key priority as evidenced by the length of time it took to appoint Sonny Perdue as agricultural secretary.

Added to this, there are mixed signals on support for the bio-ethanol and renewables sector. As reported last month, despite promises of support during the presidential campaign, Scott Pruitt, the head of the Environmental Protection Agency is a critic of biofuels. Furthermore, the administration contains numerous appointments with close links to the oil and gas industry. However, one area where farmers feel that Trump has sent clear signals that he will support them on is reduced environment-related regulation.

Trade is another area where there are major concerns. The US withdrawal from the Trans-Pacific Partnership (TPP) is seen as a significant, if not unexpected, blow as many farmers saw possibilities to export more soybeans, corn and pork to Asia. There is also anxiety over trade with China which is a major outlet for soybeans. If the US imposes tariffs on Chinese manufactured goods, then it is likely that the Chinese would react by importing soybeans from elsewhere.

There are also questions over the stance that the Trump administration will take on the next US Farm Bill, which is due to be put before Congress by autumn 2018, as well as migrant labour which was covered previously on InsideTrack.

From a UK perspective, the US has a major underlying influence on prices for arable commodities. The US biofuels policy supports grain prices globally. Any trade disputes will disrupt prices although this could also present opportunities especially as the UK strives to be a champion of freer trade.

The prospect of a bilateral US-UK trade deal should not be ignored. This is likely to be much less ambitious than the proposed US-EU trade deal (TTIP) which according to most experts has gone into ‘cold storage’. Market access for US beef to the UK under such a deal would be a key issue for British farming. If the US secures good access for hormone-treated beef, UK farmers would struggle to be competitive, based on its current production standards. Arguably, US beef could displace imports from the EU, especially Ireland which imports sizeable volumes of animal feed from the UK. Any significant decrease in UK and Irish beef output would have negative implications for UK feed grain prices.