Potential Implications for the Irish Agri-food · UK Agri-Food Trade •Second largest economy in...

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Brexit:

Potential Implications

for the Irish Agri-food

Sector

Trevor Donnellan & Kevin Hanrahan Agricultural Economics and Farm Survey Dept.

Teagasc, Athenry, Co. Galway,

DAFM, Backweston, Dublin

April 13th 2016

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Outline • The terms of Brexit

– Trade policy

– UK Ag policy

• Current trade relations between

– UK and EU

– IRL and UK

• Implications of Brexit for EU

• Implications of Brexit for Ireland’s agri-food

exports

• Uncertainties ….. And there are many !

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So many unknowns

• Brexit is a step into the unknown

• Vote to Remain: Relatively known outcome

– No impact on future trade

• Vote to Leave: Completely unknown outcome

– No indication of UK’s trade relationship with the world

– No indication as to what UK ag policy would be

• A comprehensive analysis of Brexit cannot therefore

be produced at this time

• But we can provide an assessment of the

consequences based on a set of Brexit assumptions

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Mechanics of Brexit

• Brexit Vote June 23rd

• If UK votes to Leave then what happens next?

a) Nothing (paralysis)/ stalling for time?

b) Further renegotiation and another referendum?

c) Brussels immediately notified of intention to leave?

• Clock starts ticking once intention to leave is notified

– prompts a two year negotiation process on exit terms

– which could be extended with consent of EU

– preferable for UK to leave on amicable negotiated terms

– but possible that UK might exit with no trade terms in place

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Exit Dates ?

• At the very earliest mid 2018

– But could be messy as MFF revisions would be required

• Possibly 2020

– Neater solution as it marks end of current MFF period

• Probably some time after 2020

– The complexities of Brexit make a later departure more

practical than an early one

• However, Eurosceptics may apply pressure for

Brexit to occur as soon as possible

– to ensure it occurs within life of current UK government

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What will Brexit require?

• Negotiation of trade relations between EU27 and UK

– UK application for WTO membership

• Negotiation of trade relations between UK and other

WTO members

• Resolution of tariff levels and TRQs

• Past experience shows that trade negotiations are very

time consuming

• Concern that UK may lack professional capacity

– Given that UK trade matters have been dealt with by EU

since 1973

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Brexit Trade Terms

• Decision required on trade relationship with EU

• Agriculture might be included/excluded from any trade agreement with EU

• Could result in all manner of trade relationships e.g.

a) No tariffs on EU UK trade

• i.e. free trade between UK and EU

b) MFN tariffs

• UK and EU treat each other as WTO members

c) Unilateral UK tariff reduction

• lopsided outcome where UK faces tariffs on its exports to EU but reduces or

removes tariffs on imports from EU and other WTO members

• Questions also about what sort of TRQs the UK could establish

– May not be able to acquire a pro rata share of existing EU TRQs

– Subdivided UK/EU TRQ limits are less valuable to 3rd country exporters

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5

Suite of Brexit Trade Terms

The UK’s relationship with

the EU

Agriculture

‘in’ an

agreement

Agriculture ‘out’

Existing most-

favoured-nation

(MFN) tariffs

Unilateral tariff

reduction by the

UK

Customs Union 1 2 3

European Economic Area 4 5 6

Simple Free Trade Area (FTA) 7 8 9

No formal link 10 11

9 Source: Swinbank (2016)

• 11 possible trade relationship outcomes for agriculture

Brexit Trade Terms ?

• Some outcomes more likely than others

• Full UK trade liberalisation in agriculture is unlikely

• Tariff elimination would expose UK dairy and drystock

– Severe competition from low cost non EU exporters

• UK likely to see dairy and drystock as “sensitive products”

– Offering only limited or no tariff reductions for these sectors

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And to compound matters….

need to decide UK Ag Policy

• UK would also be free to set agricultural policy

• Reform of UK ag policy is likely to be gradual

• In short term

– Likely that this would be closely aligned to the CAP

– This would be less disruptive to UK agri-food sector

• In medium term

– Direct payments unlikely to pass a UK Treasury value for money audit

– Likely to see a movement away from income support direct payments

– Progression towards smaller ag payment budget, geared towards

environmental considerations

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Brexit Implications for CAP

Loss of the UK Budget contribution

-15

-10

-5

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Billio

n E

uro

EU expenditure in UK

UK contribution to EU own resources (net of rebate)

Net contribution

12 Source: Matthews (2016)

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What will Brexit mean for

Irish Trade ?

• The good news

– Agri-food trade will not cease

– The UK is too dependent on imports and will not

embark on a food self-sufficiency policy

• The bad news

– Irish exports will face more competition in UK

– Trade from Ireland will be impeded and

– Trade will be diverted from UK to other markets

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What is trade diversion?

• Simply put, trade diversion is a change in export destination

• It is usually caused by a change in tariffs or other trade costs

– Which affect the competitiveness of exports

• Country B (Britain) leaves a customs union (EU)

• Exports from country I (Ireland) to country B are reduced

– Country B import more from country Z (e.g. New Zealand)

– Country I exports more to country F and country G (EU Member States)

• Trade diversion has a negative outcome for exporting country (I)

– Prices may be lower in the country that trade is diverted to

– Transportation and other logistical costs may also be higher

– Additional costs associated with market development

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UK Agri-Food Trade

• Second largest economy in EU28

• UK is a major net importer of food

– Unlike most other large EU member states

• UK has an agri-food trade deficit of €27.6 billion (2014)

– This trade deficit is mainly with the EU

• UK self-sufficiency higher in some agri-food sectors

– Net imports of dairy, beef, pig meat, fruit are significant

– Relatively balanced trade position for cereals & sheep meat

– Large positive net exporter in beverages

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Who are the UK’s major agri-

food import suppliers

• Main exporters of agri-food to the UK

– Netherlands, Spain, France, Germany and Ireland

• Beef

– Ireland

• Dairy

– Ireland

• Sheep meat

– NZ and Australia

• Pig meat

– Denmark, Netherlands, Germany

• Fruit and Veg

– Netherlands and Mediterranean Member States 16

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UK Trade Shares

by HS2 Chapter

17

0% 5% 10% 15% 20% 25% 30% 35%

LIVE ANIMALS

MEAT AND EDIBLE MEAT OFFAL

FISH AND CRUSTACEANS, MOLLUSCS AND OTHER AQUATIC…

DAIRY PRODUCE; BIRDS' EGGS; NATURAL HONEY; EDIBLE…

LIVE TREES AND OTHER PLANTS; BULBS, ROOTS AND THE LIKE;…

EDIBLE VEGETABLES AND CERTAIN ROOTS AND TUBERS

EDIBLE FRUIT AND NUTS; PEEL OF CITRUS FRUITS OR MELONS

COFFEE, TEA, MATÉ AND SPICES

CEREALS

PRODUCTS OF THE MILLING INDUSTRY; MALT; STARCHES;…

OIL SEEDS AND OLEAGINOUS FRUITS; MISCELLANEOUS GRAINS,…

ANIMAL OR VEGETABLE FATS AND OILS AND THEIR CLEAVAGE…

PREPARATIONS OF MEAT, OF FISH OR OF CRUSTACEANS,…

SUGARS AND SUGAR CONFECTIONERY

COCOA AND COCOA PREPARATIONS

PREPARATIONS OF CEREALS, FLOUR, STARCH OR MILK;…

PREPARATIONS OF VEGETABLES, FRUIT, NUTS OR OTHER PARTS…

MISCELLANEOUS EDIBLE PREPARATIONS

BEVERAGES, SPIRITS AND VINEGAR

RESIDUES AND WASTE FROM THE FOOD INDUSTRIES; PREPARED…

TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES

PRODUCTS OF ANIMAL ORIGIN, NOT ELSEWHERE SPECIFIED OR…

LAC; GUMS, RESINS AND OTHER VEGETABLE SAPS AND EXTRACTS

VEGETABLE PLAITING MATERIALS; VEGETABLE PRODUCTS NOT…

Chapter Share of Agri-food Exports Chapter Share of Agri-food Imports

Source: Eurostat COMEXT

Beverages

Meat

Dairy

Processed meats

UK Meat Trade Balance 2014

(HS4)

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-1.4 -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6

MEAT OF BOVINE ANIMALS, FRESH OR CHILLED

MEAT OF BOVINE ANIMALS, FROZEN

MEAT OF SWINE, FRESH, CHILLED OR FROZEN

MEAT OF SHEEP OR GOATS, FRESH, CHILLED OR FROZEN

MEAT OF HORSES, ASSES, MULES OR HINNIES, FRESH, CHILLED…

EDIBLE OFFAL OF BOVINE ANIMALS, SWINE, SHEEP, GOATS,…

MEAT AND EDIBLE OFFAL OF FOWLS OF THE SPECIES GALLUS…

MEAT AND EDIBLE OFFAL OF RABBITS, HARES, PIGEONS AND…

PIG FAT, FREE OF LEAN MEAT, AND POULTRY FAT, NOT…

MEAT AND EDIBLE OFFAL, SALTED, IN BRINE, DRIED OR…

CORRECTIONS DUE TO ERRONEOUS CODES BELONGING TO…

TRADE BROKEN DOWN AT CHAPTER LEVEL ONLY

CONFIDENTIAL TRADE OF CHAPTER 02

Billion Euro

IMP ROW IMP EU EXP ROW EXP EU


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UK Trade Meat Preparations 2014

(HS4)

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-2.5 -2 -1.5 -1 -0.5 0 0.5

SAUSAGES AND SIMILAR PRODUCTS, OF MEAT, OFFAL OR BLOOD;FOOD PREPARATIONS BASED ON THESE PRODUCTS

PREPARED OR PRESERVED MEAT, OFFAL OR BLOOD (EXCL.SAUSAGES AND SIMILAR PRODUCTS, AND MEAT EXTRACTS AND

JUICES)

EXTRACTS AND JUICES OF MEAT, FISH OR CRUSTACEANS,MOLLUSCS AND OTHER AQUATIC INVERTEBRATES

PREPARED OR PRESERVED FISH; CAVIAR AND CAVIAR SUBSTITUTESPREPARED FROM FISH EGGS

CRUSTACEANS, MOLLUSCS AND OTHER AQUATICINVERTEBRATES, PREPARED OR PRESERVED (EXCL. SMOKED)

CORRECTIONS DUE TO ERRONEOUS CODES BELONGING TOCHAPTER 16



Billion Euro IMP ROW IMP EU EXP ROW EXP EU


UK Dairy Trade 2014

(HS4)

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-2 -1.5 -1 -0.5 0 0.5 1

MILK AND CREAM, NOT CONCENTRATED NOR CONTAINING…

MILK AND CREAM, CONCENTRATED OR CONTAINING…

BUTTERMILK, CURDLED MILK AND CREAM, YOGURT, KEPHIR…

WHEY, WHETHER OR NOT CONCENTRATED OR…

BUTTER, INCL. DEHYDRATED BUTTER AND GHEE, AND…

CHEESE AND CURD

BIRDS' EGGS, IN SHELL, FRESH, PRESERVED OR COOKED

BIRDS' EGGS, NOT IN SHELL, AND EGG YOLKS, FRESH, DRIED,…

NATURAL HONEY

TURTLES' EGGS, BIRDS' NESTS AND OTHER EDIBLE PRODUCTS…

CORRECTIONS DUE TO ERRONEOUS CODES BELONGING TO…



Billion Euro

IMP ROW IMP EU EXP ROW EXP EU


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UK Fresh Beef Imports (Volume) -2014

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IE 56%

FR 6%

DE 4%

IT 0%

DK 7%

NL 11%

Other EU 4%

Other non-EU12%


UK Sheep Meat Supply & Use Balance

(2001-2014)

22

0

50

100

150

200

250

300

350

400

450

2001 2003 2005 2007 2009 2011 2013

000 t

on

nes

Production Imports Domestic Use Exports

Source: DEFRA (2015)

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UK Sheep Meat Imports (volume) - 2014

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IE 5% FR 1%

Other EU4%

NZ 72%

AU 16%

Other non EU 2%


UK Sheep Meat Exports (volume) - 2014

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IE 8%

FR 50%

DE 10%

IT 5%

DK 0%

NL 2%

Other EU

10%

Other non-EU 15%


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UK Butter Imports (volume) - 2014

25

IE 56%

FR 6%

DE 4%

IT 0%

DK 7%

NL 11%

Other EU 4%

Other non-EU12%


UK Cheese Imports (volume) - 2014

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IE 28%

FR 23%

DE 13%

IT 6%

DK 8%

NL 7%

Other EU 12%

Other non-EU 3%


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Ireland Merchandise Exports

(1999-2015)

27

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Eu

ro B

illio

n

Agri-food (HS2 Chapters 01-24) Other Merchandise (HS2 Chapters 25-100)


Ireland Merchandise Imports

(1999-2015)

28

0

10

20

30

40

50

60

70

1999 2001 2003 2005 2007 2009 2011 2013 2015

Eu

ro B

illio

n

Agri-food (HS2 Chapters 01-24) Other Merchandise (HS2 Chapters 25-100)


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Irish Agri-Food Exports by Destination

(1999-2015)

29

0

2

4

6

8

10

12

1999 2001 2003 2005 2007 2009 2011 2013 2015

Eu

ro B

illio

ns

UK OEU ROW


Irish Agri-Food Imports by Source

(1999-2015)

30

0

1

2

3

4

5

6

7

8

9

1999 2001 2003 2005 2007 2009 2011 2013 2015

Eu

ro B

illio

n

UK OEU ROW


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Irish Agri-Food Exports by HS2 Chapter

and Share of Chapter to UK (2014)

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0% 20% 40% 60% 80% 100%

LIVE ANIMALS

MEAT AND EDIBLE MEAT OFFAL

FISH AND CRUSTACEANS, MOLLUSCS AND OTHER AQUATIC…

DAIRY PRODUCE; BIRDS' EGGS; NATURAL HONEY; EDIBLE…

PRODUCTS OF ANIMAL ORIGIN, NOT ELSEWHERE SPECIFIED OR…

LIVE TREES AND OTHER PLANTS; BULBS, ROOTS AND THE LIKE;…

EDIBLE VEGETABLES AND CERTAIN ROOTS AND TUBERS

EDIBLE FRUIT AND NUTS; PEEL OF CITRUS FRUITS OR MELONS

COFFEE, TEA, MATÉ AND SPICES

CEREALS

PRODUCTS OF THE MILLING INDUSTRY; MALT; STARCHES;…

OIL SEEDS AND OLEAGINOUS FRUITS; MISCELLANEOUS GRAINS,…

LAC; GUMS, RESINS AND OTHER VEGETABLE SAPS AND EXTRACTS

VEGETABLE PLAITING MATERIALS; VEGETABLE PRODUCTS NOT…

ANIMAL OR VEGETABLE FATS AND OILS AND THEIR CLEAVAGE…

PREPARATIONS OF MEAT, OF FISH OR OF CRUSTACEANS,…

SUGARS AND SUGAR CONFECTIONERY

COCOA AND COCOA PREPARATIONS

PREPARATIONS OF CEREALS, FLOUR, STARCH OR MILK;…

PREPARATIONS OF VEGETABLES, FRUIT, NUTS OR OTHER PARTS…

MISCELLANEOUS EDIBLE PREPARATIONS

BEVERAGES, SPIRITS AND VINEGAR

RESIDUES AND WASTE FROM THE FOOD INDUSTRIES; PREPARED…

TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES

Total Export Value Share UK Share of Exports


Key Brexit Assumptions

• The UK leaves the EU

• The UK joins WTO

• The CAP remains unchanged

• No new trade deals are entered into by the EU

• UK agricultural policy mimics the CAP

– at least for a transitional period

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Brexit Scenarios

Share of Irish-UK

exports that are

diverted (%)

Reduction in

value of diverted

trade (%)

Core Scenario 1 21.5% -15%

Scenario 2 56.6% -15%

Scenario 3 21.5% -30%

Scenario 4 56.6% -30%

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Impact of Brexit on the Value of Irish

Agri-Food Trade (1) Share of UK

trade

diverted (%)

Reduction

in value of

diverted

trade (%)

Value of

Exports in

2014

Value of

Exports

Under Brexit

Change in

Value of

Exports

% Change

% % € billion € billion € billion percentage

Core Scenario 1: Trade Diversion based on

ESRI/Hufbauer and Schott estimate & assumed 15% reduction in value of diverted trade

UK 21.5 -15 4.52 3.55 -0.97 -21.5

Other EU 21.5 -15 3.28 4.10 +0.83 +24.5

Rest of World 21.5 -15 2.85 2.85 0 0

Total 10.65 10.50 -0.15 -1.4%

Alternative Scenario 2: Larger Trade Diversion based on

Hufbauer and Schott estimate for agri-food trade & assumed 15% reduction in value of diverted trade

UK 56.6 -15 4.52 1.96 -2.56 -56.6%

Other EU 56.6 -15 3.28 5.45 2.18 66.4%

Rest of World 56.6 -15 2.85 2.85 0.00 0.0%

Total 10.65 10.26 -0.38 -3.61%

34 Source: Authors’ Calculations

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Impact of Brexit on the Value of Irish

Agri-Food Trade (2) Share of UK

trade

diverted (%)

Reduction

in value of

diverted

trade (%)

Value of

Exports in

2014

Value of

Exports

Under Brexit

Change in

Value of

Exports

% Change

% % € billion € billion € billion percentage

Alternative Scenario 3: Trade diversion based on

ESRI/Hufbauer and Schott estimate and assumed 30% reduction in value of diverted trade

UK 21.5 -30 4.52 3.55 -0.97 -21.5%

Other EU 21.5 -30 3.28 3.96 0.68 20.8%

Rest of World 21.5 -30 2.85 2.85 0.00 0.0%

Total 10.65 10.35 -0.29 -2.74%

Alternative Scenario 4: Larger Trade Diversion based on

Hufbauer and Schott estimate for agri-food trade & assumed 30% reduction in value of diverted trade

UK 56.6 -30 4.52 1.96 -2.56 -56.6%

Other EU 56.6 -30 3.28 5.07 1.79 54.7%

Rest of World 56.6 -30 2.85 2.85 0.00 0.0%

Total 10.65 9.88 -0.77 -7.22%

35 Source: Authors’ Calculations

What about UK agri-food

exports to Ireland?

• We have not focused on Brexit impact on agri-food imports – 2014 imports of €4.1 bn vs exports of €4.5 bn

• If Brexit reduces UK agri-food exports to Ireland – Opportunities for Irish indigenous producers to fill gap in market

– Alternatively, products could be sourced from elsewhere in the EU27

• Outcome would depend on – Capacity of indigenous Irish food producers to scale up production

– Decisions by Irish retailers to use non UK suppliers, and

– Irish consumer preferences for Irish products vs EU27 products

• Some Irish agri-food businesses could benefit from Brexit – Particularly those with limited exposure to the UK market

– Brexit could lead due to reduced competition on the Irish market

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Caveats and uncertainties

• Post Brexit UK Agri-food policy is unknown

– Agri-food

– Trade

• TRQ and Preferential Trade access post Brexit

• Macroeconomic uncertainty and impact of Brexit

– Exchange rates, competitiveness and GDP growth

• Trade liberalisation and sensitive products

• All island agri-food processing sector integration

• Consumer preferences for food products – where will

Irish consumers get their Kit Kat ?

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Brexit Conclusions (1)

• Outcome of vote and economic impact highly uncertain

• Post Brexit, UK unlikely to pursue agri-food self-sufficiency

– Since the Corn Laws the UK has relied on trade

– No reason to expect volte face

• Reason to expect UK to shy away from unilateral free trade

– UK recognises that it may be vulnerable in livestock sectors

– Sensitive product status for livestock sectors ?

• Not credible to imagine agri-food trade between UK and

Ireland coming to a stop

• Other Irish agri-food export markets now much more

important than historically – Dilutes the trade impact of Brexit somewhat

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• Brexit likely to involve at least some additional trade

barriers between UK and Ireland

– Exports from Ireland to UK likely to be reduced

– Exports diverted to other lower value markets

• Overall Irish agri-food export value reduced

• Export value to non-UK destinations likely to increase

• Magnitude of trade diversion and loss of export value

uncertain

– Trade and ag. policy dependent

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• Core Scenario:

– Trade diversion based on ESRI analysis

– Augmented by reduction in value of diverted trade

• Three alternative scenarios

– Greater diversion of trade

– Larger reduction in value of diverted trade

• In Core scenario Irish agri-food exports reduced

– €150 mn per annum (-1.4%)

• Most negative alternative scenario

– Close to €800 mn per annum (-7.2%)

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• Exposure to UK market is not uniform

– varies by agri-food product and commodity category

– Varies by agri-food firm

– Certain industry/firm specific risks from Brexit likely to be

higher

• If the UK votes “leave” – Need for further detailed analysis of the impact on Irish

agriculture and agri-food industry

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