Brexit, the CAP and a future UK agriculture policy
Hello, and welcome to this special Brexit edition of the Down to Agribusiness podcast. I'm Adam Sharpe, publishing director for IEG Vu and Policy. It's impossible to discuss the year in European agricultural politics without covering the fallout from the UK's decision to leave the European Union. While it was not mentioned in the CAP communication document published recently, the shadow of Brexit looms large over the European Commission's thinking on the future direction of the policy. At the same time, British politicians must come up with a new farming policy outside of the CAP for the first time in 40 years, and UK farmers will be eager to hear if they face greatly increased competition from foreign importers for our new trade deals, or indeed effectively being locked out of the main export market.
I'm joined today by CAP and Brexit expert Chris Horseman to reflect on where things are heading. Hello Chris.
We've looked at the factors behind the European Commission's latest CAP reform proposals, and conspicuous by its absence in the communication was the mention of Brexit. What impact is Brexit likely to have on the CAP in terms of budgets and future direction?
Well, most obviously and most immediately, the CAP is going to lose roughly €4 billion a year in terms of the net contributions from the UK into the EU budget, which will disappear at the point where the UK leaves the EU. So, that is going to leave the European Union, certainly from 2021 onwards, either needing to make savings, or make higher contributions for each of the remaining EU 27 member states in order to keep the CAP financed at the rate, at that current level. So, there are two possible routes to doing that which we've seen in the in the CAP communication. One is that the Commission seems quite keen on the idea of introducing aid caps.
Now, an initial suggestion that that could be capped, direct aid payments per farm could be capped at between €60 and €100,000 Euros per holding did not survive until the final version, the published version of the communication. Nevertheless, the Commission has said that it does want to make aid capping part of the package, and that could save a significant amount of money depending on, obviously where the aid cap limit is set, and exactly how that process is worked out. Another important element of the Commission's communication is this idea of each member state producing strategic plans, essentially each member state choosing from a menu of policy instruments, fitting it together with a large degree of discretion in terms of how they how they do that. Now, it is just possible that member states might end up using more of the Pillar 2 type our payments than they have done until now, and, of course Pillar 2 payments co-funded by member states rather than paid for exclusively from the EU budget. So, we can't say with any certainty, but there is speculation that that might be part of the Commission's strategy for saving money. Certainly the budget is the biggest headache in terms of the future CAP, once the UK leaves.
So, the UK, as things stand, is scheduled to leave the EU at the end of March 2019, but obviously, the current CAP runs until 2020. There was also talk of some sort of transitional arrangement to prevent a cliff-edge scenario. Do you think the UK will still be part of CAP during that transitional phase, as things stand?
Well, there's a lot of confusion about this, and it will need to be clarified, really, in the next phase of the Brexit talks, which will begin in early 2018. What we do know, is that the UK will, essentially, in effect, continue to pay into the EU budget, and will continue to finance the CAP until the end of 2020, the end of the current multi-annual financing, financial framework period. So, it would be logical, to some extent, for the UK to therefore continue to draw funds from that budget to which it's continuing to make payments. However, the position is confused. A statement from Defra, the UK agriculture ministry, stated that the UK will definitely be leaving the CAP in March 2019. A subsequent statement from the Defra secretary Michael Gove seemed to be a lot less definitive on subject. So, it really depends on the nature of the transition agreement which is negotiated now in the next phase of the Brexit talks, but it's certainly possible that the UK could remain at least an associate member of the CAP beyond March 2019. That's certainly not out of the question at this point.
Okay, so looking ahead, in terms of a future British agriculture policy, it's probably important to differentiate between a farming policy and an agri-food trade strategy. So, let's first start with the farming policy. Do you see a British farm policy shaping up? How do you see it shaping up, and how do think it's going to be different from the current CAP?
Well, so far we've had no detail, but we've had quite a few fairly clear signals from Defra secretary Michael Gove, who is masterminding at the planning for all this. It seems very clear that the current Pillar 1 style area based direct aid payments will disappear, be phased out, or at least be scaled down, and there will be caps on the amount of direct subsidy which each farm will receive. Michael Gove has been quite outspoken in his criticism of the fact that very large farms can receive very large amounts of public financing, as is possible under the CAP. He's also made very clear that there will be much more focus on farmers being paid to deliver environmental benefits, and he wants to see more focus on things like innovation, and supporting investment in farms and in the agri-food chain.
So, to put it into, sort of, CAP shorthand, essentially the UK is going to move away from a Pillar 1 type approach, and put much more of its eggs in the Pillar 2 basket, if you could put it that way. It's going to be more of a Pillar 2 type approach with a focus on farmers being paid to be stewards of the countryside, and to deliver specific goods, and to be encouraged to modernise their production. So, exactly how that works out in terms of policy instruments remains to be seen. We've got a commitment from the UK government that the levels of support to agriculture will remain at their current levels until 2022. Beyond, that no commitments have been given, and so it is possible that the aggregate amount of funding for agricultural support will decline after that point, and indeed most people, I think, in the UK agriculture sector are expecting that to happen.
Okay, so moving onto trade, the other 27 EU member states are the key destination for UK agri-food exports on the whole. We've seen a lot of talk from commentators, talking about a bespoke future relationship between the EU and the UK, probably based on an existing model, but amped up, so Canada plus, plus, plus, or a Norway-Switzerland hybrid for example. How do you see this being resolved? Do you think we're going to see this deep and comprehensive trade deal that the UK wants, or is that going to be problematic for the EU, considering it might have to review the other trade deals that it has?
I think it's is very hard to predict the outcome, and in a sense, the, sort of, taking existing models as a template might not be the most helpful way of trying to understand or guess, I suppose, what's going to happen next. You see, normally with trade talks, you start from the basis of, 'We would like better access to this market, we would like harmonised rules in this sector, and we prepared to offer you in return, X, Y and Z.' Now, with the EU and the UK, the starting point is already full harmonisation and full integration. So, the talks will need to address, where is this harmonisation and integration no longer going to apply? In a sense, what we've got is the world's first ever trade de-liberalisation process. So, the question is, how much regulatory alignments, to use a topically popular phrase, is the UK prepared to tolerate?
The closer the regulatory alignment, the easier it will be to have a close trade relationship between the EU and the UK, and this phrase, 'Regulatory alignment,' cropped up, of course, in the discussions about the relationship, or the trade relationships between Northern Ireland and Republic of Ireland, which by extension, will also have to govern the border between the UK and the EU. If the UK is outside of the single market, and particularly if it's outside of the customs union, then these levels of easy integration, frictionless trade, are going to be very difficult to deliver. I think that there won't be any tariffs on agricultural trade between the EU and the UK. There aren't any at present, there haven't been any for a long time, and it's much easier to just keep something going rather than to remove something which is there at present, which is what normally causes the political friction when you're looking at agricultural trade agreements. I think frictionless trade will not be possible, and course it's important to remember, from taking the broader perspective, that services account for a far greater amount of the UK's trade by value than trade in goods. It's going to be a lot more difficult to maintain the current status quo in terms of financial services, insurance services, that kind of thing, than it will be to simply maintain zero tariffs on trade in agricultural and other goods.
So, looking ahead to new markets for the UK, do you think this flurry of trade deals being promised by Liam Fox, David Davies and others is actually going to materialise post-Brexit? For instance, there's been a lot of negative press about chlorine-treated chicken, and hormone-fed beef. So, will a UK-US trade agreement that would allow these products to enter the British market, is that a possibility, do you think?
I think the idea of a quick, easy win, in terms of a UK-US trade agreement, is actually quite unlikely. To begin with, the UK will have to clarify what the transition period will be after March 2019. It's looking possible that the UK could be tied in for a period of perhaps a couple of years, during which time, essentially, the status quo will continue to apply, and the UK certainly won't be a position to agree any new trade agreements, it might be able to, sort of, negotiate them. The question of the regulatory standards is going to continue to be a problem, it's by no means clear that UK consumers are any less amenable to the idea of hormone-treated beef or chlorinated chicken than are consumers in the rest of the EU. That has been a stumbling block in the TTIP negotiations over the last few years, and I think it will probably continue to be a considerable barrier to trade when it's just the UK that's involved.
Of course, depending on how long the talks go on, it may well be that by the time they are concluded, there will be a different administration in Washington than the one that is there at present. It's very unlikely to be a quick process. I think also, on the trade question, something which has not been fully understood by large sections within the UK political and trading fraternity, is that, once the UK leaves the EU, it will also lose access to the existing trade benefits from which it benefits a present as a EU member country. So, a lot of the existing preferential access to third country markets, for which the UK currently benefits from, it will have to go back and potentially renegotiate, or certainly get agreement with the third countries in question that these that these deals will continue to apply. That's by no means a foregone conclusion.
So, just finally, a lot of farming businesses rely on cross-border trading in Northern Ireland and the Republic of Ireland. They also have facilities on both sides of the border. Do you think after this seeming agreement on the Phase 1 of the Article 50 negotiations in Brussels, do you think those farmers and businesses can breathe easy now that there appears to be a firm commitment to find a solution not to have border posts and customs checks?
Well, I think there has been so much political capital invested in this pledge not to have any customs posts on the Irish border that we can be fairly certain that these will not happen. and so that will be a physically open border, but there a lot of questions which remain to be answered in that respect. If the UK is no longer part of the EU customs union, then the border between the north and the south of Ireland will, de facto, be the border of that customs union and the autonomous trading unit that is the United Kingdom. So, there will have to be some kind of way of preventing irregular trade, if one could put it that way, from crossing the border, even if regular trade can be perhaps regulated by the use of trusted trader status for regular agribusinesses and others, and so on. So, I've likened the border between the north and south of Ireland as being the, sort of, diplomatic equivalent of Schrödinger's cat, in the sense that it both must not exist and yet simultaneously must exist. It's a dilemma which will take a lot of resolving in terms of the way that that the talks are currently shaping up.
Well, there are certainly a number of unanswered questions about this whole process, particularly around agriculture, so let's hope that 2018 starts to answer some of those questions. Thank you very much, Chris.
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