National Farmers’ Union – Written Evidence (JTN0015)

Introduction

1. The NFU welcomes the opportunity to provide evidence on UK – Japan trade negotiations. Japan is the largest net importer of agri-food products worldwide, it lacks sufficient agricultural land to feed its population and relies on imports for around 60%[1] of the food it consumes. It is the fourth largest export destination for EU agricultural products. In addition, Japan’s food-and-drink market is one of the largest globally, with high per capita spending and consumption levels[2]. As a result, the Japanese market represents a genuine opportunity for UK farmers and growers to export more great British food and drink.

2. The EU-Japan Economic Partnership Agreement (EPA) is a great success story for EU farming in the framework of trade agreements concluded by the EU. Since the agreement came into force on 1 February 2019 EU farmers and by merit of EU membership UK farmers, have been able to benefit from the trade preferences it grants. As the table in the appendix shows, UK exports for several key commodities saw significant growth from 2018 to 2019. However, if a UK-Japan Free Trade Agreement (FTA) is not in place at the end of the transition period these trade preferences will fall away for UK businesses. As a result, the NFU is very supportive of the governments aim to agree a comprehensive FTA with Japan as soon as possible and at the latest by the end of the year.

3. The Department for International Trade (DIT) note in the scoping assessment that was published as part of the UK negotiating mandate, that a renegotiated trade agreement with Japan could increase UK GDP by 0.07%. This is an equivalent of £1.5 billion compared to GDP in 2018 level. UK exports to Japan are estimated to increase by 21.3% and imports from Japan are estimated to increase by 79.7%. The DIT scoping assessment specifically notes that UK agriculture could benefit from an FTA with Japan through a combination of reduced tariffs and red tape for food and drink exports.

4. In this context, this submission from the NFU seeks to give a broad response to the general questions posed by the committee.

EU – Japan EPA

5. The EU-Japan EPA aims to boost trade between the EU and Japan by reducing the tariff and non-tariff barriers to trade. When the deal was signed in 2018 it was expected to increase UK exports to Japan by between £3.2bn and £5.4bn while imports from Japan to the UK were expected to increase by between £5.5bn and £8.4bn[3]. Japan is currently the UK’s 4th largest non-EU export market (and 11th globally), accounting for just over 2% of the UK’s total exports in 2018[4].

6. Japan is a developed economy with a low food self-sufficiency ratio. In 2018, it was reported that the food self-sufficiency in calorie terms was 37%, meaning that Japan is heavily reliant on imported food. Japan is also a highly protected market for agricultural commodities with a complex gate price system and strong safeguards in place. The EU-Japan EPA is extremely positive for the EU farming sector as it sees around 85% of EU agri-food products allowed to enter Japan duty-free over time. The agreement eliminates or sharply reduce duties on agricultural products in which we have a major export interest, including pork, beef, cheese and sugar.

7. In this regard the NFU believes that in the context of a UK-Japan FTA negotiations, the UK should work to achieve at least the same level of market access as is afforded to EU farmers through the EPA. In the EPA Japan has granted several concessionary Tariff Rate Quotas (TRQs) for agricultural products, including ones for malt, Skimmed Milk Powder (SMP), butter and whey, these should be adjusted in size to reflect the UK. If the UK and EU agreements see tariffs cut over a different timescale or to different levels (i.e. the EU has earlier or better access then the UK) it would put UK businesses at a competitive disadvantage compared to equivalent EU businesses. Market share is hard won and if the EU has preferential access over and above the UK, it will mean EU businesses will establish themselves earlier, leaving less room in the market for UK imports.

8. The EU/ Japan EPA includes a provision that says that “if a party grants a larger or faster tariff reduction, higher quota or any other more favourable treatment than that provided for under this Agreement to a third country based on an international agreement for goods which affects the balance in the European Union's or Japan's market of such goods, the Parties shall, with a view to ensuring that the other Party obtains at least the same preference, commence such a review within three months of the date of entry into force of the international agreement between the European Union and that third country or between Japan and that third country, and will conduct the review with the aim of concluding it within six months of the same date.” As the NFU’s objective is to ensure that UK farmers get as a minimum, the same access to the Japanese markets as their EU counterparts, we do not believe this provision prohibits UK negotiators from achieving this.

9. The EU-Japan EPA puts in place a series of committees with the aim of discussing and solving issues arising from the implementation of the agreement (e.g. market access, SPS, cooperation in the field of agriculture). This preferential dialogue is something that the UK should aim to replicate as it is a useful tool to prevent trade issues from escalating to disputes. The EU-Japan EPA also tackles other trade barriers including Japan’s unclear rules and regulations which will make it easier for European producers to export their produce to Japan. This process was made easier since Japan and the EU both have similar views on controversial areas such as GMO’s and the use of hormones in beef - like the EU, Japan has strict rules on GMO’s and bans the use of hormones in beef and processed beef imports

Trade and standards

10.                     The NFU believes that to enable and support a thriving British agriculture sector it is crucial that the UKs future trade policy respects domestic production standards. To do otherwise would contradict the government’s own stated commitment to upholding our high animal welfare and environmental standards and would undermine British farmers.
11.                     Earlier this year the government set out in its negotiating mandate very clear parameters for trade talks with Japan including a commitment not to undermine our high environmental protection, animal welfare and food standards. To have this embedded from the outset of the talks is critical and is an important factor in ensuring that a UK / Japan trade deal works for both UK farmers and consumers.

12.                     UK farmers and growers are proud of their high standards of production – whether in terms of food safety, environmental protection, or animal welfare and indeed many other factors of operation. Many of these standards are underpinned by law, but these regulatory requirements often result in comparatively high costs of production for UK farm businesses. Often, global competitors have less stringent requirements, giving them a competitive advantage over UK producers, through production methods that fall below the expectations of the UK public. It is important that UK farmers are not put at an unfair disadvantage through the imposition of extra costs, both direct and indirect, that are not shared by overseas competitors who are exporting food to the UK. Equally, recent analysis by the consumer group Which? demonstrates that UK consumers have a clear desire that food imports adhere to the same high standards as UK producers. The research found that most people in the UK would feel uncomfortable eating food produced using methods not currently in the UK, with nearly three quarters (72%) saying that food from countries with lower standards should not be available here[5].

Rules of Origin (RoO)

13.                     The committee specifically seeks feedback on the type of RoO and cumulation requirements that might be necessary in a UK-Japan trade agreement and how in turn, they might play into the UK’s trading arrangements with the EU. In the context of EU-UK negotiations the NFU urges the government to seek a RoO chapter that preserves the established supply chains that already exist between the UK and the EU, but that does not enable the substitution of UK raw materials for imported materials more than is encouraged today. The NFU also supports the government’s aim of achieving diagonal cumulation, a concept that would be important when trading with mutual FTA partners – such as Japan if a UK-Japan FTA is concluded.

Accession to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)

14.                     As the committee notes the UK Government has expressed strong interest to use a UK – Japan FTA as a stepping stone to joining the CPTPP. While the NFU supports the multi-lateral phased reduction of average tariff levels for agricultural products, notwithstanding the issue of production standards mentioned above, we believe that the protection of sensitive goods on a global market should be a priority when negotiating trade deals. As such, CPTPP includes major agricultural exporting countries who already enjoy preferential access to the UK market in the form of Tariff Rate Quotas (TRQs) for certain key commodities – these include beef, sheep meat, sugar and certain dairy products. This preferential access is provided for in the UK WTO schedule and will be maintained. As a result, the NFU is concerned that in becoming a partner in the CPTPP, the UK Government will be asked to increase market access for sensitive agricultural products.

15.                     UK agricultural producers could benefit from increased access to the CPTPP market. Areas in which there is potential to expand exports of high-quality UK produce include the beef, sheep and dairy sectors. However, further exploratory work of the potential benefit gained from exporting to these markets through joining the CPTPP would need to be undertaken in order to give a comprehensive overview of the potential for UK agricultural exports.

Parliamentary scrutiny and stakeholder engagement

16.                     Given the high impact that trade agreements invariably have on consumers and the economy, including primary producers, the negotiation and ratification of trade agreements should be subject to a high level of democratic scrutiny and accountability at all stages. We believe that the UK Parliament should also be given an active and formal role in the process, significantly more than is currently provided for by under UK constitutional arrangements. At present, MPs will not necessarily “have a vote” on the final form of any trade agreements signed by the UK with other countries and so may not be able to exercise any influence should there be concerns about the impact of these deals on their constituents.

17.                     Whilst the UK government is responsible for international relations and treaty making, the devolved administrations and legislatures are likely to have at least some responsibility for the application, administration, and oversight of the obligations that trade agreements give rise to. It is the NFU and the NFU Cymru’s view that the Welsh Government and the National Assembly ought to have an appropriate degree of involvement by being sighted of relevant documents ahead of such agreements being entered into, as well as the development and approval of implementing legislation which underpins concluded trade agreements. By extension, this approach should be reflected across the constituent parts of the UK.

18.                     Stakeholders should also be actively consulted and kept abreast of developments prior to the commencement of, and throughout, any negotiations. The NFU has welcomed the opportunity for a representative to apply join the DIT Strategic Trade Advisory Group (STAG) and has a place on the Agri-Food Trade Advisory Group (TAG). We will need to assess in the weeks ahead whether this structure provides sufficient opportunity for industry to scrutinise and feed into negotiations. We would welcome further details from government on its plans to keep stakeholders informed as trade talks progress, including under what circumstances government can withhold the publication of relevant documents, and the governance structures that are established to ensure organisations representing relevant interests are properly involved.

Export promotion

19.                     Research conducted by AHDB[6] highlighted that Japanese consumers are particularly driven by ‘food safety’ when buying food, offering real potential for UK agri-food exports given our highly regulated, safe and traceable food supply chain. The AHDB research also points that the tradition and heritage of British agriculture give us a unique selling point. Japanese consumers currently show little familiarity with “Brand Britain” when it comes to food. Therefore, the UK Government should do more to promote UK exports in Japan with messaging focusing on the UK’s food safety record and heritage, rather than relying solely on the Union flag.

Sector interests

20.                     Beef - The NFU welcomed the joint initiative agreed between the UK government and Japanese government in January 2019 to increase the sales of UK beef and lamb. The agreement is expected to be worth approximately £75 million over the first five years for the UK beef industry. Japan is a major importer of beef; it has a high value market and despite the declining population consumption is forecast to marginally increase to 2026[[1]]. The AHDB note that there is potential for increased sales of high value premium cuts of beef, offal and some lower-value cuts. Alongside this, there are opportunities for some branded added value manufactured products such pies and cured meats. Japan takes a similar approach to the EU and bans the use of hormones in beef production, although allows the import of meat produced using them. The USA is currently the largest supplier of beef to the Japanese market and is one of the most competitive producers in the world, as such it will be a challenge for the UK to compete for market share on price alone. Instead, promotion should be focused on the excellent food safety record and heritage of the UK beef industry, two factors highly valued by the Japanese consumer. The EU-Japan EPA sees tariffs on beef cut from 38.5% down to 9% over 15 years for a significant volume of beef products. This level of market access should at least be replicated for UK beef producers under any UK – Japan FTA.

21.                     Lamb - The joint initiative mentioned in relation to beef also opened the Japanese lamb market to UK lamb exports. This is estimated to be worth £52 million over the first five years. Japan is not a significant producer of lamb and there is no tariff on imports of lamb to Japan. Currently 99% of imports of lamb to Japan originate in either New Zealand or Australia, as such the UK will need to compete for market share with two very dominant and competitive suppliers. Therefore, to ensure this market fulfils its potential we believe that more should be done through specific bilateral efforts – such as in market promotion - to increase the sales of UK lamb in Japan.

-          Pig meat – Japan is the second largest global pork importer (excluding EU member states) after China and pork is the preferred meat in Japan. As a bloc, the EU is currently the largest supplier and due to geography mainly supplies frozen product[7]. Similarly, to beef, there are opportunities for the UK pig meat sector to supply premium cuts to Japan. However, Japan does allow ractopamine (a growth promoter) imports on pork and already imports significant volumes from other competitive global suppliers, so it may be difficult for the UK to compete on price. The Gate Price system is Japan’s main tariff barrier to pork imports. Pork import prices are compared to the Gate Price and if the import price is at the Gate Price level or above, then only the ad valorem tariff is paid (4.3% in the case of fresh, chilled or frozen pork meat). If the import price is below the Gate Price, then in addition to the ad valorem tariff, the importer must pay a specific duty which is equal to the difference between the Gate Price and the import price. Under the EU – Japan EPA, both the specific duty and the ad valorem duty will be strongly reduced over time for fresh, chilled and frozen products. For processed pork products, the duties and safeguard systems will be eliminated over eleven years[8]. Despite the EPA being in place the UK continues to experience difficulties in exporting uncooked pork sausages to Japan. because of  technical barriers to trade. Sausages are made of composite material and Japan requires proof that the composite materials are from UK approved premises. Practically this is very difficult given the large volume of GB-NI-ROI composite product. There is also an issue with sausage casings, all casings must be made from the animal in question (i.e. pig casing on pork sausages, beef casings on beef sausages) and this requires proof. Although this is not a large market, it should be unlocked for the future. Any UK – Japan EPA should at least replicate these preferences, to do otherwise would place UK pork producers at a competitive disadvantage to their EU counterparts.

22.                     Dairy - there are opportunities for high value products to be exported to Japan. Since 2016 HMRC data shows that exports of UK cheese have expanded significantly from £326,004 to £2,233,900 in 2019 – a six-fold increase. The dairy provisions in the EPA are complex and vary by product type. The EPA phases out tariffs on hard cheeses by 2023 and introduces a TRQ for soft and fresh cheeses (e.g. mozzarella and blue veined cheeses) which is phased in over a 16 year period. The EPA introduces a TRQ for butter, condensed milk and SMP, the volume of the TRQ will increase over six years and the applicable tariffs will be reduced over eleven years. There is also a TRQ introduced for whey (with specific protein content) that will see tariffs reduced by 70%[9]. The UK should seek at least the same level of access for UK dairy producers as is granted for EU dairy farmers in the EPA. The TRQ’s in the EPA should be adjusted in size to reflect the UK and tariff reductions should happen over at least the same time period. To do otherwise would place UK dairy farmers at a competitive disadvantage to their EU counterparts.

23.                     Poultry - duties in the EPA on poultry meat products will be gradually liberalised in periods varying between 6 and 11 years. In 2018 the UK exported 17,930 tonnes, so there is opportunity for growth. This should be at least replicated in any UK – Japan FTA.

24.                     Crops – there is opportunity to export UK malt and malt products to Japan. Since 2016 UK malt exports to Japan have continued to expand alongside the increasing UK acreage, as farmers seek to diversify crop rotations. The EPA grants several TRQs for malt[10] – some for roasted and others for non-roasted – these should be adjusted in size to reflect the UK and tariff reductions should happen over at least the same time period. Alongside malt there are opportunities, albeit small, for UK feed grains. Japan is a major importer of grain and the UK can offer Japan diversity in supply helping them to become more resilient to weather and political shocks around the world. Depending on the year the UK fluctuates between net import and export status for feed wheat but is always net exporter of feed barley. The EPA grants a TRQ for barley, although small at only 30T we would consider this an area that the UK should seek to achieve more in a UK – Japan FTA. Longer working hours and rising disposable incomes continue to drive growth in savoury snacking across Asia[11], there is opportunity to export British peas. The UK has an excellent reputation for growing pulses and in a good season can hit the specification required for export. Generally, Japan is interested in marrowfat peas, as such (provided they hit export spec) these trade at a premium and are usually grown on contract. This therefore provides an excellent opportunity for UK growers to diversify their rotation whilst managing their exposure to price volatility. The EPA sees tariffs eliminated on peas; this should be replicated in any UK – Japan FTA.

25.                     Horticulture and potatoes – Due to the expansion in snacking market there is also opportunity for UK exports of potato products. AHDB forecast[12] that across the Asia-Pacific region, potato crisps were worth $6.2 billion (USD) in 2017 and are forecast to grow to $10 billion by 2022, with India, China and Japan expected to contribute the most to growth. Japan also imports the highest volume of frozen potato products in the Asia-Pacific region, this is nearly all French fries destined for the food service market. Currently the US is the main supplier of French fries to the Japanese market, but as the EPA reduced tariffs on potato products to zero over three years there could be opportunity for EU potato growers to supply this expanding market. The UK negotiators should seek this same level of market access for UK potatoes. UK exports of seed and ware potatoes are currently prohibited in Japan on the grounds of plant health. This should be addressed by UK negotiators and expedited through a plant health agreement which may sit outside of the main FTA.

26.                     Sugar - Japan has granted limited tariff-free TRQs of equal size for sugar in both the CPTPP and in the EU-Japan EPA. Due to limited market access, Japan is a premium market for sugar, for which preferential access offers opportunities for UK sugar. We call on the government to seek at least equivalent market access in any UK-Japan FTA as is afforded in the existing EU-Japan EPA.

27.                     Geographic Indicators (GIs) - The EPA also grants protection to protected names like West Country Farmhouse Cheddar and White/Blue Stilton Cheese. In this respect, we would like to see the protection for those Geographical Indications (GIs) maintained and new provisions in the UK-Japan agreement to allow for the continuation of the protection once a new UK scheme for protected names enters into force.

27 August 2020

Appendix

Table 1 – UK exports to Japan by value

Source: HMRC