Dr Ilona Serwicka (BFS0009)

UK Trade Policy Observatory (UKTPO), University of Sussex

The following notes answer specific questions set out in the Terms of Reference for the Lords Select Committee’s inquiry on the implications of leaving the European Union for food prices.

This written submission addresses the following questions:

• What impact could post-Brexit tariffs have on food prices and availability?
• What are the non-tariff barriers that could affect food prices and availability, post-Brexit, and what could their impact be?

About UKTPO

•            The UK Trade Policy Observatory (UKTPO), a partnership between the University of Sussex and Chatham House, is an independent expert group that initiates, comments on and analyses trade policy proposals for the UK; and trains British policy-makers, negotiators and other interested parties through tailored training packages.
•            The UKTPO is committed to engaging with a wide variety of stakeholders to ensure that the UK’s international trading environment is reconstructed in a manner that benefits all in Britain and is fair to Britain, the EU and the world. The University of Sussex has the largest collection of academic expertise on the world trading system in the UK, with specialists on trade policy, trade law and trade politics and European law and economy. The team includes experts in economics, international relations and law.

1. INTRODUCTION

1.1.                     The United Kingdom’s prospective departure from the European Union will have implications for the prices of goods sold in this country. This is something that our analyses to date – including those specifically of the impact of Brexit on the cost of living[1] and on the vulnerability of different manufacturing sectors to Brexit[2] – have shown.

1.2.                     A new trade relationship between the UK and the EU, one that will depart from the status quo of the EU membership, will raise the cost of doing trade between the UK and the EU and lead to higher prices for domestic consumers. This increase in prices can come from the imposition of both tariffs and higher non-tariff measures (NTMs), including the cost of additional border checks and customs procedures.

1.3.                     To find out how an increase in tariffs and NTMs may affects prices of food in the UK, we used a partial equilibrium multi-market model to simulate the impact of different Brexit scenarios. The partial equilibrium model offers insight into short-term impacts of trade policy changes (although the model does not have a time dimension). It asks a hypothetical question of how different sectors of the economy (each of which is considered separately) may be impacted as a result of changes in tariffs, NTMs and other trade costs. The advantage of using the partial equilibrium model is that it allows for a much more disaggregated analysis of changes in trade policy, in comparison to the computable general equilibrium models.[3] The model that we have worked with does not account for any input-output linkages and supply chains, exchange rate movements and labour market implications.

2. TARIFFS

2.1.                     In our paper on the impact of Brexit on the cost of living,[4] we analysed the impact of tariffs on the cost of food and other consumer goods. In this exercise we assumed that the UK leaves the EU with no deal, and is obliged (under the World Trade Organisation (WTO) rules) to impose the same tariffs on their mutual trade as they impose on imports from the third countries (those not covered by preferential trade agreements). We modelled this scenario as the UK levying the current EU most favoured nation (MFN) tariffs on UK imports from the EU, for which reason we term it ‘MFN Brexit’.[5]

2.2.                     The paper found the overall increase in the price of final consumption goods (some 40 per cent of UK consumers’ consumption basket) to be 2.7 per cent, which could equate to an increase in the cost of living of between £400 and £930 per annum. It also found that tariff-induced price rises were likely to be more pronounced for food than for other products (see: Table 1 below), ranging from an 8.1 per cent increase for dairy products (characterised by a high share of imports from the EU, at 98 per cent) to a 1.5 per cent for fish (where the EU share of UK imports is much lower, at 28 per cent). Overall, the EU shares of UK imports are high in many food sectors – partly reflecting the high tariffs and other barriers levied by the EU against imports from the rest of the world.

Table 1: The derivation of the price effects of ‘MFN’ Brexit

(Source: Clarke, S., Serwicka, I. and Winters, L.A. (2017) Will Brexit Raise the Cost of Living?, National Institute Economic Review, 242(1):R37-R50.)

2.3.                     While tariffs have been declining in recent decades, tariffs on foodstuffs are on average higher than those on manufactured goods. The weighted average EU MFN tariff on food is equal to approximately 22 per cent, while the weighted average EU MFN tariff on non-food consumer goods (such as clothing and footwear, fuel and energy, household articles, etc.) is equal to 5 per cent. Among groups of food products, tariffs applied by the EU are highest for dairy products (45 per cent) and lowest on other categories of food products (mostly processed and prepared foodstuffs).

2.4.                     However, there is significant variation in tariffs within groups; as much, in fact, as there is between groups. The weighted average EU MFN tariff on whole milk is equal to 70 per cent, but 36 per cent on low fat milk; beef is subject to a 56 per cent average tariff, but the tariff on poultry is 14 per cent.[6] Sugar is subject to high EU tariffs (75 per cent) but salt, spices and culinary herbs face lower tariffs (3 per cent).

3. NON-TARIFF MEASURES (NTMs)

3.1.                     In recent decades tariffs (as well as some non-tariff measures such as quantitative restrictions) have been steadily decreasing, but technical regulations (such as product standards and sanitary and phytosanitary, SPS, measures on food products) are on the rise. Using the CEPII NTM-Map database that contains indicators measuring the incidence of NTMs and dummies capturing the presence of different types of NTMs at the country product level, Cadot and Gourdon (2016) found that more than 60 per cent of food-related products were affected by at least one form of SPS.

Table 2: Frequency ratios[7] for the agri-food sectors

(Source: Gourdon, J. (2014) CEPII NTM-MAP: A Tool for Assessing the Economic Impact of Non-Tariff Measures, CEPII Working Papers 2014-24, CEPII Research Center, Paris.)

3.2.                     In our more recent work, which modelled the impact of five Brexit scenarios on 122 manufacturing sectors[8] using the multi-market partial equilibrium model,[9] we took account of the impact of NTMs (alongside tariffs) on prices. This paper found that Brexit (and all its versions) will lead to higher domestic prices, with price increases in the food processing industry ranging from 0.6 per cent (under the soft EEA membership Brexit scenario) to 3.7 per cent (under the most pessimistic No Deals Brexit scenario).

Table 3: Impact of different Brexit scenarios on prices

(Source: Gasiorek, M., Serwicka, I. and Smith, A. (2018) Which Manufacturing Sectors are Most Vulnerable to Brexit?, UK Trade Policy Observatory Briefing Paper 16.)

3.3.                     Within the food processing industry, there is a variation in how different sectors may be affected (see: Table 4), with manufacturing of macaroni, noodles and couscous being the most impacted by a rise in prices.

Table 4: Impact of different Brexit scenarios on prices in food processing sectors

(Source: Gasiorek, M., Serwicka, I. and Smith, A. (2018) Which Manufacturing Sectors are Most Vulnerable to Brexit?, UK Trade Policy Observatory Briefing Paper 16.)

3.4.                     To build on the first exercise (where we modelled the impact of tariffs but not NTMs), we ran simulations for the following three Brexit scenarios, where – like in the first exercise – we assume that trade costs (and relationship) with non-EU countries remain unchanged.

3.4.1. Scenario 1. Membership of the EEA: here, we assume that the UK leaves the EU Customs Union (CU) but stays within the Single Market (SM); leaving the CU entails increased border inspections between the UK and EU, which we capture as adding 3.5 per cent to trade costs;[10] all other costs (tariffs, NTMs), including the relationship with other partner countries remain unchanged.

3.4.2. Scenario 2. UK-EU FTA: in this scenario, we assume that the UK leaves both the CU and the SM, but signs an FTA with the EU; this keeps all tariffs at zero, but adds 3.5% to trade costs (border inspections) and also implies that imports from EU face low levels of NTMs.

3.4.3. Scenario 3. No EU-Deal: this is the ‘hard’ Brexit scenario, where the UK leaves the EU with no deal; this pushes all components of trade costs (tariffs, NTMs and border inspection cost of 3.5%) up; tariffs on UK imports from the EU (and EU imports from the UK) go up to the Most Favoured Nation (MFN) level and imports from the EU face high levels of NTMs.[11]

3.5.                     The estimates of NTMs that we employed in our modelling come from the work of Cadot and Gourdon (2016), who calculated the average ad-valorem tariff equivalent of NTMs, including NTMs in the presence of an RTA (FTA) (low NTMs) and without (high NTMs).[12]

3.6.                     The impact of these three Brexit scenarios on different categories of food products (following the process of disaggregating the price effects from the ISIC4 classes into the COI+ categories) is reported in Table 5 below, alongside information on change in average trade costs between the UK and the EU.

Table 5: Price effects of three Brexit scenarios (with NTM changes)

(Source: authors’ own calculations)

3.7.                     All categories of food products will see prices rises as a result of Brexit. The increase in average food prices will range from 0.9 per cent under the softest EEA membership Brexit scenario to 7.1 per cent under the most pessimistic No-EU Deal Brexit scenario. Signing an FTA with the EU (which will keep tariffs at zero, but push NTMs up) will lead to an average food price rise of 3.8 per cent.

3.8.                     Among nine groups of food products, ‘oils and fats’ and ‘other food products’ will be most impacted by prices rises (with a price increase in excess of 10 per cent under the no EU-deal scenario). At the other end, prices of bread and cereals (which are more likely to be produced domestically), and of fish (with a low EU share of UK imports), will see price rises not exceeding 3 per cent.

4. FURTHER IMPLICATIONS

4.1.                     The prices of food products in the UK are expected to increase under all Brexit scenarios. In addition, our modelling also suggests that the UK’s food processing industry may see an expansion in domestic production after Brexit. This is because increasing tariffs and NTMs (which are relatively higher on foodstuffs than on other manufactured goods) ‘protect’ domestic producers from import competition and lead to expansion in output (but reduction in both exports and imports). It is important, however, not to confuse an increase in self-sufficiency with an increase in food security: there has been no evidence that supplies from the EU are insecure and domestic supplies are just as subject to local shocks such as weather or disease as are those from abroad.

4.2.                     Our modelling of the impact of Brexit suggests that domestic production in the food processing industry will expand under all Brexit scenarios, with this growth in domestic production ranging from 0.9 per cent under the soft EEA membership Brexit to 9.2 per cent under the pessimistic no deals Brexit. Again, there are likely to be differences in this growth between different sectors (see: Table 6).

Table 6: Impact of different Brexit scenarios on output in food processing sectors

(Source: Gasiorek, M., Serwicka, I. and Smith, A. (2018) Which Manufacturing Sectors are Most Vulnerable to Brexit?, UK Trade Policy Observatory Briefing Paper 16.)

4.3.                     As stated above, this growth in domestic production will come at the expense of higher domestic prices for consumers. This will have implications on household spending power, which our research to date suggests will have a most negative effect on unemployed households, those with children, and pensioners.

2 March 2018

REFERENCES

Anson, J., Cadot, O., Estevadeordal, A., Melo, J. d., Suwa-Eisenmann, A. and Tumurchudur, B. (2005) Rules of Origin in North–South Preferential Trading Arrangements with an Application to NAFTA, Review of International Economics, 13(3): 501–17.

Cadot, O., Estevadeordal, A. and Suwa-Eisenmann, A. (2005) Rules of Origin as Export Subsidies, CEPR Discussion Paper No. 4999.

Cadot, O. and Gourdon, J. (2016) Non-Tariff Measures, Preferential Trade Agreements, and Prices: New Evidence, Review of World Economics, 152(2): 227-49.

Carrère, C. and de Melo, J. (2015) Are Different Rules of Origin Equally Costly? Estimates from NAFTA, World Scientific Book Chapters, in: Developing Countries in the World Economy, chapter 12, pages 277-298 World Scientific Publishing Co. Pte. Ltd.

Centre for Economic Policy Research (2013) Estimating the Economic Impact on the UK of a Transatlantic Trade and Investment Partnership (TTIP) Agreement between the European Union and the United States. Final Project Report, March 2013.

Clarke, S., Serwicka, I. and Winters, L.A. (2017) Will Brexit Raise the Cost of Living?, National Institute Economic Review, 242(1):R37-R50.

Francois, J., Manchin, M., Norberg, H., Pindyuk, O. And Tomberger, P. (2013) Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment. Final Project Report, March 2013.

Gasiorek, M., Serwicka, I. and Smith, A. (2018) Which Manufacturing Sectors are Most Vulnerable to Brexit?, UK Trade Policy Observatory Briefing Paper 16. Available at: http://blogs.sussex.ac.uk/uktpo/publications/which-manufacturing-sectors-are-most-vulnerable-to-brexit/.

Gourdon, J. (2014) CEPII NTM-MAP: A Tool for Assessing the Economic Impact of Non-Tariff Measures, CEPII Working Papers 2014-24, CEPII Research Center, Paris.

Hayakawa, K. (2011) Measuring Fixed Costs for Firms’ Use of a Free Trade Agreement: Threshold Regression Approach. IDE Discussion Papers No. 275, Institute of Developing Economies, Japan External Trade Organization(JETRO).

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