Brexit and U.S. Agricultural Trade

What Is "Brexit" and What Could It Mean for U.S. Agricultural Trade With the UK?

The United Kingdom (UK) has decided by referendum to leave the European Union (EU), a process popularly known as "Brexit." The United Kingdom's economy is very integrated with that of the European Union, particularly in agriculture, and disentangling the UK economy may lead to significant changes in legal regimes and trade patterns. The UK is still negotiating their future relationship with the EU, and the resulting changes to domestic and trade policy may affect all of the UK's trade relationships, including commerce with the US.  The UK is an important trading partner of the US. Mutual trade in agriculture is a small share of the total, although trade in some agricultural product categories is growing.

The UK's decision to leave the EU changes a long-standing relationship

The UK has been a member of the EU, a now-28-nation single market for trade and commercial services, since the 1970s, so this marks a profound change in its economy (BBC News, 2007). When the UK government formally notified the EU government of its decision to leave on March 29, 2017, a 2-year separation process began, according to Article 50 of the Treaty of Lisbon, one of the governing documents of the EU (EP, 2016).

The UK has played an important role in the EU. It accounted for 12.8 percent of the EU’s population and 17.5 percent of its gross domestic product (GDP) in 2015. Together, Germany, the UK, France, Italy, and Spain represented 62.9 percent of the EU population and 71.5 percent of its GDP (ERS calculations from World Bank data). Actions in these countries are therefore relatively important to the EU as a market. Additionally, the UK is one of several countries that are significant net contributors to the EU budget (EC, 2016a).

The UK is also an important participant in world trade, and its trade is heavily tied to the EU

The UK is the world’s eighth largest exporter and fifth largest importer as measured in total trade in all sectors in 2015, including trade with other EU countries. (United Nations, 2016). Despite its importance to world markets, UK trade, is very integrated with the EU. Forty-four percent of UK overall exports go to the EU. Import data for the UK may also reflect goods that will eventually go to another EU country. (ERS calculations from Global Trade Atlas data).

But the UK agricultural sector is small relative to the UK economy as a whole, and the UK is a net agricultural importer

The value of UK farm output in 2015 was $37.3 billion(£24.4 billion)[1] (UK-DEFRA, 2017). Of this total, $13.1 billion (£8.6 billion) was attributed to crops, with wheat, barley, vegetables, and horticultural products accounting for more than half of the total. Livestock products were valued at $20 billion (£13.1 billion) (UK-DEFRA, 2017). While, seventy percent of UK land is used for agriculture, the UK’s large population compared to the amount of arable land makes it a net agricultural importer. The UK imported $59.8 billion in agricultural goods in 2015 and exported $20.5 billion (ERS calculations from Global Trade Atlas data).

The UK's importance in individual sectors is also pronounced. For example, among the world’s major importing countries, the UK is the second largest importer of beverages and the fifth largest importer of meats, when intra-EU trade is included (United Nations, 2015).

The UK farm sector is very integrated with the EU

The UK agriculture sector received $32.4 billion (€29.2 billion)[2] from the EU's Common Agricultural Policy (CAP) between 2007 and 2013. This total includes direct payments to farmers, market price support, and investment in rural development projects (EC, 2014). In 2015, direct payments were $4.3 billion (£2.8 billion) (UK-Defra, 2017). Additionally, in agriculture, the close EU trading relationship is even more pronounced, with EU members accounting for more than two thirds of the UK’s agricultural trade with the world.

UK agricultural exports to non-EU countries are growing faster than those to EU countries, but UK imports do not exhibit the same pattern (See chart below)

The UK is an important trading partner of the U.S., with a rank as an importer of overall US exports similar to that of South Korea or Japan, and a rank as an importer of US goods just below that of South Korea.

However, agricultural products account for only a small share of total UK trade with the U.S., and the UK receives a small share of US agricultural exports

U.S. agricultural exports to the UK in 2015 were valued at $1.7 billion, about 1.3 percent of the U.S. agricultural total ($132 billion) (ERS calculations from Global Trade Atlas data). The largest category of U.S. agricultural exports to the UK in 2015 was beverages, mostly wine (ERS calculations from Global Trade Atlas data). U.S. agricultural imports from the UK were smaller, about $1 billion, with beer the largest category (ERS calculations from Global Trade Atlas data). In addition to agricultural products, the United States exported $230 million in alcoholic spirits to the UK and imported about $1.5 billion in 2015 (ERS calculations from Global Trade Atlas data). The US exported a further $1.98 billion in forestry products[i] to the United Kingdom in 2015.

However, U.S. agricultural exports to the UK have been growing in a number of major categories

HS category Description Growth in U.S. exports to UK, 2005-15 (nominal, percent) Export values in 2015
22 Beverages 101.4 $314 million
08 Fruit and nuts 27.4 $270 million
21 Miscellaneous edible preparations 214.6 $209 million
12 Oilseeds 109.9 $124 million
23 Food industry residues and prepared animal feed 24.3 $114 million
07 Vegetables 99.4 $106 million

Source: USDA, Economic Research Service calculations from Global Trade Atlas data. Categories include only those goods included in the USDA definition of agriculture

The fastest growing categories are beverages, miscellaneous edible preparations, oilseeds, and vegetables. The rise in U.S. exports of alcoholic beverages is mostly due to increases in exports of wine. Wine consumption has been growing in the UK (Euromonitor, 2014; Global Trade Atlas, 2016). Exports of miscellaneous edible preparations to the UK rose fairly steadily over the last 10 years (Global Trade Atlas, 2016). The rise in exports in the oilseeds categories has been mostly due to increased U.S. soybean exports to the UK, but exports of hops and peanuts have also risen (Global Trade Atlas, 2016). Vegetable exports to the UK rose steadily over the last decade, with large increases in exports of sweet potatoes and some increases in exports of legumes (Global Trade Atlas, 2016).

The EU is a very important trading partner for the United States

The United States exported about $10 billion in agricultural products to the EU (minus the UK) in 2015, with beverages and nuts as some of the primary sectors (ERS calculations from Global Trade Atlas data). In addition, the United States imported $19 billion in agricultural products from the EU (minus the UK) in 2015, and again, beverages figure prominently in that trade (ERS calculations from Global Trade Atlas data). As the EU represents 28 countries, and the UK represents only 12 percent of the EU population, US-EU trade is much larger than US-UK trade in agriculture.

Scholars and international organizations have suggested a number of possibilities for the future relationship between the EU and the UK

An IMF modeling exercise indicates that a  scenario in which the UK has both access to the common market and free movement of labor, as Norway has now, could result in a 1.5-percent decline in UK GDP (IMF, 2016). Alternatively, The Lisbon Treaty states that, now that the UK has indicated formally that it intends to leave the EU, an agreement must be concluded within 2 years. If no agreement is reached, UK goods will be subject to most favored nation (MFN) tariffs, which can average 12.5 percent for agriculture (WTO, 2016). The IMF found that this scenario could result in a 4.5-percent decline in output in the UK in the long term (IMF, 2016). The government of the UK has indicated that it is more likely that the UK will conclude a separate agreement outside the EU single market, with negotiated tariffs and market access provisions.

The Brexit vote has led to uncertainty about the future of economic growth and stability in the UK and the EU. The outlook for the UK’s trade relationships remains unclear in the near term

The terms of the settlement with the EU, as well as any future trade agreements between the UK and its other trading partners, remain to be negotiated. These terms of settlement may change tariffs, regulations, labor supply and demand. These may in turn affect the willingness of firms to locate in the UK, the future of the UK’s large financial services sector, exchange risk, credit markets, and ultimately, UK GDP. In addition, regions of the UK, such as Scotland, may experience these changes differently. This uncertainty has additionally led to a sharp devaluation of the pound and a modest devaluation of the euro following the vote. The pound has not recovered from its downturn. The euro initially recovered, but has since fallen as other fundamentals have changed.

UK total exports fell from $459.8 billion in 2015 to 409.2 billion, a five year low, in 2016.  Imports rose slightly from $626 billion to $636 billion over the same time frame.  In contrast, UK agricultural products exports fell by 2 percent between 2015 and 2016 (from $20.4 billion to $19.9 billion), but imports fell by 5 percent (from $59.8 billion to $56.8 billion) over the same period. In contrast to overall trade, the pattern in agricultural trade is the pattern that would be predicted if the decline in the pound were one of the root causes of the decline in trade. The decline in UK agricultural exports was largely due to a decline in exports to the EU, while the decline in imports occurred across the board. Exports of wine, prepared cereal, and dairy experienced the largest declines, while some sectors, like cereals, experienced an increase in export values. The largest declines in UK agricultural imports were in meat, dairy, wine, and cereals. UK agricultural imports from the US fell by 4 percent over the one year time frame, while UK agricultural exports to the US fell by 2 percent. If the pound’s depreciation were driving the trade flows, the lower prices of British exports for other countries should have led to an increase in exports, while the increasing prices of foreign goods for British consumers should have led to lower import flows. Overall UK trade is not following this pattern, possibly because overall trade flows are often determined by flows of capital in and out of a country. Agricultural trade, however, is more closely following the pattern suggested by exchange rate movements, although it is too early to say whether the exchange rate changes are the root cause of these small alterations in trade.

This potential for policy change is particularly acute in the agricultural sector

The EU has a very extensive farm policy and farm subsidy scheme, and the UK government must decide what form its own policies will take (EC, 2016b). The UK is also very dependent on food imports, with 48 percent of the country’s food supply imported in 2015, and 29 percent imported from the EU, so trade policy decisions may have widespread effects (UK-Defra, 2016). These unanswered questions may, in turn, have implications for U.S. agricultural trade. In particular, depreciation of the pound and the euro may make EU and UK exports less expensive and U.S. exports more expensive, which, in turn, will lower U.S. exports and raise U.S. imports from these countries.

Uncertainty about the UK economy, current EU-U.S. negotiations, and the future trading relationship between the United States and the UK may continue for some time.

References

BBC News. “A Timeline of the EU,” 2007.

European Commission (EC) (2014). “United Kingdom Common Agricultural Policy,” May 2014.

European Commission (EC) (2016a). “Budget – EU Expenditure and Revenue, 2014-2020,” 2016, accessed 8/25/2016, http://ec.europa.eu/budget/figures/interactive/index_en.cfm

European Commission, Agriculture and Rural Development Directorate (2016b). “CAP at a Glance,” 2016, accessed 9/2/2016, http://ec.europa.eu/agriculture/cap-overview/index_en.htm

European Parliament (EP). “Article 50 TEU: Withdrawal of a Member State From the EU,” Briefing, February 2016.

Global Trade Atlas. 2016, 2017.

International Monetary Fund (IMF). “United Kingdom – Selected Issues,” IMF Country Report 16/169, June 2016.

International Monetary Fund (IMF). “Representative Exchange Rates for Selected Currencies,” 2017.

United Kingdom, Department for Environment, Agriculture, and Rural Affairs (UK-Defra). "Total Income From Farming in the United Kingdom, May 25, 2017."

United Kingdom, Department for Environment, Agriculture, and Rural Affairs (UK-Defra). "Food Statistics Pocketbook, 2015."

United Kingdom, Department for Environment, Agriculture, and Rural Affairs (UK-Defra, 2016). "Food Statistics Pocketbook, 2016."

United Nations. "Comtrade database," 2016.

World Bank. "World Development Indicators," 2017.

World Trade Organization (WTO). Tariff Profiles, 2016.

[1] Converted from GBP, using average 2015 daily exchange rate (ERS calculations from IMF data).

[2] Converted from Euros, using average daily exchange rate for 2015 (ERS calculations from IMF data).

[i] This figure refers to the definition of forest products used by the European Forest Institute, which includes HS Chapters 44-49, 9401, 9403, and 9406.