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) decided by referendum in 2017 to leave the European Union (EU), a process popularly known as "Brexit." The UK’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 its 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 United States, an important UK trading partner. 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 had been a member of the EU, a now-27-nation single market for trade and commercial services, since the 1970s, so this marked 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 (EU Parliament, 2016).

The UK played an important role in the EU economy. It accounted for 15 percent of the EU’s population and 17.6 percent of its gross domestic product (GDP) in 2019. Together, Germany, the UK, France, Italy, and Spain represented 72.5 percent of the EU population and 81.6 percent of its GDP (USDA, ERS calculations from World Bank data). Actions in these countries are therefore relatively important to the EU as a market. Additionally, the UK was one of several countries that was a significant net contributor to the EU budget (European Commission, 2020).

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 twelfth largest exporter and fifth largest importer as measured in total trade in all sectors in 2020, including trade with other EU countries (World Bank, 2020). Despite its importance to world markets, UK trade is very integrated with the EU. Forty-three percent of UK overall exports went to the EU in 2019. Import data for the UK may also reflect goods that will eventually go to other EU countries. (USDA, ERS calculations from Trade Data Monitor data).

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 2020 was $34.2 billion (£26.7 billion)[1] (UK-Department of Environment, Food, and Rural Affairs, (DEFRA), 2020). Of this total, $11.6 billion (£9 billion) was attributed to crops, with wheat, barley, vegetables, and horticultural products accounting for close to half of the total. Livestock products were valued at $19.3 billion (£15.1 billion) (UK-DEFRA, 2020). While, over 70 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 $75.5 billion in agricultural and related goods in 2020 and exported $30.5 billion (USDA, ERS calculations from Trade Data Monitor data).

The UK's importance in individual sectors is also pronounced. For example, among the world’s major importing countries, the UK is the third largest importer of beverages and the fourth largest importer of meats (Trade Data Monitor).

The UK farm sector is highly integrated with the EU

The UK agriculture sector received $46.5 billion (€37.8 billion)[2] from the EU's Common Agricultural Policy (CAP) between 2010 and 2019. This includes direct payments to farmers, market price support, and investment in rural development projects (DEFRA, 2021). In 2020, direct payments were $3.6 billion (£2.8 billion) (UK-DEFRA, 2021). 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 United States, with a rank as an importer of overall U.S. exports similar to that of South Korea or Japan, and a rank as an importer of U.S. goods just below that of South Korea

Agricultural products account for only a small share of total UK trade with the United States

U.S. agricultural exports to the UK in 2020 were valued at $2.7 billion, about 1.8 percent of the U.S. agricultural total of $167 billion (USDA, ERS calculations from Trade Data Monitor data). The largest category of U.S. agricultural exports to the UK in 2020 was forest products, followed by beverages, mostly wine (USDA, ERS calculations from Trade Data Monitor data). U.S. agricultural imports from the UK were smaller, about $1.1 billion, with distilled spirits the largest category, primarily whiskey and gin (USDA, ERS calculations from U.S. Census Bureau data).

U.S. agricultural exports to the UK grew in a number of major categories

Description Annual Growth in U.S. exports to UK, 2010–2020 (nominal, percent) Export values in 2020
Forest products 17.74 $925 million
Alcoholic beverages* 0.92 $328 million
Tree nuts 10.84 $197 million
Food preparations 18.64 $155 million
Essential oils 1.14 $89 million
Fresh vegetables 11.33 $84 million

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

The fastest growing categories are forest products, fresh vegetables, tree nuts, and food preparation items, respectively. Over the last decade, the UK emerged as a significant importer of U.S. forest products becoming the third largest market for forest commodities. Imports rose by 336 percent over the decade from 2010 to 2020. The rise in U.S. exports of forest products largely consists of wood pellets, assembled barrel casks, and various hardwood lumbers (U.S. Census Bureau, 2020). The growth in fresh vegetable exports is due largely to exports of dried sweet potatoes and vegetables such as asparagus and onions (U.S. Census Bureau, 2020). The rise in exports in tree nuts are primarily attributable to increased consumption of almonds, walnuts, pistachios, and pecans. U.S. tree nut exports to the UK increased by nearly three times. Fresh vegetables also showed remarkable growth over the last decade, rising by 159 percent since 2010 (U.S. Census Bureau, 2020). Exports of miscellaneous food preparations to the UK nearly doubled over the last 10 years (U.S. Census Bureau, 2020).

The EU is an important trading partner for the United States

The United States exported about $12 billion in agricultural and related products to the EU (minus the UK) in 2020, with tree nuts and soybeans as some of the primary products (USDA, ERS calculations from U.S. Census Bureau). In addition, the United States imported $30.6 billion in agricultural and related products from the EU (minus the UK) in 2020, rising by more than $13 billion since 2010, nearly a 6 percent annual increase over the decade (USDA, ERS calculations from Trade Data Monitor data). As the EU represents 27 countries, and the UK represents only 15 percent of the EU population, U.S.-EU trade is much larger than U.S.-UK trade in agriculture.

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

An International Monetary Fund (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 (International Monetary Fund, 2016). Alternatively, The Lisbon Treaty states that once the UK indicated formally that it intended to leave the EU, an agreement must be concluded within 2 years. If no agreement was reached, UK goods will be subject to most favored nation (MFN) tariffs, which can average 12.5 percent for agriculture (World Trade Organization, 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 had indicated that it was more likely that the UK would conclude a separate agreement outside the EU single market, with negotiated tariffs and market access provisions. As such, the UK and EU extended trade negotiations beyond the initial deadline with Brexit formally taking effect December 31, 2020. Even with the extended period of negotiation, provisional pre-Brexit trade arrangements have remained in place while the UK and EU continue to work toward a final trade agreement.

The Brexit vote led to uncertainty about the future of economic growth and stability in the UK and the EU

The terms of the settlement with the EU, as well as many future trade agreements between the UK and its other trading partners, remain to be negotiated. These terms 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 also 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 changed.

UK total exports rose slightly from $466.3 billion in 2015 to 468.3 billion in 2019, recovering from a lull in recent years that saw the country’s total trade value reach a 5-year low in 2016. Imports rose by nearly 10 percent from $630.3 billion to $692.5 billion over the same period. In contrast, UK agricultural and related products exports fell by 2.8 percent between 2015 and 2020 (from $20.4 billion to $19.8 billion), but imports rose by 2.4 percent (from $73.7 billion to $75.5 billion) over the same period. In contrast to overall trade, the initial 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. Of the UK’s primary agricultural and related products, exports of alcoholic beverages (distilled spirits, wine products, and beer) saw the largest declines, while some sectors, like dairy, experienced an increase in export values. In contrast, increases in UK agricultural imports were mostly in fresh fruit, processed vegetables, and bakery products, while UK imports of wine and poultry products fell by 12.7 and 22.4 percent, respectively—2 primary commodity groups imported from the EU (Trade Data Monitor). UK agricultural imports from the United States fell by 7.9 percent between 2015 and 2020, while UK agricultural exports to the United States fell by 13.4 percent over the same period. 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 an extensive farm policy and farm subsidy scheme, and the UK government must decide what form its own policies will take (European Commission, 2016). The UK is also very dependent on food imports, with 45 percent of the country’s food supply imported in 2019, and 26 percent imported from the EU, so trade policy decisions may have widespread effects (UK-Department of Environment, Food, and Rural Affairs, 2020). These unanswered questions may 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. 2007. “A Timeline of the EU.”

European Commission. 2014. “United Kingdom Common Agricultural Policy.”

European Commission. 2020. “Budget—EU Expenditure and Revenue, 2014–2020.”

European Commission, Agriculture and Rural Development Directorate. 2016. “CAP at a Glance.”

European Parliament Briefing. 2016. “Article 50 TEU: Withdrawal of a Member State From the EU.”

International Monetary Fund Country Report. 2016. “United Kingdom—Selected Issues.”

International Monetary Fund. 2020.  “Representative Exchange Rates for Selected Currencies.”

Trade Data Monitor. 2019, 2020.

United Kingdom, Department for Environment, Agriculture, and Rural Affairs. 2021."Total Income From Farming in the United Kingdom.”

United Kingdom, Department for Environment, Agriculture, and Rural Affairs. 2015. "Food Statistics Pocketbook, 2015."

United Kingdom, Department for Environment, Agriculture, and Rural Affairs. 2016. "Food Statistics Pocketbook, 2016."

United Kingdom, Department for Environment, Agriculture, and Rural Affairs. 2021. "Agriculture in the United Kingdom, 2020."

United Nations. 2016. Comtrade database.

U.S. Census Bureau. 2021.

World Bank. 2017. "World Development Indicators.”

World Trade Organization. 2016. Tariff Profiles.

[1] Converted from Great Britain Pound, using average 2020 daily exchange rate (ERS calculations from International Monetary Fund data).

[2] Converted from euros, using average daily exchange rate for 2020 (USDA, ERS calculations from IMF data).