Read on for a transcription from our webinar or watch now.

Food and Agricultural Policy: what you need to know about post-Brexit divergence between the UK and EU.

Nick Edwards: Hello, welcome to today's session brought to you by IHS Markit Agribusiness. What you need to know about post-Brexit divergence between the EU and the UK. My name is Nick Edwards, I'm your host today. I'm director of research and analysis at IHS Markit, Agribusiness food and agricultural commodities division. Today's presentation brings together three of our policy experts and will last about 40 to 45 minutes. You can log a question at any time and we will try to leave time at the end after the main presentation's finished to cover as many of those questions as possible.

So, we have three speakers today who are going to be sharing the presentation. Chris Horseman, Steve Gillman and Pieter Devuyst have decades of experience in food and agricultural policy and regulation and a part of a larger team covering policy issues for food and agricultural splits between Brussels, UK and the US. So, Chris, why don't we hand over to you to begin?

Chris Horseman: Thank you very much, Nick and hello everyone. So, today - obviously the United Kingdom has been on a particular course since the start of this year. It left the EU Single Market and customs union as of January the 1st and this has - this - this is - I'm sorry. This has built on the formal departure of the UK from the EU as from February 2020. And so, this has obviously had an impact on agriculture policy production and trade. And these are some of the issues that we're going to be looking at.

And so, the main questions that we will be talking about is exactly what the UK is planning to do in terms of its agricultural support policies, it's food - food law policies and its trade policies. How this - how this differs from the approach that the EU is taking and what the possible consequences are? What this means for people in the agri-food sector whether in the UK or in the rest of Europe or around the world? So, it's a lot to cover. And we will hopefully do our best to answer the main questions or fill in the main point as we go along.

So, let's start with agricultural and environmental support policies. And increasingly in the UK's case those two go together because there is emerging really of what was typically seem to be farm supports and environmental supports with the reforms that are happening in the UK. When we talk about reform - when we talk about UK agriculture policy there are actually four policies that we're dealing with. England, Wales, Scotland and Northern Ireland, all have their own - all implement agricultural support, agricultural policy in their own ways. Agricultural policy is a devolved responsibility within the UK's constitutional set up. And so, all four nations are going about this, in a slightly different way.

We are going to focus primarily on England because England represents something like 80% of the land area and by far the biggest junk of the gross value of UK agriculture. And also, it's probably the most interesting because England's reform task is the most radical of the four nations. What is happening in England? Well, the basic payment scheme, the direct aides, which have fallen part of the common agricultural policy for decades are being phased out over a seven-year period. So, by the end of 2027 they will disappear completely. And over that period, they will be progressively replaced with supports which are designed to pay for public goods. Public money for public goods is the is the slogan and it summarizes quite nicely what the authorities in England are attempting - are planning to do.

Basic payments are going to be progressively replaced with environmental land management contracts or ELM or ELMs as it's sometimes referred to. And these are similar in many ways to the Pillar Two payments, the Agri-Environmental programs which have for the last 15 years or so, under the CAP. But they will take a much greater significant within England because they will increasingly form the bedrock of whatever governmental supports is going to the farm section. And as a result, they will be much more closely scrutinized and be much more economically significant for the individual farmer.

It's not the only form of support which we - which the UK Government would be, sorry, the authorities in England are going to be providing. There will also be support for farming innovation, this will be growths which will - which are design to help farmer get ahead as they tried to stay competitive and as they deal with challenges like adjusting their carbon footprint as time goes on. There will also be a scheme we know already to help farmers to improve animal welfare standards. This will be going beyond statutory requirements obviously to achieve a higher level of animal welfare because this is something that the public, the tax pays in England and the UK, always put a high premium on and so the government is aiming to respond to that.

So, it's public money for public goods. But it is coined a gamble that's the English authorities are taking because this will be the first that the direct paid schemes, sorry, the direct day payments, which was set up by the EU something like 30 years ago now will help you phase out. And the question is how will farmer cope in the absence of these payments. What you can see here is the schedule of phasing out the basic payment scheme over the next four years.

The farmers in England have been divided up into four payment bans as you can in the left-hand column. And the principle is that the smaller farmer to get - who receive the smallest payments under the basic payment scheme will have the payment phased out on a slower track than the bigger farmer both in the seat of more than 150,000 pounds a year. And there are significant number of farmers who do fall into that category. But as you can see for the current year 2021, the initial cuts will be 5% for the smallest group of farmers going up to 25% for the largest group.

So, already within the first couple of year that would be quite significant cuts. And so far, the schedule has been set out only as far as 2024, at which point the smallest group of farmers will have seen 50% of the subsidies taken away from them, the direct aide subsidies I should say. And the large - the farmers in the large category would have seen 70% taken away. So, this is quite a significant change in the way that agriculture will be supported in England.

And as you can see from the box of relative table, every year, there will be more money save by making these cuts and this will be progressively redirected into other schemes and in particular the environmental land management contract as they are set up. And we'll talk a little bit more about the ELMs later on. But what you can see is that by 2024, something like one billion pounds worth of money will have been saved by making this progressive reduction and all of that will go into funding the environmental and management scheme.

So, what is ELM? Well, it's a program which on the phase of it resembles quite closely the agri-environmental program which were available under the CAP. The different is that they will receive more funding than under the CAP because pretty much all of the available financial resources will be channeled in that direction and there will subtle changes as well to some other rules and principles. We don't in great detail how this will work but - because this hasn't yet been spelled out.

But what we do know is that there will be a three-tier program with basically three different schemes that farmers and the land managers can sign up to. The primary one is called Sustainable Farming Incentive or SFI. We agriculture policy types - love - love a good acronym and we're writing there with SFI, there's a new one to learn. And this is the entry level program. So, this is designed to be for all farmers and this will be relatively simple things that farmers can do in their farming practice to farm in a more environmentally sustainable or more climate friendly way.

And this scheme is actually being worked out at the moment the details of that through various pilot projects which are up and running and will increasingly be rolled out to this - they will be fully operational. It's intended by 2024. There are two tiers operating above the sustainable farming incentive. The second one is called Local Nature Recovery and this is a slightly larger scale operations such as for example managing or restoring habitats for livestock for wild animals. And also, there will be a focus on flood management within this tier.

One of the frequent criticisms of the Rural Development Program Agri-Environmental Schemes was that it actually gave a disincentive for farmers to take the kind of measures which might slow down the flow, for example rivers and streams in upland areas and thereby mitigate some of the risk of flooding further down the valley for example. So, local nature recovery will include specifically this natural flood management program as part of it's - the measures available under that program.

And the third tier is called Landscape Recovery. Now, this is on a larger scale. Typically, this will be farmers operating in collaboration, in a local region and these will be larger scale and longer-term projects and in particular things like restoring peak, in restoring peak land which has been degraded. This is the kind of thing which could be quite beneficial from a climate policy point of view but it will need quite significant work to make it happen. And the landscape recovery scheme is designed to trigger movement in that area.

But as I've said before all of this is a very significant political gamble. As we've seen farmers will take a look at what's on offer and the thing that will stand out to them is the fact that they're going to be losing their basic payment entitlements. By 2024, they will have lost depending on their size between 50% and 70% of the subsidies that they receive. And we know that for probably just over half of the farmers in England, the basic payment scheme currently makes the difference between profit-lost on their farm business accounts. It is a significant chunk of their revenue especially for smaller farms especially for livestock farmers. And there is a lot of concern among producers about whether they can actually cope with a reduction of that scope.

And farmers are also concerned about the fact that whereas it has been spelled out in detail just how quickly the subsidies will be phased out up until 2024. There is much less certainty about the scope of the ELM replacement schemes. So, how quickly will they be introduced? What will they entail? And critically how much will they pay? And there are fears which are being voiced in numerous quarters that farmers may fall into a kind of black hole round about 2022, 2023, whereby they have lost a large chunk of their basic payments. But this will not have been replaced in any meaningful way as yet by the introduction of ELM payments.

I think this could lead to the intensification of a pattern that to some extent we already see which is a kind of a two-tier agricultural economy within England. If you're a smaller farm and most of your revenue, most of your profit currently comes from the basic payment scheme then you will be heavily incentivized to make the most use you possibly can of whatever schemes there are to replace it. So, if there is an option for you to get involved in land management programs, environmental management programs of whatever type, and if there is decent money available for you to do that then you will be heavily incentivized to get involved with that.

Possibly - and you'll possibly put a bigger focus on that than on producing food for the market. This isn't actually anything new. We already see for example in some - some of the more scenic parts of England, farmers make more money from things like farmhouse bed and breakfast accommodation than they do from their farming activities but they keep the sheep or the cattle because that's the way of attracting the tourists. So, in a sense this is a sort of this - this could be a deepening and intensification of this pattern that we've already seen.

Now, at the other end of the scale larger farms, more progressive farms, more commercially competitive farms may see an advantage in maximizing their agricultural production. There - as - if - as far as I'm aware there is going to be no requirements, no compulsory requirement for farmers to enter into any environmental type program other than obviously keeping to sort of statutory regulations. There certainly won't be any kind of greening no kind of echo scheme unlike within the EU. So, farmers might say okay well this is my opportunity to take my foot off the brake and produce as much as I can especially if there is less produce coming onto the market from the smaller farming, farming sector. So, we might see this kind of two-tier agricultural economy being developed.

And it's worth noting also that there is no certainty at all over what the level of government funding will be after 2024. Now, this is because of a convention that no government can take detailed financial decisions which binds a successor government. And there will be elections in 2024 or by 2024 and it will be up to the new government after that point to make decisions on exactly how the English agricultural supports programs will be financed. So, although there is a direction of travel right the way through to 2028, the detail in terms of financing will not be set out for quite some time yet.

We should mention what is happening in the other UK nations other than England. Scotland is an interesting case because in Scotland there is a focus on a fair degree of continuity from the common agricultural policy. Now, this is partly for practical reasons because they don't want farmers to have to jump through too many hoops in adapting to a whole new support program.

But there's also a fair amount of politics involved in that because of course, the Scottish parliament is controlled by the Scottish National Party whose primary policy it is to achieve independence for Scotland and to have an independent Scotland rejoin the EU. So, there is definitely an element there of keeping things warmed up so that Scotland could potentially rejoin the CAP at some point in the future. That might be easier said than done but nevertheless there is that political element behind what the Scots are doing. So, a simplified version of the CAP will be in place from this year with the promise of a New Look Policy from 2024 onwards.

In Wales, there will be a substantial change in the sense that a sustainable farming scheme will come in. This will be not dissimilar to the ELMs in England except that they are designed to replace both, the existing Pillar One and Pillar Two supports. This will be done on a progressive basis and the basic payment scheme will remain in force in Wales in 2021 and also in 2022 to give its own administrators enough time to get everything set up and to give farmers some degree of continuity.

And in Northern Ireland, it has been made clear that a modified version of the basic payment scheme will remain in force this year. There will be elections to the Northern Ireland Assembly next year in 2022. And the government has said that more detail as to where Northern Ireland is taking its own farm policy will be provided nearer the time or after the elections have been completed. So, we've looked at what's happening, what's happening in the UK. But of course, the European union too is making changes to its agricultural policies. At this point I'm going to hand over to my colleague, Pieter to talk a little bit about what's happening there.

Pieter Devuyst: Thanks a lot, Chris and hello everyone. I will indeed be talking about the use of agricultural policy which is called the Common Agricultural Policy or shortly CAP. And I will try to explain how this policy has been developing since Brexit. So, the CAP stopped being applied in the UK on 1st of January, 2021 which is when the UK left the EU. And this coincided with the end of the CAP's previous programming period which ran from 2014 to 2020. By that time, so by the 1st of January, 2021 EU Policymakers that is members of the European Parliament and Agriculture Ministers in the council were also supposed to have reached an agreement on the new CAP. But because of several reasons including the uncertainty from Brexit, they failed to do so.

So instead, they decided to install a so called transition period for two years for 2021 and 2022. During which the previous CAP policy measures will largely remain in place so that they have a bit more time for the negotiations. Parliament and council now finally need to reach a compromise on the next CAP for the 2023, 2027 period. And these negotiations entered the final phase in November last year and so called trial logs and both sides hope to conclude these talks by the end of June.

The biggest change in the next CAP will be a move towards more so-called performance-based policy, where member states have more implementation powers through so called strategic plants, which are basically documents in which each country will have to detailed their specific farming policy measures and show to the European commission how this will help to reach EU objectives. However, overall, the EU fundamental approach to paying and supporting farmers will remain largely the same with direct payments staying the backbone of the policy. Direct payments are basically subsidies paid to farmers based on the amount of land and they will continue to account for around three quarter of the CAP budget.

This is - as Nick - as Chris explained, this is in contrast with the situation in England and Wales where authorities decided to phase out these direct payments and move towards systems that reward farmers more for the delivery of public goods. Meanwhile, in Scotland and Northern Ireland, the authorities decided to keep CAP file direct payments in place at least for the next few years. So, the CAP reform discussions are still ongoing there are still several points of discussion that need to be cleared and the - arguably the most controversial point is the future CAPs environmental measures.

The European commission has criticized Parliament and council or weakening its green elements of its CAP reform proposals. And now between themselves Council and Parliament also have very different views on these environmental schemes that they need to bridge for instance on the new eco schemes which are annual payments for farmers who go - who take climate and environmental actions that go beyond basic requirements. Overall, in the EU, there's still this ambitious rhetoric of a new green architecture of the CAP that will make progress.

But in practice the changes are likely to be less far going for instance in England, what is this more radical shift towards public money for public goods? And researchers and NGOs even fear that the final outcome on the next CAP will represent a step backwards on the environment and climate compared to the current CAP. Market rules are also still under discussion but fewer major changes are expected here, despite the fact that the UK left and was traditionally a promoter of more liberal trade. This time it's not the Member States are pushing for more market intervention but these demands are coming more from members of the European Parliament who want to expand the market intervention measures and crisis management schemes.

Well, but the Commission and Member States in the Council believe the current rules work well and so it's unlikely that, they will end up making massive changes to this. Brexit has obviously had a big impact on the EU budget and on the CAP budget. Since the EU lost the Member State that contributed around 10 billion a year to their budget. In July last year, EU had the state and government tried to solve this puzzle and agreed on a new EU budget for the period 2021 to 2027. And they foresaw around 380 billion for the next CAP which is around 20 billion less in nominal terms than for the current, for the current - for the 2014, 2020 period. But when taking into account inflation this amount drops more to around 340 billion which is around 50 billion a year for the CAP for the whole EU.

So, to sum up agricultural policies in the UK, in the EU are starting to diverge in very significant ways with the EU keeping a largely business as usual approach and England choosing for the most radical departure from that CAP system. As suppose of the question whether this could risk fair competition between farmers in different countries especially if some countries pay higher subsidy amount than others or if the conditions to get those subsidies are higher or less strict or less strict in some countries than in others for instance on the environment. And I'll now pass the floor to my colleague, Steve who will tell you a bit more about these environmental and sustainability issues.

Steve Gillman: Thank you very much, Pieter and hello everyone. My name is Steve Gillman and I'm going to talk to you today about potential EU in UK alignment and divergence in terms of Agri-Food sustainability. A good place to start is by looking at the sustainability landscape in the EUs Agri-Food market over the next decade because this can give us a platform to compare the EU with the UK post-Brexit and that platform in the EU is most certainly the Farm to Folks Strategy which is the European Commission's sustainability vision for the EU Food system until 2030.

It has 27 actions targeted along Agri-Food supply chains at the EU Farm level it's anchored for aspirational targets which you can see here. And the EUs, executive is pushing forward this level of sustainability in Member States, National Policies through something called CAP Strategic Plan which is part of the next CAP. But as Pieter mentioned there are certainly some financial issues going forward in the next period and that could affect the final level of ambition that we see within the national policies.

Still that context is important to consider because when you combine the Farm to Folk Strategy and the CAP, it's certainly going to materialist to some degree in the EU Agri-Food sector that in itself set a strong sustainability tone which is important for UK Agri-Food stakeholders because they can get an idea of where they stand with the EU sustainability and what future trade implications this may have for them.

So, with that in mind and to dig a bit deeper on where the EU and UK to the line or diverge, I've compiled this policy comparative using the Farm To Folk Strategy as a benchmark. And so, to start with more alignment we're seeing we know that both the EU and the UK are heading towards the same goal of carbon neutrality by 2050 which the Farm To Fork Strategy is designed to contribute to and the two sides have a lot of similarities to reduce their contribution to climate change as something like pure and Chris have mentioned. So, we see both sides supporting more sustainable agricultural practices in their planned policies and payments to farmers.

And there are, at the same time these are designed to mitigate climate change impacts but there are also policies there to try and address biodiversity loss and other environmental issues. We also see some alignment here with reducing both the use and risk of pesticides with plans to revise both sides main regulations going forward. This could bode well for UK Agri-Food imports into the EU. And if they're meeting the potential residue levels for instance but the time will tell where exactly those final numbers fall on the consequences to that.

And now towards more uncertain alignment where both sides are certainly moving in a similar direction, we see carbon farming is one of these. This is when farmers get paid for storing greenhouse gases in their soils and it's something that the commission is pushing particularly hard in the coming years because it gives farmers an economic advantage in going green. UK has a voluntary scheme available which is related to this as well as a pilot they're investigating which is something ELMs could support.

And so, British farmers are in a good place to have a similar situation but the question remains which one will reward farmers more and leave the other potentially at a commercial disadvantage. And there's also some EU and UK alignment with nutritional labeling, the commission is part of the Farm To Folk strategy wants a mandatory front of pack nutritional labeling scheme and the UK kind of the voluntary one. So that could see some business in the UK and better prepared for whatever the EU goes ahead with which could be something like the [indiscernible] [00:31:31] for instance.

And some EU member states also want an animal welfare label which could link to a revision of EU animal welfare rules that plan to revamp the main legislation and include aspects like a lot of transport. So, there's some question there, where the UK will go with its future annual welfare standards. Some plans could be more ambitious than the EU such as banning live transport. The time will really tell how they align but as Chris touch upon the property and be moving in a good direction and there won't be much divergence here.

And then one area where the UK could set the tone is with gene editing, the UK Government has expressed clear plans to push through this type of innovation domestically. And some EU policymakers and from the council and the parliament once the block to follow suit and they're trying to push the commission to reverse a European cultures as [indiscernible] [00:32:28] into more restrictive GMO policies. But again, time will tell how this will unfold. But it's likely that you will be playing catch up with the UK if it does change students.

And then finally to some clear divergences, the commission wants to push forward plans for sustainable food procurement in the EU. This could help galvanize demand for its vision of sustainable food and potentially give it at least 80 billion a year according to the EU Joint Research Center. On top of this, there's plans to allow businesses within and outside the EU with its sustainable, sustainability vision like using a marketing code of conduct and limiting some imports and sustainable imports. So, that gives a lot of economic MICE to the EU sustainability vision as well as more powers of the commission new assertive and sustainable trade strategy as it likes to describe it.

So, this creates a challenge for the UK's sustainable Agri-Food policies whichever market the UK looks to in terms of future trade, it could certainly become more of a follower to gain access and if, for example that's the EU. It could be greater alignment with the Farm To Fork Strategy but if it's the US for instance, it could result in further or more divergence away from the single market. So, Chris will go into a lot more detail there under general trade issue. But I just wanted to highlight the sustainability dimension here briefly because I think it's important. And with that I will pass back to Chris, who will now talk about the UK's future Food Standards. Thank you.

Chris Horseman: Thanks very much, Steve. So, has the UK actually diverged from the EU in terms of its food standards and will it do so in actual fact? I think it's probably fair to say there's a bit of a phony war going on here because in some senses nothing has changed. The UK has basically at the moment kept all of the essential elements of food law in place. This has been done systematically. The UK incorporated all of the core - relevant core provisions direct into UK law. This was done under a - the EU withdrawal act of 2018 which was designed to ensure that there wasn't any kind of legal vacuum created when the UK left the EU.

So, there's been a few - there haven't been many changes, very few changes in that in core legislation up until now. But in another sense, everything has changed because clearly the UK is now outside of the single market. And what that means in particular is that the UK is no longer part of the regulatory ecosystem of the EU which means that the EU cannot take it for granted that UK food will always comply with EU standards. And so, border checks are needed. And since January the 1st, they have been applied for goods moving from the UK into the EU they've been particularly stringent for livestock products.

And it has caused a significant drop in trade from the UK to the EU as we will see in a little while. The EU introduced these checks all in one go, right from 1st of January, when the UK left the single market. The UK is phasing the check in however because it wants to avoid any kind of disruption of supply for both practical and political reasons. And so, it has pushed back the implementation of things like requirement for pre-notification of products of animal origin back to 1st of October of this year. Physical checks on products coming into the Port of Dover and elsewhere will not actually come into effect until the 1st of January next year.

So, there is a delayed or deferred implementation of these rules on the UK side to which the EU has of course not reciprocated. And I think what we will see ongoingly is two conflicting pressures, pressures to - for the UK to align with the EU to make life simpler for traders versus the political pressures to diverge. And a particular forth line in this context is Northern Ireland. If it was just about UK goods moving into continental Europe, that might be one thing. But of course, the SPS checks which the EU required, the Sanitary and Phytosanitary checks also require, are also required on movements from goods.

Well, once it's been phased in will also be required for movements of products from Great Britain to Northern Ireland because Northern Ireland is de facto part of the EU single market under the withdrawal agreement settlement that was negotiated in 2019. So, that is causing all sorts of difficulties and you'll be aware that it's caused, it's been the trigger for some political unrest in Northern Ireland in recent weeks. The EU has commented on numerous occasions that the need for border friction between Great Britain and Northern Ireland would be significantly reduced, if there were to be some kind of veterinary or SPS agreement negotiated between the UK and the EU.

This did not form parts of the trade and cooperation agreement which was signed off on Christmas eve last year. Politically that's a difficult one for the UK because of the whole point of Brexit according to the British government is that the UK is free to make its own decisions and adopt its own rules. And if it was to agree to shadow EU legislation or comply with whatever was coming out of Brussels then that would be - that would very much go against the ideology of Brexit.

It's a very difficult one technically for the UK but it's a question which isn't going to go away. And I think ultimately there will have to be a veterinary agreement of some kind possibly similar to the - to the one which New Zealand currently has with the EU. Although the anything that the UK negotiates will have to be cover a lot more products and be a lot more wide ranging in its scope. There are also trade related questions. It's well known that the UK is in the process of trying to negotiate a free trade deal with the United States and it's very well-known that one of the things that the US is pressing for is for market access for its Hormone Treated Beef and what we will for shorthand refer to as Chlorinated Chicken Poultry which has been subjected to pathogen reduction treatments.

But the UK consumer is not keen on having these products on the UK market and the newly established Trade and Agriculture Commission which is now a statutory body within the UK advising the government on issues relating to trade agreement and agricultural questions and SPS agreements will play an important role. And so, I think there will be a great pressure on the British government not to agree to open up its products, open up its markets to products, which are currently not allowed. And I think that will probably be stronger than the desire to sign off a trade deal with the US.

The UK is also seeking to divergence in the sense that its seeking, is currently consulting on a ban on live animal exports to other countries for slaughter. This may well come into effect, but it's not actually that likely to have a significant trade impact because the vast majority of UK livestock are actually slaughtered within the UK. So, it will be a politically potent agreement to take as far as the government's concerned, but it won't have a major impact in the scheme of things on the UK livestock industry.

And as we've already discussed, the UK is very keen on the idea of introducing gene editing or making it easier for gene editing processes to be introduced for plants and potentially also for animals. And unless the EU follows suit, which it may do, but on a slower track, then that will probably create trade tensions with the EU in the meantime. So, just to conclude, I wanted to say a few things about trade policy. And there have been expectation in some quarters that once the UK was out of the EU Customs Union, it would make radical changes to its trade policy and that it would liberalize on a large scale and make swinging cuts its tariffs, so that its market was less protected than that of the EU.

That did not happen. And the UK trade policy certainly for Agri-Food products is very similar to that of the EU. The UK has a thing called a global tariff. And to a large extent, this is a copy and paste of the EU's common external tariff. There have been changes, some tariffs have been simplified, some of the less sensitive ones have actually been eliminated, not many of them, where they have been adapted, they've been converted into sterling, and they've been rounded down. And you can see a couple of examples there of the EU tariff for a couple of agricultural products and the UK equivalent tariff.

So, they've been simplify it a little bit. They've been rounded down rather than rounded up to avoid accusations in Geneva among the WTO partners with the UK was using this change of currency as a sneaky way of actually increasing its protectionism and the UK has been falling over itself to show that that's not the case. But there certainly hasn't been any kind of unilateral wholesale liberalization. And that's probably for strategic and tactical purposes as much as anything else.

The only real exception is that the UK has opened up an autonomous tariff rate quota, which wasn't there before to support cane sugar refineries in the UK, a quota of 260,000 tons a year, which will be significant for the UK sugar market. The UK and EU have also had to decide what to do about existing EU tariff rate quotas. These are our quotas, which are bound within the WTO and allow countries to import at a lower rate of tariff within certain quota levels.

The EU and UK agreed fairly early on in the Brexit process that they would divide up these tariff rate quotas based on - primarily based on historic usage, some of the supplier countries objected to the resulting quotas which would appear and there is currently a process of renegotiation of these TRQs. We have the results of some of those at present, and there have been some but not a huge number of changes to the initially communicated quotas. But as you can see that what the key thing is that there haven't been any overall increases in the quota amount.

The overall quantum of the quota is unchanged. But it's simply the allocation percentage, allocation between the UK and the EU 27, which has been adapted and changed in certain cases. There are a few examples set out in the table that you can see there. UK is in the process of negotiating some free trade agreements, there are three underway at present with the USA with Australia and with New Zealand. Britain is also committed to renegotiate two of the FTAs which it rolled over from the EU from the start to this year, that's with Canada and Mexico.

And Britain is also aiming to accede to the Trans Pacific Partnership, CPTPP that this is a rather non-intuitive move on the UK's part. I think this is what you could really describe as redefining what you mean by a regional trade agreement, given that the UK is about as far away from the Pacific as it's geographically possible to get. But nevertheless, the UK is keen to make a pivot towards Asia Pacific as part of its strategy. And it believes that going into this trade agreement with the 11 countries of the Pacific Rim will be an important statement, if in - in - in moving in that area. And those accessions negotiations are set to begin later on this year.

Having said that, it is undeniable that certainly for Agri-Food products, the EU is the UK's biggest partner. In the chart there you can see some figures comparing trade with the EU 27 with the rest of the world. And you can see that for exports, the EU exports about 50% more to the EU 27 than it does to all of the rest of the world put together. In the case of imports, that's well over double the amount. So, the EU - the UK Agri-Food sector is very dependent on the UK market for about 60% of its exports, that's 70% of its imports. And that is unlikely to change anytime soon. And despite all the rhetoric about the pivots to the Asia Pacific, this is perhaps slightly inconvenient truth for the UK government as it puts up barriers to its largest trading partner.

And the impact of Brexit can be seen in these charts, which show a trade in agricultural products both exports and imports to and from the EU 27. As you can see that the particularly for meat, dairy and for fish and seafood products, there has been a significant drop in exports since in February 21, the latest month for which we have data as compared with the same month, the previous week - previous year, which was admittedly both pre-Brexit and pre-COVID pandemic. But nevertheless, the Brexit impact has put significant friction on trade, particularly export, where those SPS checks are already in place on the EU side.

So, to wrap up, what are the key questions about the UK, the futures, the UK's Agri-Food future? Well, I described the English change in this basic payment scheme as a gamble. The question is will it pay off? If it doesn't, then there will be a lot of pressure from English farmers to change back and to have some kind of financial safety net for its producers. If it works, however, if there are not the kind of mass farm bankruptcies that some fear, if the shift to environmental land management payments is seen to be delivering environmental benefits, then the EU will certainly be watching it quite closely.

And the next time the CAP comes up for re-negotiation in 2027, it's even possible that the EU might want to copy the UK to some extent and do something similar on the EU side. In terms of Food Standards, the question is, will the UK - will the pressure for the UK to realign with the EU proved to be irresistible in the end and something which some people have suggested is that UK might consider joining the European Economic Area, along with countries like Norway and Iceland as a way of being back inside the single market but not actually being within the EU. I think that's still quite a long way off yet.

But it's possible, especially if trade remains a problem that the voices calling for some sort of solution like that will grow louder. And in terms of trade, the question is how deeply embedded the UK trade policies will become? If the UK signs, new trade agreements with the US or Australia or New Zealand and/or accede to CPTPP before 2024, when the next election comes along.

Then if there were to be a change of government at that point and a desired change in tech, perhaps a reversion back to a closer relationship with the EU. And it would be much harder to do that, if the UK had developed these new trade relationships with other countries which the EU did not have. This has been obviously, of necessity, a quite rapid tour through the questions of the UK's divergence from the EU but hopefully this has covered most of the main points. And I will stop now and ask if there are any questions.

Nick Edwards: Thanks, Chris. And so, yes, we've already got some questions come in, but there's still time for people to log new ones. And I was going to start maybe first Chris - maybe Chris and Steve could pick up around genetic technologies, gene editing, and [indiscernible [00:51:23] in the UK, legislative ballot barriers in the EU. What comments to do, maybe both have on how that might develop?

Chris Horseman: Well, I think on the UK side, there is a strong desire to be seen as a friend of biotechnology to be on the progressive side of the equation. The UK was frequently critical of the EU when it was a member state of the stances that it took on biotech. It was noticeable that when Boris Johnson became Prime Minister, in his very first speech, he actually mentioned gene editing as being something that the UK could do in his very first speech, and that sort of, I think, set a marker for the direction that the UK is moving in.

But the big question for the UK will be, will the government be able to bring the UK public with it? The British public is still quite suspicious of biotechnology when it relates to agriculture and food. And I think the challenge for Britain will be to carry that narrative. The gene editing is completely different from genetic modification, which in a real sense, it is. But of course, it's got quite a complex question to get across to the wider public. And whether gene editing can be introduced without any kind of public backlash. That's really the challenge for the UK Government. Steve, what's the view from Brussels?

Steve Gillman: Yes, I'd say it's going to be a lot more slow and frustrating to many probably on the EU side in terms of gene editing and the EU agriculture ministers have already asked the European Commission to complete a study into the status of genome edited plants and animals. And this study is actually going to be published still sometime this month. And it's going to look at the different techniques, techniques that can be used for agriculture, as well as Agri-Pharmaceutical applications.

So that will be interesting to see because I think it will give a taste of which way it's going to go with the, maybe kind of give some recommendations to pharmaceutical approach strategy to say that it's going to look at this issue as well and try and maybe open it up. But the study or at least the debates going forward will the momentum will build and then there's the question, whether it's going to just be smaller legal change that can maybe allow some sort of gene editing, or if it's going to be a full-on attempt to try and somehow reverse the European Court of Justice ruling that links them to GMOs, but time will tell.

There will certainly move I think a lot slower than the UK. And then once there is some sort of development that says that there'll also be that public acceptance issue that Chris has explained there, so. So, in that sense, I'm sure the policymakers will be studying how the EU or the UK went about persuading if they're successful and/or learning from the mistakes that the UK are in how they approach things. So yes, time will tell but I think UK will lead the way.

Nick Edwards: Okay, good. Thanks, Steve. Thanks Chris. Maybe a quick question for Chris on agricultural inputs tariffs. So, UK trade and commission suggested basically abolition completely, is that realistic? Is that likely to ever happen?

Chris Horseman: I think it is unlikely. Certainly, the proposal that the trade and agricultural commission came out with was that the UK should consider the possibility of just abolishing agricultural tariffs and sort of becoming like New Zealand, of New Zealand of the Northern Hemisphere, if I can put it that way. It's very unlikely. I think the language in the trade and agriculture commission report made it clear that this wasn't necessarily a majority view among the commission members. It was said that it should be an aspiration for the longer term.

But I think there are, having said that, I think it's primarily a tactical thing. The UK, I think will be opening up its markets and much more to its free trade agreement partners. So certainly, Australia and New Zealand, will have better access than it does at present. But of course, if the UK was to just remove all tariffs altogether, then there will be no leverage for the UK in any further FTA negotiations. So, for that reason alone is not going to happen. But it was an interesting comment. Certainly raised a few eyebrows when people read that trade and agricultural commission report.

Nick Edwards: Yes, okay. Thank Chris. And certainly, maybe one for Pieter to direct payments, England, Wales, they're moving away from the EU, or they want to keep them? What's the reason for that diversion? [indiscernible] [00:56:37] what are the pros and cons of direct payments? And what leads to a different view of their effectiveness?

Pieter Devuyst: So, I think, well, one reason is clearly political for the UK Government, that it wants to stop the phase out the direct payments that are associated with the EU's CAP because now they're free from the EU bureaucracy. That's one thing but direct payments have also been criticized on several points in recent years, also within the EU. Beside because they're based on the amount of hectares of land. So, one of the criticisms is that it artificially raises land prices. It's because it's based on hectares, also the largest farmers get getting most of the subsidies. There is one statistic that's always being repeated that 80% of the CAP - of CAP, the payments goes to 20% biggest holdings.

And then another criticism is that it's based on land, so it's not based on a specific outcome and I think this might also be interesting to see how England and Wales will link farming subsidies more to public goods and improvements for the environment. And then maybe if that's successful, maybe they can put more pressure on the EU to move into the same way as Chris explained also.

Nick Edwards: Okay, thanks, Pete. Maybe time for one quick question. There's probably maybe no quick answer. So, UK different relationship with the EU that also means a different relationship with other organization. So, WTO, how does UK position in WTO negotiations change going forward? I mean, that's going to be clear, and it's going to be less clear, but do you have any coincident?

Chris Horseman: The UK is positioning itself in WTO as a facilitator of progress of reform, the WTO of course is facing a lot of difficulties, structural institutional, functional difficulties at the moment, not all of which were caused by Donald Trump. But the, yes, it's a problem. The UK is trying to position itself as being a free trader. We haven't yet, I don't think got into the depths of the agricultural policy negotiations in the WTO to an extent where the UK's distinct line on things like farm subsidies and tariffs will become evident. I mean, there's very little discussion on import tariffs. There is some residual discussion in WTO about domestic subsidies. There the UK could be on the side of the angels and say, well, everyone should do like what we're doing and get rid of basic payments.

But of course, the UK is continuing to channel. It'll be somewhere between two and three billion pounds a year into supports, which in the WTO context will be green box. And some other countries will say, well, hang on a minute, would your farmers really be viable if these payments were not be being made? So, there isn't that great a difference, I don't think from the from the WTO politics perspective between the stance of the EU and the UK.

Nick Edwards: Okay, thanks, Chris. Good answer. [Indiscernible] [01:00:44]. So, let me wrap up by thanking Chris, Pieter and Steve. I really hope the audiences [indiscernible] [01:00:51] whether you're customer or the feedback culture policy service, or not yet a customer. We've got really given you a good showcase at least of some of the issues that the team covers on a regular basis. The slides are available to attendees afterwards. And if you do want to discuss any of these issues with any, and your customer, then please we can put you in touch with Chris, Pieter or Steve. So, thank you and I hope you attend future events. Good bye.

Posted 28 April 2021 by Chris Horseman, Policy Analyst, S&P Global Commodity Insights and

Nick Edwards, Director, Refining Chemicals and Resources Solutions, S&P Global Commodity Insights and

Pieter Devuyst, News Analyst, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.