Tag Archives: UK

Brexit and the Common Agricultural Policy (CAP)

With the 29th March deadline approaching UK farmers are particularly opposed to a no-deal Brexit; customs hold-ups at the borders could ruin fresh produce. And there is concern that new trade deals with countries like New Zealand could lead to a flood of cheap imports and therefore making it harder for British farmers.

The EU bloc receives receives about 60% of UK food exports with 70% of the UK food imports come from the EU bloc. Lamb and beef exports could face export tariffs of at least 40% if the UK reverted to World Trade Organization rules under a no-deal exit. The UK produces approximately 60% of what is required to feed its population with the remainder being imported. The UK’s £110bn-a-year agriculture and food sector is deeply integrated with Europe relying on the bloc for agricultural subsidies of £3.1bn ($4bn) under the CAP – Common Agricultural Policy. The government has promised to pay the equivalent of the CAP subsidies up to 2022, no one is certain what will happen after that.

What is CAP?

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector has been known as the common agricultural policy – CAP. The CAP was established under Article Thirty Nine of the Treaty of Rome, and its objectives – the justification for the CAP – are as follows:

1. Raise and maintain farm incomes, through the establishment of high prices for food. Such prices are often in excess of the free market equilibrium. This necessarily means support buying of surpluses and raising tariffs on cheaper imported food to give domestic preference.
2. To reduce the wide flutuations that often occur in the price of agriculutural products due to uncertain supplies.
3. To increase the mobility of resources in farming and to increase the efficiency of all units. To reduce the number of farms and farmers especially in monoculturalistic agriculture.
4. To stimulate increased production to achieve European self sufficiency to satisfy the consumption of food from our own resources.
5. To protect consumers from violent price changes and to guarantee a wide choice in the shop, without shortages.

CAP Intervention Price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

CAP Int Price
Figure 1: The effect of an intervention price on the income of EU farmers.

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU.

Brexit and New Zealand’s trade with the UK and the EU

The impact of Brexit on New Zealand depends on what kind of exit agreements are reached between the UK and the European Union. The published provisional deal includes a transition period which runs until the end of 2020. During this time, existing trade conditions for third parties (such as New Zealand) will continue. Below are tables showing the trade relationship between New Zealand and both the EU and the UK. The benefits of two way trade with the EU outweigh those of the UK – US$23,273m against that of the US$5,640m

March 2018 – New Zealand’s total trade balance was a surplus of $4.0 billion in the year – this surplus is up $1.3 billion from the trade surplus in the year ended March 2017.
Total exports of goods and services were $78.0 billion, while total imports were $73.9 billion.

China ($15.3 billion) and Australia ($13.9 billion) were the top export destinations.
The European Union ($13.4 billion) and Australia ($12.1 billion) were the top import sources.

Dairy products and logs to China were New Zealand’s top two export commodities by destination, earning $4.0 billion and $2.6 billion, respectively. This was followed closely by spending by visitors from the European Union ($2.2 billion) and Australia ($2.1 billion).

New Zealand’s negotiations

New Zealand is in negotiations with the UK over a FTA. According to New Zealand Foreign Affairs and Trade NZ wants the following from a FTA:

  • Removing tariffs and other barriers that restrict the free flow of goods between our two countries
  • Making it easier for traders of all sizes to do business in the UK, including services exporters
    Strengthening  cooperation and dialogue with the UK in a variety of trade and economic fields
  • Reflecting our goals including progress on gender equality,  indigenous rights,  climate change, and improved environmental outcomes.
  • Some key areas in which we will be seeking even closer cooperation with the UK under the FTA include:
  • High quality primary sector and goods access to the UK’s market, such as for meat, mechanical machinery and equipment, fruit, pharmaceuticals, forestry, dairy and wine
  • Helpful conditions for investment and services providers who operate between the two countries
  • Commitments on progressive trade issues including environmental and labour protections, indigenous rights and gender equality.

Sources:

  • Parliamentary Library Monthly Economic Review – December 2018.
  • New Zealand Foreign Affairs and Trade. 

https://www.mfat.govt.nz/en/about-us/work-with-us/vacancies/

 

 

UK and US unemployment falls but for very different reasons

For both the newly appointed Governor of the Bank of England and the Chairwomen of the US Federal Reserve, Mark Carney and Janet Yellen respectively, the level of unemployment has been targeted as an indicator for increasing interest rates. It is encouraging that the unemployment rates have been dropping in both countries but for different reasons.

The flow chart below show that the US unemployment has dropped mainly because of the fact that people are leaving the workforce. Whilst across the Atlantic the UK’s fall in unemployment is more to do with conventional growth. However the US economy has experienced some significant growth which hasn’t feed through into more positive employment figures. On the contrary the UK economy has had weak growth but it has had little impact on employment figures. The Economist stated the following:

This divergence is commonly explained with nods to Britain’s “productivity puzzle”. America, the thinking goes, suffered a “normal” recession. Its low rate of inflation is symptomatic of weak demand, which can account for its output loss and much of the shortfall in jobs. In Britain, in contrast, tumbling demand has been matched by a strange decline in workers’ productivity. Falling productivity cushioned the economy against large job losses, since more workers were needed to do the same amount of work. But it also reflected a loss of productive capacity, the evidence for which was stubbornly high inflation. Since late 2007 annual inflation in Britain has been almost twice as high as in America, at 3.1% to 1.8%.

US UK unemp

Further tightening in the UK

Bank of England Governor, Mervyn King, has warned households to prepare for further increases in interest rates as inflation creeps higher. Mervyn King’s comments came after the Bank published its February Inflation Report, in which it lowered its forecast for economic growth this year from 2.6% to around 2% and confirmed that inflation could reach 5% before June – the UK has a target rate of 2% for the Consumer Price Index.

Currently the UK Bank Rate (equivalent to OCR in NZ) is at 0.5% but is expected to rise to 0.75% in the next four months and be at 1% by the end of the year. Projections for 2012 is 2% and by the end of 2013 the rate will be at 3%. Mervyn King also acknowledged that an 0.25% increase in the Bank Rate would not damage growth. “There’s one camp that says even a small rise in Bank rate, no matter how small, will plunge us back into recession and mean that hopes of recovery are dashed forever. I don’t really understand the logic behind that,” he said.

Compared to Australia and New Zealand rates in the UK, and US for that matter, are still very stimulatory – see table above. Interesting to note that the economies with higher interest rates are those that are more commodity based. It would be a useful exercise to draw a business cycle graph and look at the relationship between each country’s key interest rate and where they are on the business cycle.