Impacts on living standards and prices

A number of studies that were published before the referendum looked at potential impacts of a vote to leave on prices and living standards in the UK. An overview of a selection of studies of possible interest to food and drink manufacturers is included below.

National Farmers Union (NFU) – April 2016

The NFU's study modelled impacts on farmers and food prices under three possible trade scenarios in the event of the UK leaving the EU.

The first two scenarios would result in more protectionist agri trade policies than under the Common Agricultural Policy (CAP) with prices increasing, whereas the third scenario would see more mixed price impacts. The full loss of EU subsidies worth €3bn a year at current levels would reduce average farm incomes by between €17,000 and €36,000.

  1. UK-EU Free Trade Agreement (FTA)
    The scenario that is most frequently advocated by leave campaigners, with a UK-EU FTA liberalising most agrifood trade. Trade facilitation costs (i.e. customs red tape) increase the price of traded goods by 5 per cent. This scenario sees an average increase in UK farmgate prices of 5 per cent, with higher prices leading to increased UK production and reduced imports.

  2. World Trade Organization (WTO) default position
    The UK leaves the EU without securing FTAs with the EU and international partners and falls back on the WTO default position. Agrifood and drink products traded between the EU and UK are subject to standard WTO 'Most Favoured Nation' tariffs and the same rules apply equally to all 162 WTO members. Trade facilitation costs increase prices of traded goods by 8 per cent, with UK farmgate prices also increasing by an average of 8 per cent. Higher prices result in increased UK production and reduced imports.

  3. UK trade liberalisation
    WTO rules prevent the UK from setting import tariffs higher than EU default 'Most Favoured Nation' levels set in 1995, however the UK can set 'applied' tariffs below those levels. Under this scenario, UK exports face standard EU import tariffs, but the UK cuts its tariffs by 50 per cent for all imports. Trade facilitation costs add 8 per cent to the price of traded goods. Impacts on farmgate prices vary significantly by sector.

Food Research Collaboration – March 2016

Professor Tim Lang (City University) and Dr Victoria Schoen (Food Research Collaboration) published a briefing paper on 'Food, the UK and the EU: Brexit or Bremain' which includes some analysis of food price impacts.

Average UK household expenditure on food has fallen from around 25 per cent of disposable income to less than 10 per cent. Previous research they have undertaken in 2014 found that UK food prices were 14th equal in Europe, i.e. exactly in the mid-point of cheapness/expensiveness. In the event that the UK leaves the EU, tariffs on imports could affect this situation.

The study highlights significant tariff rates that UK exports to the EU would face. These range from more than 5 per cent for coffee and tea, over 20 per cent for beverages, nearly 30 per cent for sugars and confectionery and 36 per cent for dairy products.

Impacts on UK food prices are not so clear. It is suggested that remaining in the EU provides a larger buffer and a close source of supply for the UK and that prices would be fairly likely to rise following the UK's EU exit. This would be as a result of disruption and sterling volatility.

London School of Economics (LSE) – March 2016

The Centre for Economic Performance (CEP) at the LSE published a paper analysing potential consequences on UK trade and living standards in the event the UK opts to leave the EU. Key findings in this study include:

  • EU membership reduces trade costs between the UK and the EU. This makes goods and services cheaper for UK consumers and allows UK businesses to export more.
  • Leaving the EU would lower trade between the UK and the EU because of higher tariff and non-tariff barriers to trade. In addition, the UK would benefit less from future market integration within the EU. The main economic benefit of leaving the EU would be a lower net contribution to the EU budget.
  • In an 'optimistic' scenario, the UK (like Norway) obtains full access to the EU single market, resulting in a 1.3 per cent fall in average UK incomes (or £850 per household). In a 'pessimistic' scenario with larger increases in trade costs, incomes fall 2.6 per cent (£1,700 per household).
  • The overall GDP fall in the UK is between £26bn and £55bn.
  • If the UK unilaterally removes all tariffs on imports from the rest of the world, UK incomes fall by 1 per cent in the optimistic case and 2.3 per cent in the pessimistic case.
  • In the long run, reduced trade lowers productivity. Factoring in these effects substantially increases the costs of Brexit to a loss of 6.3 per cent to 9.5 per cent of GDP, about £4,200 to £6,400 per household.
  • Leaving the EU means the UK would not automatically benefit from future EU trade agreements. This would mean missing out on the deals currently being negotiated with the US and Japan, which are forecast to improve real incomes by 0.6 per cent.
  • After Brexit, would the UK obtain better trade deals with non-EU countries? It would not have to compromise so much with other EU states, but the UK would lose bargaining power as its economy makes up only 18 per cent of the EU's Single Market.
  • It is unclear whether there are substantial regulatory benefits from Brexit. The UK already has one of the OECD's least regulated product and labour markets. 'Big ticket' savings are supposedly from abolition of the Renewable Energy Strategy and the Working Time Directive – both of which receive considerable domestic political support in the UK.

House of Commons Library – July 2013

The House of Commons Library published a research paper investigating impacts of a UK withdrawal from the EU. The paper includes a section looking at food prices and the role of the EU's Common Agricultural Policy (CAP).

It notes a major criticism levelled at the CAP is that it artificially inflates consumer food prices, especially in the UK which imports more and produces less than other major EU Member States. The paper notes that the Organisation for Economic Cooperation and Development (OECD) analysed agricultural policy support, including the cost to consumers in terms of higher prices.

 

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The above table demonstrates:

  • overall level of CAP support declined from nearly 4.5 per cent GDP to less than 1 per cent of GDP by 2011. This is because of EU policy reforms as well as a substantial decline in agriculture's share of total output;
  • EU reforms largely decoupled financial support from farm output, leading to a fall in output-based payments, partially replaced by other forms of support;
  • decoupling was accompanied by reforms to reduce other price- and trade-distorting aspects of the CAP. Combined with convergence with world food prices, this reduced support to farmers arising from consumers paying higher prices.

UK producer support in 2011 from the EU budget was around €6.7bn. OECD estimates suggest total support paid by UK consumers in 2011 was around €1bn.

The report suggests that if the UK leaves the EU, Government would need to consider whether and how to support UK farmers in the absence of CAP payments and protections afforded by the EU's common external tariff, which shields many producers from cheaper exports produced outside the EU.

Consumer prices for goods imported from outside the EU are raised as a result of the EU's common external tariff and non-tariff barriers to trade. Tariffs are not applied uniformly, and least developed countries benefit from preferential tariff-free access to EU markets.

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Last reviewed: 21 Nov 2017