Yet again The Guardian has a dubious story about the cost of Brexit. This time they are claiming that Brexit food trade barriers have cost UK households £7bn, report finds. The Independent’s headline on the same story is more attention grabbing – Your Brexit bill: The staggering cost of ‘Leave’ for every British household. Both stories are based on a new report but neither newspaper examined it in any depth, nor did they question whether its findings were true.
The report, an updated paper from the Centre for Economic Performance (CEP) at the London School of Economics is almost performance art in its elaborate model for what they claim is an ‘empirical’ study to explain the increase in consumer food prices due to Brexit. What the authors failed to realise is that a much simpler test of their hypothesis is readily available – actual trade data.
In fairness, the CEP paper did conclude that there is only ‘strong evidence that Brexit is the driving force behind these [inflationary] effects’, and it is the newspapers who have skipped over that qualification and highlighted the CEP’s claim that Brexit has cost UK households £7 billion in higher food bills. But why did neither the newspaper journalists nor the economists at the CEP ever think to look at actual trade data from the EU food exporting countries?
The CEP paper claims that UK food price rises would be 8 percentage points lower if the UK had remained in the EU. They blame this on the introduction of non-tariff barriers, but they come to this conclusion without looking at what has happened to the price of EU food exported to other destinations.
The CEP paper makes seven Key findings, I am going to start with their fourth as it appears to be where I think their analysis went wrong.
Key Finding 4.
- Between January 2022 and March 2023, the price of food products that were more exposed to Brexit (due to their reliance on imports from the EU before the referendum), increased by approximately 3.5 percentage points more than those that were not.
They are correct that the UK does import about 25% of its food from the EU. This is mainly because of very high tariffs placed on non-EU food, first by the EU when we were members, but then by the UK’s Department of International Trade after we left the EU. The Trade Department apparently did this so that they had some bargaining chips in new trade agreement negotiations. They obviously didn’t realise that it would take so long for the new trade deals to be finalised – the Australia and New Zealand trade deals only come into force at the end of this month, almost three and a half years after the UK formally left the EU, and it will take up to 15 years before the UK has completely free trade with either country.
So, during the period that the CEP is reviewing, the UK has had a tariff free and quota free trade deal with the EU but no new trade deals with other internationally competitive food producers, so it is hard to imagine which food products the CEP are using as a comparison. While many of the free trade agreements that the EU negotiated, and which the UK rolled over after Brexit, had limited access to EU/UK markets for food products, usually in the form of very small tariff free quotas.
But it would appear that the CEP are comparing the price rises for UK food imports from the EU with price rises for non-EU food imports and somehow blaming any difference on Brexit. However, as we shall see in the next section, many EU export prices went up for all of their export customers including to other EU members – not just to the UK.
While many goods imported from non-EU countries can only be imported tariff free out of the main European growing season so that they don’t compete with UK/EU products. For example, the UK imports similar quantities of Kiwi Fruit from Italy and from Chile but the export price (fob) in GBP per tonne increased by 43% from Chile between 2020 and 2022 but by only 2% from Italy. Even after this large price increase, Italian kiwis were still 13% more expensive than Chilean ones, but due to their seasonal production, the two countries’ producers don’t compete with each other.
Key Finding 5.
- These changes were entirely driven by products with high non-tariff barriers. Food products which fall into this category, such as meat and cheese imported from the EU, have seen price increases in the region of 10 percentage points higher relative to similar products which were not exposed to Brexit since January 2021, when the trade and co-operation (TCA) agreement began.
Here they seem to be missing the point – food export prices have increased to most EU export markets, not just the UK. For example, Ireland is the UK’s largest supplier of fresh or chilled beef. The UK buys almost half of Irish beef exports and between 2020 and 2022 the unit price, in Euros per tonne, of Irish beef exports to the UK increased by 40% but so did Ireland’s exports to its second largest EU customer, France. In total, Ireland’s unit export prices were 36% higher between 2020 and 2022 to all markets and this increase ranged from 69% higher for beef exports to Spain, to only 4% higher for beef exports to Luxemburg – not that Luxembourg buys much Irish beef. So, could we really blame the increase in the export prices of Irish beef to the UK on Brexit? Probably not.
Well, what about other meats? The UK imports more pork than any other meat, we imported 329,112 tonnes of fresh, chilled or frozen pork in 2022. (By the way, this figure doesn’t include cured or dried pork.) Our biggest supplier was Denmark, then Germany, then Spain. Danish pork’s unit export prices to all markets, in Krone per tonne, were slightly lower between 2020 and 2022, down 2.4%, but they fell by 11.7% to the UK. Denmark’s biggest market in 2022 was China, their average unit price was down 5.1% from 2020. It was Danish exports to EU countries such as Italy and Greece that saw large unit price increases of 9.7% and 9.1% respectively. Is anyone claiming the large drop in the per tonne export prices of Danish pork to the UK as a Brexit benefit? I thought not.
Similarly German pork’s export prices, in euros per tonne, were up 3.5% between 2020 and 2022 to all markets but only 0.2% higher to the UK. Like Demark, it was Germany’s EU customers: Italy, Netherlands, Greece, Austria, and Czechia, who saw the largest price increases for German pork of 13.4%, 10.8%, 9%, 8.7%, 7.6% respectively. Anyone blaming this on Brexit? No?
Spanish pork export prices per tonne were up 7.2% to all markets and up 11% to the UK. But they were also up 11% to both Portugal and Romania who each imported more than twice as much Spanish pork as the UK. So again, it is hard to blame the UK’s price rise on Brexit as neither Portugal or Romania have left the EU. But Spain’s largest customer, China, saw its per tonne price remain relatively stable, increasing by only 1.1% between 2020 and 2022, yet China has never been part of the EU. Maybe purchasing power is determined more by size of order than by EU membership?
I thought I would look at sheepmeat prices for good measure although the UK is a net exporter of sheepmeat and almost 60% of the UK’s out of season sheepmeat imports come from New Zealand (tariff free under a WTO quota now divided between the EU and the UK) with about 9.5 thousand tonnes coming from each of Australia and Ireland.
New Zealand lamb unit export prices, measured in NZ dollars per tonne, were up 18% to all markets. Their biggest market, China, saw a unit price increase of 5.1%, their second biggest market, the UK, saw unit price increase of 14.1%, while the Netherlands, their 4th biggest market, saw prices increase by 19.2%, then Germany by 19.9% and then France by 24.4%. How could anyone blame the UK’s price increase on Brexit? Outside of China and the CPTPP countries, UK importers seems to have made the best bargain with New Zealand exporters and certainly better than the other EU nations. If we look at import prices, which include insurance and freight, rather than export prices, the unit price of lamb imported by the UK from Ireland, measured in GBP per tonne, fell by 3% between 2020 and 2022. No doubt this won’t be attributed to Brexit either, but just politely overlooked.
Although the UK is mainly self-sufficient in poultry, we do import some from the Netherlands and Poland. Dutch unit prices for chicken in Euros per tonne were up 46% to all markets, probably due to the massive increase in the price of imported chicken fed as well as higher heating and lighting costs – chicken is generally intensively farmed indoors. And while Dutch export prices, in euros per tonne, to the UK were up 53% between 2020 and 2022, this was lower than their 79% increase in export price to Denmark and the 85% increase in export prices to Spain, while Dutch export prices to Greece were up by a staggering 102%. So again, it is very difficult to blame this price increase on Brexit. Polish poultry prices were similar, up 79% to all export markets, up 69% to their largest market, Germany, but only up 59% to their second largest market – the UK. How is this a Brexit problem?
But the CEP paper also mentioned cheese – so let’s look at cheese prices. The UK’s largest supplier of cheese is Ireland, and Irish unit export prices in euros per tonne increased to all markets by 23.6% between 2020 and 2022. But unit export prices to the UK were only 16% higher over the same period, while export prices to the Netherlands, Irelands second biggest market were up 34.2%. Admittedly, Irish cheese prices were unchanged to Germany but up 53% to Japan, so things could have been better for the UK and they could have been worse, but this also doesn’t look like it could be Brexit related. And as I have mentioned before – export prices don’t include insurance or freight.
The UK’s second biggest cheese supplier is France and here the UK seems to have been singled out for higher prices. The UK saw the unit price of French cheese imports, measured in euros per tonne, increase by 42% between 2020 and 2022 while the unit price increase to all destinations of French cheese exports was only 16% and for non-EU markets, such as the US and Switzerland, prices increased by only 9% and 8% respectively. The only EU market that saw a larger unit price increase than the UK was Ireland, where the export price per tonne of French cheese increased by 110%.
So, was this about Brexit? It is likely to just be due to the type of cheese that the UK’s imports from France – more from smaller independent producers than from larger industrialised producers as the export prices of the UK’s third largest EU cheese supplier Germany, were not similarly affected. German cheese export prices per tonne were up 41% to all destinations between 2020 and 2022 but only up 28% to the UK, while Italy saw a 44% increase in German cheese prices, the Netherlands a 49% increase, Spain a 44% increase, and even France saw German cheese prices increase by 33%. So, it would be very hard to blame increased prices to UK customers simply on Brexit when increases to Italian, Spanish and Dutch customers were higher.
Key finding 7.
- The observed price increases of products more exposed to Brexit are not correlated with macro events which could be associated with inflationary pressures such as Covid lockdowns, or the Russian invasion of Ukraine. Furthermore, the fact that the results are driven entirely by products with high NTBs imported from the EU offers strong evidence that Brexit is the driving force behind these effects.
There is so much more to inflation than macroeconomic events and international politics. Many things besides Covid lockdowns and Russia’s invasion of Ukraine have happened to corporate Britain since Brexit. UK retailers may have increased their prices to cover their higher interest rates, higher rents, higher wages, higher delivery costs, higher national insurance charges and/or higher corporate taxes. Yet these potential reasons for price increases appear to have been overlooked by the CEP’s analysis. Price increases are rarely only about higher wholesale prices. There is also potentially a shopkeepers’ moral hazard – if the population has been convinced by the media that prices are higher due to Brexit, then it gives retailers an easy excuse to increase their prices and then blame it on Brexit.
Not that we should disregard the Ukraine war, as this has pushed up the prices of fuel, feed and fertiliser as well as reducing the supply of many food stuffs such as wheat, sunflower seeds, and soybeans. All of which are important in producing indoor intensively farmed meats such as chicken and pork as well as many European dairy products – their cows are also often kept indoors. EU/UK regulations require indoor reared animals to be kept warm and given adequate amounts of light, both more expensive in 2022 than in 2020 due to higher energy costs. EU intensively farmed animals are often fed imported grains and seeds, which also increased in price due to reduced supply from Russia and Ukraine, as well as increased international production and transport costs due to higher fuel and fertiliser prices.
In short there are many reasons why food prices, especially food prices with high EU non-tariff barriers such as meat and cheese, have increased since Brexit, but from the trade data – it doesn’t look like Brexit is the cause. Unless of course, a lot more EU countries have secretly left the EU.
There is another problem with the CEP analysis – for the most part the UK has not implemented many checks or imposed Non-Tarif Barriers (NTBs) on EU food imports, so how could NTBs possibly be the driving force behind these price increases?
The cost of free trade
However, while I doubt the CEP’s assumption that Brexit related non-tariff barriers are the cause of a third of UK food price inflation, and I believe that the trade figures demonstrate that the UK has not suffered higher imported price inflation than any other EU country, the CEP’s findings do highlight one interesting point:
Key finding 6.
- The cost of Brexit to each household now stands at £250 when only considering the impacts on food since December 2019. This aggregates up to £6.95 billion overall for UK households.
Key finding 6 is interesting because the total amount of almost £7 billion is not dissimilar to the net cost to the UK of being a member of the EU. Many people mistakenly believed that the EU offered the UK ‘free trade’, but it didn’t. The UK had to pay for this access. This was doubly expensive as we were not only paying to give EU suppliers access to UK markets, but we also had to restrict UK market access to non-EU suppliers.
This allowed many EU food providers to undercut UK producers while simultaneously benefiting from not having to compete with more efficient non-EU producers. So, membership of the EU gave UK consumers the worse of both worlds: their domestic food production was lost but without benefiting from dramatically cheaper food.
Now companies that import or export goods to the EU must pay for their own compliance costs, just as they do when they trade with non-EU countries. These costs are probably passed on to UK consumers unless there is a competitive reason not to do so. Many trade compliance costs fall on exporters not importers, so in a competitive market some exporters may absorb these costs.
But regardless, these costs should never have been paid by the government and only for trade with one region. So, it is possible that costs that were once part of the EU membership fee and so covered by UK government expenditure, are now being charged directly to UK consumers, but this is not an increased cost, in fact it is much less than our present membership fee would be if we were still EU members, we have simply changed how we pay it – at the supermarket till, rather than as tax.