Agricultural Policy and Trade

This document discusses the impact of agricultural policy and trade on the UK post-Brexit. It explores trade liberalization, WTO tariffs on imports, and two alternative trade scenarios. The document also examines the welfare improvement by imposing optimum tax and the importance of maintaining high standards in animal welfare, environmental welfare, and food standards.

Running head: AGRICULTURAL POLICY AND TRADE
Agricultural Policy and Trade
Name of the Student:
Name of the University:
Author Note:

1AGRICULTURAL POLICY AND TRADE
Table of Contents
Trade Liberalisation Scenario for UK Agricultural Post-Brexit................................................2
Two Alternative Trade Scenarios for UK Agriculture Post-Brexit.......................................2
WTO Tariffs on Imports....................................................................................................2
Trade Liberalisation:..........................................................................................................3
Welfare Improvement by Imposing Optimum Tax....................................................................3
References..................................................................................................................................6

2AGRICULTURAL POLICY AND TRADE
Trade Liberalisation Scenario for UK Agricultural Post-Brexit
Trade liberalisation is the abolition or depletion of restrictions or trade obstacles like
duties and surcharges as tariff and licensing rules and quotas as no-tariff barriers on the free
exchange of goods and services between nations (Fan, Li and Yeaple 2015). Brexit is derived
from “British Exit”. This means the UK’s decision to leave the European Union.
UK uses its 71% of land for farming and 19% of land for arable crops. Arable crops
include wheat and barley. In terms of value at market prices, agricultural production of UK
was £25.8 billion in which cereals was accounted for £3.5 billion. Similarly, pork was
accounted for £1.3 billion, milk was accounted for £4.6 billion and eggs were accounted for
£0.7 billion in terms of value at market prices. The EU is the only largest trading partner of
UK, which accounts for 70% of imports and 60% of exports. In pre-Brexit situation, UK was
benefited by free trade within European Union. Both EU and UK charges tariffs on imported
products from other countries into the EU. In post-Brexit situation, UK-EU trade comes
under WTO rules. IT has a significant effect on agriculture. Tariffs on agricultural products
are higher than other oods and services (Holmes, Rollo and Winters 2016). Therefore, meat,
dairy and cereals sectors dependent on the export market will be greatly affected. For an
example, the tariff under WTO rule on cheese is 40% to 50% based on the variety of cheese.
Two Alternative Trade Scenarios for UK Agriculture Post-Brexit
WTO Tariffs on Imports
Price Increase: Import tariff will increase the cost of importers and so costs of consumers.
This will increase 30% price of meat and dairy products, 18% price of veetables like tomato
and 10% price of broccoli.
Opportunities for UK Business: Import tariff will give the opportunity to British products
as an import substitution. British Products will be more attractive to the domestic consumers

3AGRICULTURAL POLICY AND TRADE
by imposition of tariff on imports. UK produces 14.5 billion litres of milk and it needs 3.3
billion litres more to fulfil its own needs (Whitfield and Marshall 2017). This is just 20%
extra. This dairy sector is more likely to displace imports.
Trade Liberalisation:
Cheap Imports: Abolition of import tariff will decrease the cost of imported good. This will
result in lower welfare, environmental and health standard in UK as the import is cheaper.
Continued Viability of UK Business: Liberalisation of tariffs to UK can affect the viability
of British farms which can result in “irreversible damage” in UK’s agricultural sector. Sheep
producers in hill areas can also be affected by the decrease in income of farm business
(Hubbard et al. 2018). It is expected that price in beef sector can decrease by 45% and price
in sheep sector can decrease by 29%.
High animal welfare, environmental welfare and food standard of UK has an
international reputation that cannot be compromised on alter of cheap imports. The
government of UK did not offer any clarity regarding post-Brexit policy on agricultural
sector. This is also important that no sacrifice can be done in regards to standards of
environment and food.
Welfare Improvement by Imposing Optimum Tax
The presence of external cost in production harming third party or society is termed as
negative externality. In case of negative externality, the marginal social cost (MSC) is greater
than the marginal private cost (MPC). In an unregulated market, negative externality leads to
an over production of the goods that carries high social cost.
Given that the monopoly produces a harmful externality, the marginal social cost far
exceeds the marginal private cost. The figure below used partial equilibrium model to analyse
the equilibrium scenario in the market with a negative externality (Cowell 2018). In the

4AGRICULTURAL POLICY AND TRADE
Price, Cost
Quantity
P1
MPC
Q*Q1
P*
MSC
MSB=D
Tax
Deadweight loss
from externality
A
E1
E
F
B
C
below diagram, marginal private cost (MPC) is equal to marginal cost (MC). The downward
sloping curve represents marginal benefit to the private individual as well as to the society.
In the presence of negative externality, social optimum level of output is Qb where price is
equal to Pb. The monopolist without any government intervention however operates at EM
with equilibrium price and quantity being P1 and Q1 respectively. (Q* - Q1) is the amount of
excess output due to the presence of externality. It is clear that the producing harmful
externality if profitable as the firm chares high price for lower amount of output.
Figure 1: Negative externality and taxation
If the monopoly market is left unregulated, then the monopolist operates at the point
E. At this point, consumers receive a surplus given by the area EP*A. The producer surplus
equals EP*B. Because of the externality, there is a net loss in welfare as shown by the
triangle EE1F. In order to improve social welfare, the externality should be corrected. A
possible way of reducing externality is to impose an optimal tax that fully account the
external cost. The tax should exactly equal the external cost of production (Baumol and
Blinder 2015). The tax creates a wedge between buyers pay and the price that sellers receive.

5AGRICULTURAL POLICY AND TRADE
As price increases, consumer surplus after tax reduces to E1P1A. Taxes though reduce
consumer and producer surplus it actually enhances social welfare by reducing the
deadweight loss generated from harmful production.

6AGRICULTURAL POLICY AND TRADE
References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Fan, H., Li, Y.A. and Yeaple, S.R., 2015. Trade liberalization, quality, and export
prices. Review of Economics and Statistics, 97(5), pp.1033-1051.
Holmes, P., Rollo, J. and Winters, L.A., 2016. Negotiating the UK's post-Brexit trade
arrangements. National Institute Economic Review, 238(1), pp.R22-R30.
Hubbard, C., Davis, J., Feng, S., Harvey, D., Liddon, A., Moxey, A., Ojo, M., Patton, M.,
Philippidis, G., Scott, C. and Shrestha, S., 2018. Brexit: How will UK agriculture
fare?. EuroChoices, 17(2), pp.19-26.
Whitfield, S. and Marshall, A., 2017. Defining and delivering ‘sustainable’agriculture in the
UK after Brexit: interdisciplinary lessons from experiences of agricultural
reform. International journal of agricultural sustainability, 15(5), pp.501-513.