Agriculture, tariffs and food prices

Sir Richard Packer, former Permanent Secretary of the Ministry of Agriculture, Fisheries and Food, explains the impact of protectionism on food prices

Trade is a complex area. All sorts of different industries are impacted by trade policies and will have varied views on what the government ought to prioritise. Normally, there is more for governments to consider than domestic prices. But putting overarching trade goals to one side, it is perfectly possible to analyse what the impact of certain measures will be - whether they are universally welcomed or not. One certainty is that tariffs and restrictions on agricultural products will push up the cost of food. 

It is critical to bear one simple truth in mind when considering tariffs and other trade measures, as with most questions of taxation. Measures designed to help a certain industry (like agriculture) will incur economic costs, which must be borne by someone. In practice, this means taxpayers and/or consumers.


The present situation in British agriculture

The most obvious special treatment for agriculture and food is not in the area of agricultural policy, but in that of VAT. Agricultural output and unprocessed foods are zero rated, a status shared with a motley range of other products including houses, newspapers and children’s shoes. Although it is not the intention of the zero-rate, at the margins this probably helps the agricultural industries as consumption is somewhat higher than it otherwise would be.

Farmers also enjoy a special low rate of tax on ‘red diesel’ used in tractors and agricultural vehicles, a concession confirmed as recently as the 2020 budget, at the same time as it was withdrawn from some other industries. According to a leading agricultural firm, this might be worth up to £50 a hectare (2.4 acres/hectare). Given that according to Savills, the UK currently has 17.6 million hectares (43.5 million acres) of farming land, the exemption is worth hundreds of millions. 

But what about support for agricultural production? Agriculture is helped worldwide in a very large number of ways, and in the UK this has been done largely at an EU level for the past four and a half decades. The special tax concession for red diesel in the UK is an example of a British-government based policy. But the bulk of support will always come in one of two ways. Either money is given directly to farmers, or prices are manipulated to be higher than they would be if demand and supply were able to find their natural level. 


How trade policy manipulates prices

There are several major mechanisms for artificially raising prices, but the common factor is the government taking steps to push up the cost of foreign goods, in order to reduce competition for domestic agriculture. There are three main means of doing this, all of which have been advocated by public figures in recent months: 

  1. Banning imports of particular goods, often on alleged grounds of human, animal or plant health. Such allegations might or might not be justified.
  2. Import quotas. A physical limit on the amount of a product that can be imported. E.g. an annual limit of 10 million tons of wheat.
  3. Import charges, such as direct tariffs or levies. 

It is important to remember that both direct support for farmers and artificial price rises will have an impact on the national finances. Taxpayers will contribute, whether it is via tax paid to the exchequer dished out to farmers, or via higher consumer prices. 

But notice that these forms of support will appear very differently on the government’s balance sheet. Giving money to farmers is straightforward – the sum concerned will appear as an outgoing payment. The government providing help by keeping prices high might not involve any expenditure at all, but consumers i.e. taxpayers (as they are the same people), will still have to pay. 

Accordingly, a price may be kept high by means of import restrictions of one kind or another without any monetary cost at all. Indeed, such a policy might result in revenue from import charges, no expenditure and hence a net gain to the exchequer. Is everything fine therefore?

The answer is probably not. In so far as the price of a product – beef, say, or butter, is above where it would be but for import restrictions, consumers will be worse off than they would have been since they will have paid more for their meals. Taxpayers have not paid more tax, but they might as well have done since, after they have consumed the beef/butter, they have less money than they would have had without the import controls.   

Historically governments have often preferred the indirect method of support via price manipulation since people notice it less than if the same amount of support is placed in the public accounts for all to see as “payments to farmers.” But both methods of support have to be paid for by citizens either as taxpayers or consumers - and most of us are both.

It would probably be wise for parliamentarians who intend to make the public pay these costs to be honest about it. If they believe it, they should say this is an example of a necessary trade-off that comes from trade negotiations. But regardless of one’s views of what the ultimate trade priorities should be, or whether one believes the additional costs are worth it, it is inevitable that there would be higher costs for most as a result of larger barriers to trade in agriculture.

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