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Brexit Impact on Korean Agriculture and Its Implications
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| Writer | KREI |
| Date | 2016.07.14 |
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Through its report, "An Analysis of Brexit's Impact on Korean Agriculture and Its Implications," the Korea Rural Economic Institute said that the effect of British withdrawal from the EU on Korea's agricultural sector would be limited in the short term and negative in the medium and long term. Brexit, decided in a referendum on June 23, 2016 (local time), should be understood as a political event different from the global financial crisis in 2008. Discussions on Brexit began due to the burden of a rapid increase in immigrants to the UK, Britain's low influence compared to its economic scale in the EU, the burden of contributions to the EU, antipathy to excessive regulation in the EU and so on. On June 23, Britain decided to leave the EU by 51.9% of the vote. However, as a final decision on British withdrawal from the EU depends on negotiations with the European Council, the European Parliament's approval, and qualified majority voting of the Council of Ministers, according to Article 50 of the Lisbon Treaty, Brexit is expected to take 5-10 years. If two years pass without agreement on the extension of the negotiation period between the UK and the European Council in the transitional period, the existing agreement loses effect on Britain. Also, in the transitional period with the European Council, the tariff rates of the Korea-EU FTA are applied to the tariff rates between Korea and the UK. The global financial crisis caused by the Lehman Brothers bankruptcy on September 15, 2008, is different in essence from Brexit in that the large finance company's bankruptcy resulted in direct damage to the financial system and rapid changes in asset value. Brexit has had negative effects on the financial market as a political event rather than as a problem of the economic system itself. Therefore, Brexit should be understood as an event different from the 2008 global financial crisis in which the financial system caused the spread and amplification of uncertainty. In addition, while the international financial crisis of 2008 was unexpected bad news, Brexit has been an unfavorable factor already known in the global financial market. The range of fluctuation in financial indexes at home and abroad after Brexit is relatively smaller than that in the 2008 global financial crisis. After the Brexit vote, the exchange rate on the US dollar rose by 3.4%, global oil prices fell by 5.9%, and international grain price indexes (corn, wheat, soybeans) dropped by about 1%. These figures are relatively smaller than those in the 2008 international financial crisis (the won-dollar rate +35.5%, global oil prices –43.1%, corn –23.6%, wheat –37.1%, soybeans –18.5%). Nevertheless, the political power of a new British prime minister and the progress of two-year negotiations on withdrawal with the EU Council can lead to fluctuations in international financial indexes, and the possibility of domino exits of members other than the UK from the EU may be a potential risk in the EU and world economy. Thus, Brexit's negative effects are expected to increase in the long term. Brexit's impact on the Korean agricultural sector is forecast to be indirect rather than direct. In 2015, Korea's import value of British agri-food was 0.28 billion dollars, 0.9% of its total imports, with whiskey accounting for 96.6% of the import value. Korea's export value to the UK in 2015 was 30.45 million dollars, only 0.5% of its total exports. Korea mainly exports processed food to Britain (24.41 million dollars). Given the proportion of Korea's agri-food trade with the UK, indirect effects due to economic stagnation, fluctuations in financial indexes and so forth are expected to be bigger than direct effects due to changes in trade conditions. Although Brexit's impact on Korean agriculture is limited in the short run, if the uncertainty in the world economy increases, Brexit is forecast to be a negative factor in the medium and long term. In the transitional period, a fall in consumption and the depreciation of the won due to the economic recession at home and abroad will reduce both imports and exports, leading to a 1.21% decrease in Korea's trade value and a 0.07% decline in its agricultural production value. Nonetheless, after the transitional period, with the expansion of the world economy's negative effect, the trade value and the agricultural production value are expected to fall by 1.97-3.74% and 0.32-0.34% respectively. The implications of the Brexit impact on domestic agriculture are as follows. First, it is necessary to monitor the implementation of the existing Korea-EU FTA and prepare for a new Korea-UK FTA in order to enhance price competitiveness and expand the British market and for individual agricultural negotiations with countries withdrawing from the EU. Second, as an expected rise in the dollar's value and a strong yen will positively affect Korea's agri-food export, it is required to seek strategies to expand agri-food exports to the US and Japan. Third, with increasing uncertainty due to global oil prices, international commodity prices including grain, and foreign exchange fluctuations, it is required to strengthen monitoring and continuously monitor changes in exports to the world. Finally, Brexit caused by the imbalance and conflicts among England, Wales, Scotland, and Northern Ireland implies a need for our efforts to minimize the income gap among regions, industries, and especially within agriculture and the imbalance and conflict between grain and livestock farms. |
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