Summary
Currency depreciation, economic recession, uncertainty over the future basis for access to the UK market and the disruption of triangular Fairtrade supply chains serving the UK market via a EU27 member states are some of the main effects of Brexit on Fairtrade producers highlighted. Urgent unilateral UK government action is required to guarantee continued duty free-quota free access to the UK market for ACP exporters. The disruption of triangular supply chain in the cocoa/chocolate sector is a particular source of concern. This concern reaches beyond Fairtrade producers given the importance of this trade to Africa’s overall agro-food sector exports to the EU and the depressed state of the global cocoa market. Small scale importers face particular challenges in ‘Brexit-proofing’ their supply chains, with government assistance modelled on the Irish governments “Be Prepared Grants’ being urgently needed.
Traidcraft has highlighted the multiple effects which the Brexit process is having and will have on Fairtrade exporters serving the UK market, which is the single largest market in Europe for Fairtrade products. Four principal areas of impact were identified:
- the impact of the depreciation of the £ against the $, in which import contracts are denominated;
- the impact on the functioning of triangular supply chains which serve UK Fairtrade markets through EU27 countries;
- the impact of an economic downturn in the UK on demand for Fairtrade products which a ‘hard’ Brexit is likely to induce;
- the uncertainty around the future basis for developing country exports to the UK given the complexities faced in rolling-over the existing EU EPAs into ‘UK-only’ trade agreements, which will be required once the UK leaves the EU and is no longer a party to EU trade agreements. (1).
In terms of the impact of the devaluation of the £ the first dimension of this effect has already been felt. The immediate post referendum period saw a 15% decline in the value of the £ against the $ increasing the costs of Traidcraft’s imports from Fairtrade suppliers in developing countries. This lost Traidcraft as an importer £350,000 on an import value of £2.4 million (1).
Given the Fairtrade principles on which Traidcraft operates there was never any question of passing on these currency related costs to suppliers. This is normally common practice along developing country supply chains serving the UK market. It is feared these currency losses are unlikely to be a one-off event with projections on the currency effects of a ‘hard’ Brexit suggesting Traidcraft could face ‘a further potential increase in buying costs of around £200,000’ (1).
The Traidcraft analysis highlights how ‘after 40 years of single market membership there are some manufacturing processes that no longer take place in the UK, and certain ports (Hamburg and Rotterdam) that have developed a capacity to receive shipped goods for the whole of Europe’. All in all around 8.5% of Traidcraft’s Fairtrade imports into the UK are imported either via other EU27 member states or are subject to processing in an EU27 member states prior to onward shipment to the UK. Supply chains potentially affected include:
- the ‘newly-launched premium organic ‘Eat Your Hat’ chocolate‘ which ‘is bought via the German fair trade company GEPA’, with these imports potentially facing a UK import duty of 8.6%;
- fair trade pasta imported via CTM in Italy which could face a duty of at least 6.4%;
- palm oil imported via he Netherlands for the ‘Clean and Fair’ product range which could face a duty of 5.1% (1).
In addition it is highlighted how under a ‘no-deal’ Brexit these triangular supply chains ‘would face additional paperwork (which comes at a cost)’ and ‘customs checks’ which would be put in place and which could cause delays, further adding to costs along these triangular supply chains (1).
It was highlighted how while direct sourcing can be replicated for some products ‘the reality is that the necessary port facilities and manufacturing capabilities we need will not be replicable in the UK on April 1st 2019’ or ‘ if at all, for many years’. This creates a situation where even if goods were bought directly from Fairtrade suppliers by UK Fairtrade importing companies ‘the goods would still, in many cases, need to be shipped via, or processed in EU countries’ (1).
Traidcraft highlights how some Fairtrade goods it imports can be seen as ‘discretionary (rather and essential) expenditures’. As such the Fairtrade market component can be seen as particularly vulnerable to any economic downturn in consumer demand which would arise from a ‘hard’ ‘no-deal’ Brexit (1).
Finally while the UK government has repeatedly reiterated its commitment to ensuring continuity of existing preferential access for developing country supplies even under a no-deal scenario, beyond least developed country suppliers this could face certain challenges (see companion epamonitoring.net articles ‘UK government commits to extending EBA access for LDCs post Brexit’ 30th June 2017 and ‘The Complications of ‘Rolling-Over’ Current EPAs into ‘Cut and Paste’ Bilateral ‘UK-Only’ Trade Deals‘ 12 March 2018). Against this background for non-least developed countries such as Ghana, Kenya and Eswatini (formerly Swaziland) Traidcraft argues ‘it would be safer, simpler and quicker for the Government to include this handful of countries in their unilateral preference scheme rather than run the risk that market access is disrupted because agreements cannot be replicated in time’ (1).
Overall it was highlighted how small scale importers such as Traidcraft do not ‘have the time or resources for complex contingency planning’ (1) This view was reiterated in the findings of a recent UK Food and Drink Federation survey which found less than 30% of small and medium sized enterprises in the sector had developed back up plans for a ‘no-deal’ Brexit compared to around 55% of enterprises across the sector has a whole (2).
| Comment and Analysis
While the UK government has made repeated commitments to ensuring existing terms and conditions of access for developing countries to the UK market are replicated in ‘UK-only’ trade arrangements, refitting existing trade agreements into ‘UK-only’ arrangements in a WTO compatible manner will be by no means a straight forward task, particularly in the areas of rules of origin and trade documentation requirements. The finalization of the UK-EU Withdrawal Agreement and the establishment of a 21 month transition period would include a binding commitment from the UK to maintain current terms and conditions of access to the UK market until 1st January 2021. This would then allow more time for refitting existing EU trade agreements into ‘UK-only’ arrangements, without any disruption of ACP exports to the UK. The model for this would be the EU’s MAR1528/2007 regulation which established non-reciprocal duty free quota free access on a transitional basis while ACP governments completed the process of negotiating full economic partnership agreements with the EU. It was this regulation which provided the basis for non-reciprocal duty free-quota free access to the EU market for a range of ACP countries for almost a decade without a single WTO challenge. Whether or not ACP governments choose to roll over UK reciprocal preferential access from 30th March 2019 in line with the preferences accorded EU27 exporters, would be for individual ACP EPA signatory governments to decide. However such decisions will need to be taken in the light of the possible WTO challenges to any such arrangements which could arise if trade preferences were granted to a developed economy (the UK) outside of a formal WTO compatible trade agreement which were not then extended to all WTO members. The scale of the challenges faced by small scale businesses in ‘Brexit proofing’ their supply chains suggests the UK government should consider the establishments of a “Be Prepared Grant Facility” to assist small scale importers sourcing from developing countries in analyzing and addressing the challenges which could arise along their supply chains under different Brexit scenarios. This would require the UK government to make funding immediately available. The launching of such analysis would assist the UK government in identifying the administrative requirements necessary to minimizing the disruptive effects of Brexit on small scale importers. Specifically in regard to cocoa supply chains, the ‘Eat Your Hat’ chocolate example cited is illustrative of broader problems which could arise along cocoa/chocolate supply chains which reach beyond the Fairtrade sector. Despite a hiccup in the general trend the UK chocolate confectionary industry has been thriving in recent years with a compound annual growth rate of 1% (3). According to analysis from the Bord Bia between 2016 and 2021 consumption volume in the UK is predicted to grow by 2.7%. Recently ‘per capita consumption of Confectionery in the UK increased from 7.71kg in 2011 to 8.32kg in 2016 and is expected to reach 9.17kg by 2021’ (4) However analysis from the CBI in the Netherlands notes cocoa grinding in the UK has been in decline in recent years, with the UK increasingly importing cocoa pastes, cocoa butter and cocoa powder (5). In 2016 the total UK import volume of these products exceeded the volume of imports of cocoa beans. While some imports of cocoa paste and butter come from West African cocoa producers, the majority of UK cocoa paste (60.7%), cocoa butter (52.5%) and cocoa powder (94.8%) imports were sourced from fellow EU member state (the Netherlands, Germany, France and Belgium). There is thus a strong orientation towards the supply of value added cocoa products to the UK market via other EU27 member states.
Against this background a ‘hard Brexit could disrupt these supply chains, as import duties are re-imposed and delivery schedules are disrupted by the introduction of as standard 3rd country import on EU27/UK trade at ports of entry which lack the border post infrastructure to efficiently carry out such controls. These disruptions are then likely to carry commercial consequences for West African cocoa exporters (Ivory Coast and Ghana). This needs to be seen in a context where in 2016 cocoa beans, paste, butter and powder accounted for 40.9% of the total value of African agro-food exports to the EU. However it should be noted 2017 saw a dramatic increase in UK cocoa bean imports (+74%), partially reversing the earlier trend in declining imports. This may well form part of broader chocolate industry preparations for Brexit. However, it is unclear whether this broader trend would be of any assistance in addressing the specific challenges Brexit will give rise to for Fairtrade chocolate supply chains, given the traceability requirements along these supply chains. UK extra-EU imports of f Cocoa Beans, Paste, Butter and Powder
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Source
(1) Traidcraft, ‘Brexit no-deal: a view from a UK SME’, 24 August 2018
https://www.traidcraft.org.uk/traidcraft-in-depth/2018/8/24/brexit-no-deal-a-view-from-a-uk-sme
(2) Foodnavigator.com, ‘Shadow of no-deal Brexit looms large as UK food makers see increased costs’, 6 august 2018
https://www.foodnavigator.com/Article/2018/08/06/Shadow-of-no-deal-Brexit-looms-large-as-UK-food-makers-see-increased-costs
(3) Euromonitor International, ‘Chocolate Confectionery in the United Kingdom’ July 2017
https://www.euromonitor.com/chocolate-confectionery-in-the-united-kingdom/report
(4) Bord Bia, ‘Confectionery’
http://www.bordbiavantage.ie/market-information/sector-overviews/confectionery/
(5) CBI, ‘CBI Product Factsheet: Cocoa in the United Kingdom’
https://www.cbi.eu/sites/default/files/market_information/researches/product-factsheet-united-kingdom-cocoa-2016.pdf