Summary
UK and EU dairy associations are seeking to develop a common approach to avoiding Brexit related disruptions of the existing dairy trade. While the UK governments white paper proposals appear aimed at remaining as close as possible to the single market and customs union, while formally leaving both, it is unclear whether these UK proposals would be consistent with the ‘redlines’ the EU has established in order to maintain the integrity of the single market and the alignment of its trade policy with WTO rules. The potential for ‘terrible market turbulence’ which a poorly manage Brexit process could give rise to in the dairy sector is an issue of concern to ACP countries, since as Dairy UK and the EDA position paper highlights, the last time EU exporters lost access to 3rd country markets (the Russian import embargo) this saw a massive expansion in EU exports of milk powders to Africa. This has served to further undermine efforts to develop local milk-to-dairy supply chains in Africa.
As part of their engagement with the evolving Brexit process the ‘Dairy UK and the European Dairy Association (EDA) have jointly developed a ‘Future UK-EU Dairy Framework’ setting out the outcome the dairy sector’ wished to see achieved through the current EU/UK Brexit negotiations. In order to prevent disruption of the functioning of current dairy supply chains a framework is sought which:
- addresses the issue of tariffs to be applied on future EU/UK mutual trade in dairy products;
- ensures continued access to the necessary skilled labour;
- avoids regulatory divergence; and
- minimises delays at border crossings.
The EDA maintains ‘Brexit has the potential to create a completely new scale of milk crisis’ dwarfing the earlier crisis caused by the closure of the Russian market to EU dairy exports. It was highlighted how the ‘volumes of EU27 butter sold in the UK are three times higher than EU28 butter exports to Russia’, while EU27 cheese exports to the UK are ‘twice the volumes that were sold to Russia’ (1).
‘In 2016, cheese exports from continental EU countries to the UK totalled 466,000 tons, in addition to 350,000 tons of yogurt products’. The milk equivalent tonnage of this trade is put at 3.9 million tonnes, ‘equivalent to Austria’s total annual milk production’. It is held re-routing goods to other markets is likely to be more difficulty in response to Brexit than it was in response to the Russian import embargo (2).
This needs to be seen against the background of the ‘extremely precarious situation’ in the EU dairy industry, with ‘terrible market turbulence threatening to set in if the UK government and the EU don’t reach any agreements in good time’ (2).
Against this background the first demand from Dairy UK and the EDA is to avoid the re-imposition of tariffs, which based on 2016 levels of trade would see UK importers paying more than €1.7 billion in duties on imports of dairy products from the EU and EU27 importers paying more than €660 million on dairy products from the UK. This would translate into extra costs to consumers of €18 per person per year (1).
The joint report calls on the UK to ‘remain part of or at least as close as possible to, the EU Single Market and the Customs Union’, so as to ‘secure the free movement of milk and dairy products between the EU and the UK with no tariffs or quotas from either side for milk and dairy products’ and limit the effects of non-tariff measures (1).
| Comment and Analysis Remaining ‘part of or at least as close as possible to the EU Single Market and the Customs Union’ is something which the UK government appears to be trying to do through the future framework for UK/EU27 relations set out in the July 2018 White Paper released following the Chequers UK cabinet ‘away-day’ on the 6th July.However it is unclear whether the UK’s proposed mechanisms for remaining as close possible to the single market and customs union will be acceptable to the EU, given the redlines the EU has established in order to maintain the integrity of the single market and the alignment of its trade policy with WTO rules (for more details on the political and practical complexities faced in responding positively to the UK white paper see companion epamonitoring.net article ‘What Could the UK’s July 2018 Negotiating Position Mean for ACP Agro-Food Producers’, 13 July 2018).From a private sector perspective in regard to the application of non-tariff measures, while many of the challenges faced arising from a ‘hard’ Brexit could be individually manageable, the multiplicity of the individual actions required could prove problematical in the short term for exporters lacking nay experiences in the application of these types of controls on trade between the UK and EU27 member states (for more details on the nature of EU 3rd country controls on imports of animal products see companion epamonitoring.net article ‘Getting to Grips with the Import Controls Required If the UK Is Treated As Just Another 3rd Country, 29 July 2018) .Even in the longer term under any potential UK-EU27 FTA these non-tariff measures could still prove highly disruptive unless new comprehensive arrangements can be set in place, which are compatible with the non-discrimination provisions of WTO rules on the treatment of 3rd countries and from an EU perspective, the functioning of the EU single market under the jurisdiction of the European Court of Justice. The scale of the ‘terrible market turbulence’ a hard Brexit could give rise to is potentially a serious issue for ACP countries seeking to promote the development of local milk-to-dairy supply chains. The August 2014 Russian import embargo triggered not only a crisis in the EU dairy sector but saw a large scale expansion of EU exports of milk powders to ACP markets, mainly to Sub-Saharan Africa. This further expansion of low priced EU milk powder exports, which extended the import surge which the 2007/08 EU market crisis gave rise to, further constrained efforts to develop local milk-to-dairy supply chains in Africa. Even into 2018 low international milk powder prices were still being undermined by the disposal of accumulated EU milk powder stocks at even lower prices than those prevailing on depressed global milk powder markets (see companion epamonitoring.net article ‘Ageing EU SMP Intervention Stocks See EU SMP Prices Discounted’, 6 July 2018). In this context a ‘hard’ Brexit from April 2019 would provide no chance for skimmed milk powder markets to recover and would be likely to see EU milk powder stocks once again increase, despite the current EC efforts to dispose of accumulated stocks. Given the investment and trade strategies which have been set in place by EU dairy companies since 2013 aimed at strengthening their market position on expanding African dairy markets, any disruption of EU27/UK dairy trade would be likely to see an expanded Africa orientated export drives by these EU dairy companies. With the exception of the South African market, where a broader range of dairy products are exported, for most sub-Saharan African countries this would be primarily focussed on expanding opportunities for the use of milk powders in serving expanding African dairy demand for milk products (for the scale of the existing EU trade into African markets for fat filled milk powders see epamonitoring.net article companion article ‘Strong Expansion of EU Fat Filled Milk Powder Exports to West African Markets Resumes’ 19 April 2018). This could then serve to further constrain opportunities for the development of local milk-to-dairy supply chains across sub-Saharan Africa. |
Sources:
(1) Dairyreporter.com, ‘Brexit could hurt dairy in UK and Europe, EDA and Dairy UK say’ 26 June 2018
https://www.dairyreporter.com/Article/2018/06/26/Brexit-could-hurt-dairy-in-UK-and-Europe-EDA-and-Dairy-UK-say
(2) blog.drinltec.com, ‘The future of the dairy industry: A harder Brexit than expected on the cards’, 29 March 2018
http://blog.drinktec.com/brexit-dairy-industry/