Summary
UK retailers with operations in the EU are counting the costs of the UK’s exit from the EU single market, with a fundamental restructuring of supply chains looking necessary if the affected UK companies are not to lose market share in EU27 countries. This is particularly the case since there continues to be little progress towards the obvious short-term solution, a formal agreement on the ‘temporary’ alignment on UK regulatory requirements with existing EU standards. Rather than pursuing this option the UK government has announced a major regulatory review which will include a review of the use of the EU’s ‘precautionary principle’ approach and its replacement with a ‘proportionality principle’. Such a move can only complicate efforts to find agreements which will restore the smooth flow of goods across EU/UK borders. Against the background of the need for restructuring of supply chains ACP agri-food exporters need to identify how they will adjust their export operations in order to fit into these new restructured supply chains. Early adjustments could help individual ACP exporters sustain and even gain market share, while a failure to adjust could see a reduction of overall exports to the UK as the onward trade from the UK to EU markets grinds to a halt.
Discussions over the likely impact of the ending of the grace period in mainland UK-Northern Ireland trade on the operation of UK supermarkets in Northern Ireland, has brought into sharp focus the enormity of the challenges faced in moving agri-food products across the UK/EU border on the basis of the ‘thin’ UK/EU trade agreement concluded at the end of December 2020.
The Chair of Marks & Spencer’s (M&S), Archie Norman, has highlighted how in serving M&S stores in the Republic of Ireland, the company now has to complete ‘40,000 pages of customs documents a week to get goods into Ireland’ (this would triple if the same controls were applied to mainland-Northern Ireland trade from 1 October 2021) (1). According to Mr Norman M&S now has to employ 14 full time veterinarians ‘simply ticking boxes and filling in forms’, in order to document compliance with EU requirements. He pointed out how sandwiches for example, now needed ‘three veterinary certificates’ to cross a UK/EU border (2).
For some short shelf-life products previously shipped to M&S stores in Ireland, the company has simply decided to end exports from the UK in order to avoid the risk of delays and spoilage (this includes prepared sandwiches). According to Mr Norman checks on goods crossing over from the UK were threatening M&S operations in the Republic of Ireland (2).
Mr Norman described current EU customs arrangements as ‘totally unsuited’ to a ‘modern fresh food supply chain between closely intertwined trading partners.’ Mr Normal called for ‘pragmatism’ in finding solutions for the challenges now faced. He acknowledged a ‘temporary Swiss-style veterinary agreement’ between the EU and UK would offer a solution, describing it as ‘by far the best way of delivering a smooth trade flow’ (2). However, he also acknowledged the UK has rejected such a solution, proposing instead a ‘trusted trader’ scheme for mainland UK/Northern Ireland trade. However, this idea of an ‘honesty box’ system is seen as unacceptable, given on-going efforts of the UK to trivialise what is at stake and the fundamental lack of trust in the integrity of nominal UK policy commitments resulting from ‘consistent unilateral deviation’ from agreements jointly agreed (3).
Despite this situation, urgent solutions would appear to be needed, given the lapsing of the grace period on mainland UK-Northern Ireland ‘border’ controls in October 2021 and the UK’s recently launched regulatory review.
According to a UK government press release, this regulatory review includes the option of moving away from ‘the EU’s excessive use of the precautionary principle’ and adopting instead what the UK government describes as a ‘proportionality principle’. This would aim to focus regulations on ‘outcomes, not processes and be proportionate to the issues and impacts on businesses and people.’ For the UK government the issue is about ‘taking back control’ over the regulatory process on a basis which works best for British business, workers, and the wider economy (4).
However, the UK government needs to recognise that securing markets in the EU will require complying with EU regulatory requirements on a cost competitive basis. This needs to be seen in light of the so called ‘Brussels effect’, which has seen the EU acquire a role as the world leading global standard setter in the agri-food sector (5). This see’s international companies adopting their production processes to EU requirements simply because of the size of the EU market (447 million relatively high-income consumers, relative to a UK market of 68 million) and the extra costs involved in producing different products for markets with different regulatory standards. This is a particularly important issue in the agri-food sector for internationally traded products.
It is against this background, any movement away from the EU’s precautionary principle in the setting of regulatory standards would only be likely to complicate the conclusion of EU/UK agreements which would restore the previous smooth flow of goods between the UK and all areas of the EU single market.
| Comment and Analysis It would appear as if, now the costs arising from the absence of formal regulatory harmonisation are being felt, UK supermarket chains are belatedly recognising the benefits previously gained from being party of the EU single market. With these costs not having been faced since 1993, many businesses operators have no personal recollection of the costs which the absence of regulatory harmonisation generates. Suppliers in other non-EU countries have long been aware of these EU requirements and associated costs and hence have built these into their business model. Having to adjust the existing UK business model to the realities, which face all third countries which have not concluded formal agreements with the EU in the relevant regulatory areas, is proving difficult and costly.However, it simply needs to be recognised, it is normal for the EU to insist that all imported products meet the requirements necessary for placing such products on the EU market and that compliance be verifiably documented. Now the UK has stepped outside of the EU regulatory regime, by choosing to leave the EU single market, compliance with EU requirements needs to be demonstrated before UK products can be placed for sale on the EU. Currently the burden of demonstrating compliance falls on individual UK companies seeking to place goods for sale on the EU market. This financial burden for UK businesses could most simply be removed by the UK agreeing to align UK standards with EU regulatory requirements. Such a ‘temporary’ alignment arrangement, while a longer-term framework for dealing with this issue is set in place is seen by the EU as offering the most ‘pragmatic’ solution. So far, the UK government has insisted it has no intention of agreeing to such regulatory alignment, even on a temporary basis. This is generating a situation where UK businesses seeking to export to Ireland and other EU27 markets will need to provide documentary evidence of compliance with EU regulatory standards and be subject to inspections of such goods before they can be placed for sale on the EU market. The new business level costs this generates is a product of the policy choices made by the UK government in regard to the basis for the UK’s withdrawal from the EU regulatory framework. These costs were not inevitable consequence of the result of the UK’s withdrawal referendum, nor are they a product of a punitive application EU rules. Rather these additional costs now facing UK businesses are a logical consequence of the policy choices made by the UK government since the 2016 referendum, in regard to the basis on which the UK’s withdrawal from the EU would take place. Against this background if the UK government continues with this approach, companies such as M&S will have no option but to a) Restructure their supply chains for serving Irish market, (in both the or b) Lose out to competition from suppliers who have re-orientated their supply Against this background, a critical issue for ACP exporters who currently feed into UK supply chains serving Irish markets is: how will they need to adjust their export operations in order to fit into these new restructured supply chains? This is an important issue since many retailers and wholesalers are simply passing the new costs generated by the new EU/UK regulatory and customs border back to their suppliers. This includes suppliers from ACP countries. It is in this context, that those ACP exporters who are able to adjust early to the recent changes will be better placed to sustain current overall levels of exports to customers in Ireland and other EU27 markets traditionally supplied along UK based supply chains. Those who fail to make such adjustments are likely to find themselves exporting less to the UK overall, as the onward trade to EU member states grinds to a halt. What is clear, is that despite the conclusion of a duty-free/quota-free EU/UK trade agreement at the end of 2020, there is little prospect of substantive progress on any of the trade related areas which are causing such disruption to cross border agri-food sector trade. These disruptions are likely to continue and intensify in 2021 and indeed are likely to extend throughout 2022. Hopefully, at some point the UK government will become open to concluding the necessary agreements required to restore the smooth flow of UK agri-food goods across EU borders. However, unless adjustments to routes to markets are made now, some ACP exporters may find themselves displaced from markets to which re-entry will be extremely difficult. |
Sources:
(1) The Guardian, ‘M&S chair Brexit protocol will leave gaps on shelves in Northern Ireland’, 21 July 2021
https://www.theguardian.com/politics/2021/jul/21/ms-chair-brexit-protocol-leave-gaps-shelves-northern-ireland
(2) BBC, ‘M&S to cut Christmas products in Northern Ireland’, 21 July 2021
https://www.bbc.com/news/business-57899239
(3) BBC, ‘GB-NI grace period extension ‘problematic’ – Irish PM’, 13 June 2021
https://www.bbc.com/news/uk-northern-ireland-57459005
(4) gov.uk, ‘UK to seize Brexit opportunities and unleash innovation by overhauling approach to red tape’, 22 July 2021
https://www.gov.uk/government/news/uk-to-seize-brexit-opportunities-and-unleash-innovation-by-overhauling-approach-to-red-tape-22-july-2021
(5) see Anu Bradford, ‘The Brussels Effect’, Oxford University Press, 2020
https://global.oup.com/academic/product/the-brussels-effect-9780190088583?cc=us&lang=en&