Summary
In submissions to the UK Parliament’s Business, Energy and Industrial Strategy (BEIS) Committee the European Chocolatier Ferrero has highlighted the risks Brexit poses to the functioning of its existing pan-EU28 supply chains. Concerns arise in 3 areas: the prospect of an imposition of standard 3rd country duties; the possibility of post-Brexit regulatory divergence and inadequate post-Brexit customs arrangements. Some of the solutions advanced by Ferrero could be relevant in addressing triangular trade challenges faced by ACP exporters beyond the cocoa/chocolate sector. However the structural development implications of some of these suggestions will also need to be borne in mind.
With less than a year to go before the UK’s scheduled departure from the EU, Ferrero the Italian confectionary company that owns the British company Thornton, has warned of the ‘risk of shortages, higher prices and products turning stale after Brexit if the government goes ahead with pulling out of the single market and customs union’. Much of Ferrero’s chocolate sold in the UK is ‘manufactured in Ireland, France, Belgium, Germany, Poland and Italy’. Ferrero’s current supply chains rely on ‘the free movement of goods across borders’ and common regulations (1).
Ferrero maintained that on average tariffs applied on the raw ingredients used in Ferrero’s products could add 10% to the cost of its chocolates, with this varying depending on the recipes for individual products. This variation arises from the structure of EU import duties and supplementary levies. Ferrero argued in its submission to the BEIS Committee that ‘if the UK were to replicate these tariffs on imports, this would be one of the biggest single sources of cost faced by our company’ (2).
Ferrero also has major concerns related the future non-tariff barriers which could emerge on mutual EU27/UK trade. There are two dimensions in this area: those arising from ‘regulatory divergence’; and those arising from ‘inadequate customs arrangements’ (2). These non-tariff dimensions are seen as being ‘of greater significance’ than the tariff issue.
Particular concerns exist around the possible divergence of UK regulations from EU standards. This it is held ‘would complicate Ferrero’s business model’ (1). This dimension includes not only basic product standards but also labelling laws, where it was estimated divergence could increase packaging costs by 10% and reduce product choice. However this danger could be reduced if labelling schemes were voluntary for chocolate products not mandatory requirements (2).
On the issue of ‘inadequate customs arrangements’ Ferrero claims once the UK leaves the customs union this could lead to shortages with ‘products going stale as they wait in storage at Dover and Calais’. It would also affect the export operations of Ferrero’s UK subsidiary Thornton whose ‘products are manufactured in Alfreton, Derbyshire, but sold across Europe’. A key concern for Ferrero is the impact of delays on the shelf life of their products (2). Ferrero argues ‘the impact of delays in customs must be acknowledged as a serious risk’ (1).
The more extensive use of ‘trusted trader’ schemes could it is argued mitigate some of these risks. Under ‘trusted trader’ arrangements there is ‘pre-accreditation of shipments’, with ‘the responsibility to ensure trucks entering the UK are free from clandestine goods or travellers’ resting ‘primarily with the “trusted trader” rather than with the Government’ (2).
| Putting the UK-EU27 Chocolate Trade in Context Unlike other food and drink products in the course of the first 9 months of 2017, despite the UK’s impending departure from the EU chocolate exports to the EU grew faster than to non-EU markets (+7.1% compared to +5.1% for chocolate in value terms; +12.5% compared to +18.2% for the value of all food and drink products). EU27 countries take around 73% of UK chocolate exports, with chocolate being the 3rd main food and drink product export in value terms after whiskey and salmon (3).This chocolate trade into EU27 markets post Brexit will be influenced by the UK’s tariff policy adopted in the sugar sector and the extent to which this remains aligned with that of the EU. As was acknowledged by Tate and Lyle Sugar in its November 2017 submission to the Business, Energy and Industrial Strategy (BEIS) Committee any divergence in the UK’s sugar tariff policy could greatly complicate rules of origin requirements for chocolate and confectionery product under any future EU27/UK free trade area agreement (5). This is well illustrated by the provisions of the EU-Canada CETA where ‘products containing more than a certain % of non-EU produced sugar are excluded and will be taxed’ (4). Given the structural deficit the UK faces in the sugar sector, future UK sugar tariff policy is likely to prove politically contentious.Trends in UK Chocolate Exports
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Ferrero has called for the transition period in EU27/UK trade relations to be as ‘long as necessary to allow business to plan sufficiently for operating under a new UK-EU FTA’ (2), something which the UK government is reportedly considering (1).
In terms of trade with non-EU countries Ferrero highlighted the benefits the UK secures from the ‘53 FTAs that the EU has secured around the world’, which will need to be rapidly replaced by the UK government once preferential EU trade agreements with 3rd countries no longer apply to the UK. Illustrative in this regard is the EU-Canada Comprehensive Economic and Trade Agreement which entered into force on 21st September 2017, which eliminated duties on chocolate imports from the EU ‘which had been up to 10%’ (4). Amongst ACP countries, South Africa is acknowledged as an important export market for Ferrero’s UK operations, while in terms of maintaining access to imported raw materials at the lowest possible tariffs, reference is made to Ghana, Cote d’Ivoire, Peru, Brazil and the USA.
| Comment and Analysis
In the cocoa product and chocolate sector actual EU import duties levied consist of 3 elements: · the standard duty (8.3%); · an agricultural component; and · an additional duty on the sugar content. Actual final import levies charged thus depend on the ingredients in individual products. The figure of a 10% cost increase is thus an average across Ferrero’s whole product range. Thus in terms of future trade, while the UK is committed to abiding by all EU rules and regulations up to 31st December 2020, what happens subsequently is unclear. Future UK tariff policy on chocolate products is not just about whether or not the UK continues to apply current EU import tariffs on chocolate from 1st January 2021 (as it is committed to doing so in the immediate post-Brexit period), but also about the future of the UK’s unilateral agricultural trade policy (i.e. whether the UK continues to apply CAP related levies) and the future of the UK’s sugar sector policy. Resolving the future treatment of mutual EU27/UK trade in cocoa products (where a sugar levy is also applied on cocoa powder) and chocolate is thus likely to require far greater clarity on UK agricultural and agricultural trade policy post 1st January 2021 than is currently available. This will require the twenty one month transition period between 30th March 2019 and 31st December 2020 to be effectively utilized to thrash out the details of future UK domestic agricultural policies, future UK agricultural trade polices at the global level and the future UK trade policy to pursue towards the EU, with all of these dimensions being inter-linked. The concerns expressed by Ferrero over the ‘serious risks’ resulting from customs delays at channel ports has a far wider relevance than Ferrero’s operations and the trade in cocoa products and chocolate. Indeed, it has potentially serious implications for a range of ACP mainly horticulture and floriculture products exported to the UK via Holland, Belgium and France. In this context some of the solutions put forward by Ferrero have a wider relevance. For example, the proposed expansion of the “trusted trader” scheme alongside the introduction of technological solutions for advanced clearance of cargoes could be expanded to cover the onward forwarding of ACP agro-food products landed in a EU27 member states before onward shipment to the UK. This could be particularly relevant in the horticulture and floriculture sector and even in the banana trade. However it needs to be recognised that such solution carry implications for the structure of development of ACP agro-food sectors. Such solutions serve to create a structural advantage for EU companies with investments in production in ACP countries over local ACP suppliers. Already the evolution of EU SPS controls has created a situation where independent Kenyan horticulture exporting companies find it advantageous to either sell out to or go into joint ventures with EU operators who have a better understanding of EU SPS requirements and an inside track in securing low cost clearance. Ferrero’s call for the transitional period in EU27/UK trade to be as long as necessary could be extended in modified form to the question of continued ACP duty free-quota free access to the UK market. It can be argued the existing duty free-quota free access enjoyed by ACP and LDC exporters should be extended not until the end of the EU27/UK transition period but as long as is required to conclude fully WTO compatible ‘UK-only’ FTAs which address all ACP concerns over the impact of post-Brexit UK policy developments on the future value of existing duty free-quota free access. Finally while ACP cocoa exporters clearly have a shared interest with companies like Ferrero in preserving their existing duty free-quota free access to the UK market, these interests diverge where Ferrero wishes to see duty free-quota free access to the UK market extended to Brazil and the USA. Such a course of action could potentially complicate efforts of African cocoa bean exporters to move up the value chain in serving the UK market; a process which potentially could be stimulated if a ‘hard’ Brexit were to occur and standard 3rd country tariffs and other standard3rd country import requirements were to be applied to EU27/UK trade. |
Sources
(1) The Guardian, ‘Brexit means eggs sit: Ferrero warns of stale Easter chocolate’, 30 March 2018
https://www.theguardian.com/politics/2018/mar/30/brexit-means-eggs-sit-ferrero-warns-of-stale-easter-chocolate
(2) UK Parliament, Business, Energy and Industrial Strategy (BEIS) Committee ‘Evidence from food and drink manufacturers warns of dangers of ‘no deal’ – Written evidence from Ferrero UK’, November 2017
https://www.parliament.uk/documents/commons-committees/business-energy-and-industrial-strategy/Written-evidence/written-evidence–Brexit-food-and-drink.pdf
(3) Confectionerynews.com, ‘British chocolate exports to the EU continue to grow’, 27 November 2017
https://www.confectionerynews.com/Article/2017/11/27/British-chocolate-exports-to-the-EU-continue-to-grow
4) Confectionerynews.com, ‘EU chocolate export to Canada set to rise as tariffs lifted’, 27 September 2017
https://www.confectionerynews.com/Article/2017/09/28/EU-chocolate-exports-to-Canada-set-to-rise-as-tariffs-lifted
(5) UK Parliament, Business, Energy and Industrial Strategy (BEIS) Committee ‘Evidence from food and drink manufacturers warns of dangers of ‘no deal’ – Written evidence Tate & Lyles Sugars (BRF0012)’, November 2017
https://www.parliament.uk/documents/commons-committees/business-energy-and-industrial-strategy/Written-evidence/written-evidence–Brexit-food-and-drink.pdf