Summary
While even under an EU/UK FTA mutual trade in agri-food products will be adversely affected, under a no-deal outcome these effects would be far more severe. Thus, under an FTA it is estimated UK food exports to the EU would fall 22.5%, while under a no-deal outcome the decline would be 63.2%. The corresponding figures for EU food exports to the UK are 22.6% and 61.7% respectively under an FTA or no-deal scenario. This would have substantial market and wider trade consequences. The knock on effects of the outcome of the EU/UK negotiations will be felt in 5 main areas:
o The effects on ACP triangular supply chains serving the UK via the EU.
o The effects on ACP triangular supply chains serving the EU via the UK.
o A possible further revision of the UK’s MFN tariff schedule under a no-deal outcome.
o New opportunities for increased direct exports to the UK market.
o The diversion of displaced EU/UK exports to targeted ACP market.
ACP agri-food sector enterprises and governments will need to make preparations for dealing with the trade and market consequences which will arise under both an EU/UK FTA and more seriously, the growing prospect of anon-deal outcome to the ongoing negotiations.
Arla has commissioned a report from LSE Consulting’s Trade Policy Hub on the ‘Vulnerabilities of Supply Chains Post-Brexit’. It provides a ‘critical analysis of the “realistic” scenario for Brexit’ and its likely ‘implications for product costs and availability’ in both the dairy sector and the wider food and beverage sector. It also seeks to highlight the scope for mitigation measures under both a no deal and EU/UK FTA scenario (1).
The report highlights how ‘consumers in the UK are highly dependent on products originating in the EU’, with 40% of all food products consumed in the UK coming from EU countries. UK consumers are thus ‘highly exposed to changes in the future trading relationship.’ This needs to be seen in a context where ‘the food and beverage sector will be one of the worst affected by additional trade barriers and tariffs.’ This is likely to result in ‘reduced product availability of EU products, reduced traded volumes across the UK and the EU, and higher prices for all types of products (branded, unbranded, and specialty)’ (1).
The analysis seeks to distinguish between short-term business impacts and long-term supply chain effects. The analysis concludes that while an EU/UK FTA will ‘go a long way to minimise disruption and the impact in the food sector and on consumers… even in the case of an FTA, significant barriers to trade will be imposed through non-tariff barriers which will still negatively affect the sector’ (1).
The report highlights how while tariffs imposed on agri-food products under a no-deal scenario are likely to be higher than in other sectors (some 4 times higher than the average for imports to the UK and 6 times higher for imports to the EU), increased border controls and regulatory administrative costs will also arise under both scenarios.
For example, it is estimated the costs of rules of origin checks could impose an additional 8% cost; while import declarations on mutual trade are estimated to amount to an annual cost of €4 billion. The lack of clarity over how the UK’s Border Operating Model will apply in practice and the operational absence of planned IT system could generate particularly high non-tariff costs in the early post-Brexit period (1).
In terms of the tariff effects of a no-deal outcome to the ongoing negotiations ‘the average tariff when exporting food and beverage products from the EU to the UK will rise from 0% to 17.7%’, while ‘average tariff when exporting food and beverage products from the UK to the EU will rise from 0% to 21.7%’ (1).
In terms of the overall price effects of the various scenarios on the future basis for EU/UK trade in food and drink products it is estimated that in the case of UK imports:
- ‘the average price increase for branded and speciality products imported from the EU under an FTA is estimated to be 9% and to be 26.5% under a no deal’:
- ‘the average price increase for unbranded and more substitutable products imported from the EU under an FTA is estimated to be 7% and under a no deal to be 12.5%’ (1).
In the case of EU imports:
- ‘the average price increase for branded and speciality products imported from the UK under an FTA is estimated to be 8.5% and to be 9% under a no deal’:
- ‘the average price increase for unbranded and more substitutable products imported from the UK under an FTA is estimated to be 0% and under a no deal to be 13.2%’ (1).
Specialty dairy products in the UK such as ‘Halloumi, Gorgonzola, Feta and Roquefort are estimated to experience price increases of 55% under a no deal scenario’, while ‘speciality prosciutto and bratwurst could see increases of 31% in the UK’ (1). However, where non-tariff issues are most important, these estimates are likely to be under-estimates, given the difficulties faced in modelling the impact of ongoing uncertainties related to ‘the impact of port waiting times, checks on POAO, firms navigating the new border system & Rules of Origin, and the smooth running of the new declaration system’.
Thus, in the event of a shallow FTA the lower estimates of the impact of the final Brexit process is likely to be higher than the lower end of these estimates given the absence of other necessary agreements (e.g. the absence of an agreement on the granting of third country treatment for EU exports of animal products, which would ‘see British food manufacturers waiting in line for formal listing before they can export anything further to the EU require’ (2))
In terms of the overall trade effects it is estimated that under a no-deal scenario ‘17% of product categories in the food and beverage sector will stop being exported entirely from the EU to the UK, and 20% will stop being exported from the UK to the EU’. Overall, ‘for 85% of products, the volume of trade will fall’ (1). The ‘average reduction in UK food exports to the EU is 63.2% in a no deal scenario and 22.5% under a Free Trade Agreement’, while it will see an ‘average reduction in EU food exports to the UK is 61.7% in a no deal scenario and 22.6% under a Free Trade Agreement’ (1).
Given the EU and UK are major markets for each other the potential trade displacement to other market is enormous. In some sectors these effects will begin to be felt in the final weeks of 2020, as UK exporters serving EU markets and EU exporters serving UK markets start seeking out alternative markets. In other sectors with a long shelf life and where storage space is available, trade is likely to surge in the final weeks of 2020 (see companion epamonitoring.net article ‘If Negotiations Fail No-Deal Trade Effects Will Begin to be Felt in Final Weeks of 2020’, 27th October 2020).
In terms of the dairy sector initial analysis suggests ‘exports from the EU to the UK are estimated to fall by 18% under a Free Trade Agreement and by 94% under a no deal scenario’. However, uncertainties around the implementation of the Northern Ireland protocol of the Withdrawal Agreement mean the final outcome of any future UK/EU arrangements is very uncertain in the diary sector, given the importance of the dairy trade on the island of Ireland to overall EU/UK dairy sector trade.
The report highlights how it is not just trade in final products which will be affected but also inputs to UK agriculture and inputs and intermediate products into the UK food and drink sector. Chemical inputs, for example, will face increased regulatory costs as a result of Brexit. These effects will be compounded by potential migrant labour shortages which could be severely exacerbated under a no-deal outcome to the ongoing negotiations (see box for details on migrant labour issues) (1).
| The Migrant Labour Issue in the UK Agri-Food Sector Supply Chain Beyond the trade side a no-deal Brexit could have a significant impact on labour flows to the UK given the toxic atmosphere such an outcome would generate. Already since 2016 it is estimated ‘net migration from the EU to the UK has fallen by more than 50%.’ The UK food manufacturing sector is far more heavily dependent on EU workers than the average (25% compared to 7% overall). It is highlighted how ‘the majority of EU workers in the food and beverage industry are low skilled and unlikely to meet the earnings requirements of the new points-based immigration system.’ In addition, the warehousing and transportation sectors, which are critical to the functioning of UK agri-food sector supply chains, also have a high dependence on EU migrant labour (19%). This being noted the immediate labour market effects are likely to be masked by the short term labour market consequences of the Covid-19 pandemic. Nevertheless this migrant labour issue is likely to be an important constraining factor on the ability of domestic UK producers to increase their volume of production to meet demand which can no longer be met on a commercially viable basis by imports from the EU. The long 2 to 3-year lead time for new greenfield investments also have an important bearing on the ability of domestic UK producers to respond LSE Consulting’s Trade Policy Hub ‘Vulnerabilities of Supply Chains Post-Brexit’, September 2020 |
It is acknowledged the Netherlands will be one of the worst affected countries, with this having important effects on supply chains from 3rd countries which pass through the Netherlands on route to the UK. While 3rd country supply chains serving the UK market also pass through Belgium and France the scale of this trade in the most vulnerable product supply chains is less than in the case of the Netherlands. While the Republic of Ireland will be one of the EU member states worst affected by a non-deal outcome to the EU/YK negotiations, the absence of any major 3rd country onward trade from the Republic of Ireland to the mainland UK, means ACP countries will be less severely affected
The report calls for the maintenance of tariff free trade between the EU and UK, since a no-deal outcome would be ‘devastating for the UK food sector’. This would create a situation where the UK government would either have to ‘maintain high tariffs at the expense of consumers facing significantly increased prices or reduce tariffs and expose UK producers to intense competition from all across the world which is likely to significantly undermine the UK food and drink industry’ (1).
The report also calls for ‘full recognition of food safety systems and veterinary certifications and avoiding the creation of new non-tariff trade barriers in customs and border requirements.’ However, this will require the UK government to confirm the nature of its future SPS regime as soon as possible. It is felt there is also an urgent need for the UK government to clarify ‘the UK’s Border Operating Model’, with clear guidance being provided on ‘the eligibility and procedure for simpler customs clearance and payment of customs duty’ and ensure ‘the Goods Vehicles Management System and Smart Freight Service are tested and functional before the end of the year’ (1).
Overall, it is felt the UK government has to explore deferring as many border clearance processes as possible, until after June 2021 to facilitate their efficient introduction (1).
Beyond border related issues, it is felt the UK food and drink sector will need assistance with warehousing constraints given the UK’s departure from the EU customs union and single market will coincide with peak Christmas demand, while a dialogue will need to be initiated with retailers to manage consumer fears and avoid panic buying (1).
| Comment and Analysis There are five main areas where the trade disruptions arising from the UK’s departure from the EU customs union could impact on ACP agri-food sectors. Most of these will impact on ACP exports, but under a no-deal outcome these effects are also likely to impact on some ACP domestic markets, as both EU and UK exporters (but mainly EU) seek alternative markets for products where continued EU/UK trade is no longer commercially viable as a result of the application of standard MFN tariffs which the EU has in place and the UK has announced. · Effects on ACP Triangular Supply Chains Serving the UK Via the EU The introduction of border controls and other non-tariff requirements on goods crossing an EU/UK border will add costs to ACP triangular trade as a result of a multiplicity of factors. These range from the cost of new import checks and UK/EU specific certification requirements, through the costs of port delays and traffic congestion, to increased haulage and logistical costs, as existing onward shipment models (e.g. “groupage” practices) need to be abandoned or adjusted (see companion epamonitoring.net articles, ‘Road Haulage Issues Likely to be Critical Bottleneck Along ACP Triangular Supply Chains from 1st January 2021’, 1 October 2020; ‘Will ACP Exports to the UK Be Impacted by the New UK-EU Border Control Requirements?’, 6 August 2020; Implementation of New EC Organic Products Regulation Postponed but Unresolved Brexit Issue Threatens Commercial Gains of ACP Organic Production, 15th October 2020). Currently, all of these cost increasing effects will apply to all goods crossing an EU/UK border including ACP goods shipped to the UK via the Netherlands, Belgium and France. The most vulnerable ACP supply chains are short shelf life products, air freighted and moved by road and ferry/chunnel to the UK. This mainly affects East African floriculture and horticulture exports, although exports of these products from Southern Africa, West Africa, and the Caribbean will be similarly affected (for an illustrative example, see companion epamonitoring.net article ‘Cut Flowers Sector Concerns Over Proposed UK Border Controls Highlighted’, 23 September 2020). These costs increasing effects will arise regardless of whether there is an EU/UK trade deal before the end of 2020. ACP exporters using triangular supply chains need to urgently review their vulnerability to each of the non-tariff areas which could generate additional costs, and adopt shipping strategies which reduce their vulnerability. Such adjustment strategies would need to include either moving over to direct exports to the UK or moving over to unaccompanied freight, shipped to inland UK ports with established Border Control Post infrastructure and good onward rail connections. These routes to ‘inland’ UK ports are being served by a growing number of dedicated ferry services from EU27 ports (3). This would side step some of the worst areas of UK port and traffic congestion and minimise the impact of escalating road haulage costs. At the ACP government level there is a need to secure a policy commitment from the UK and EU to establishing a ‘Green Lane’ border clearance service for goods have already been subject to phytosanitary and safety and security controls upon entry to the EU, and where duty free/quota free access is enjoyed to both the EU and UK markets. Such a policy move would be based on a reasonable risk assessment and would in no way infringe on UK sovereignty. Such a ‘Green Lane’ border clearance approach would minimise the need for physical checks on ACP goods shipped to the UK along triangular supply chains and reduce pressures on UK border control services at no risk. However, if there is no EU/UK trade deal in place, other more serious rules of origin related issues will arise for ACP products undergoing some level of processing or repackaging in the EU prior to onward trade to the UK. In terms of economic value, the most seriously affected sector is the cocoa sector, with the Netherlands and Belgium being a major source of supply of UK value added cocoa products, where relatively high MFN import tariffs would be introduced. This will increase the costs of final products in the UK and potentially feed-back into lower cocoa bean prices for West African exports, unless remedial initiative are set in place to support the promotion of sustainable livelihoods in the cocoa sector (see epamonitoring.net article Growing Support for payment of the Living Income Differential in the Cocoa Sector’, 9 January 2020). Issues could also arise in the fisheries sector, for ACP products ranging from chilled and frozen fish landed in Spanish and French ports prior to onward shipment to the UK to Pacific tuna, canned in Italy prior to distribution to all Aldi outlets (including in the UK). There would also be some problems in regard to the limited volume of bulk Caribbean rum exports, which are bottled in the EU prior to onward shipment to the UK. These issues will need to be taken up by ACP governments so as to retrofit the ‘rules of origin’ in the rolled over ‘UK-only’ EPAs, in ways which at least for an extended transitional period allow these established supply chains to continue to function without ACP originating products losing their duty free access. · Effects on ACP Triangular Supply Chains Serving EU Markets Via the UK ACP supply chains serving EU markets via the UK could face similar problems. For fresh fruit and vegetable products, this is likely to primarily impact on trade into the Republic of Ireland, with products landed in the UK and onward traded, or products which use the UK ‘land-bridge’ to serve markets in the Republic of Ireland being affected. This will require ACP exporters using the UK ‘land bridge’ to serve markets in the Republic of Ireland to explore the use of the newly established direct ferry services between EU27 member states and the Republic of Ireland (4, 5). More serious issues are likely to arise for ACP exports which are processed in the UK prior to onward shipment to the EU, with the critical issue being whether this will lead to a loss of their ACP originating status, and hence duty free access upon entry to the EU market. The main ACP supply chains so far identified as likely to be affected, include raw sugar exports which are refined in the UK prior to onward shipment to markets in the EU (e.g. for Fairtrade certified sugar) and Pacific island fully traceable sustainable certified palm oil which is refined in the UK prior to onward shipment to customers across the EU. The latter is particularly problematical, since the UK has the only palm oil refining plant in the EU entirely dedicated to the processing of fully traceable sustainably certified palm oil. These rules of origin issues will need to be taken up by ACP governments so as to ‘retrofit’ their existing EU EPAs, in ways which at least for an extended transitional period allow these established supply chains to continue to function without ACP originating products losing their duty free access. · A Possible Further Revision of UK’s MFN Tarff Schedule The recent analysis highlights how the high food price inflation effects of a no-deal UK departure from the EU customs union and single market would create a situation where the UK government would either have to ‘maintain high tariffs at the expense of consumers facing significantly increased prices or reduce tariffs and expose UK producers to intense competition from all across the world which is likely to significantly undermine the UK food and drink industry’ This latter dimension would not only pose serious challenges for the UK food and drink industry but would also pose serious challenges for preferred ACP suppliers. This would be particularly the case, if, in order to reduce competition for UK domestic food and drink producers, any further no-deal related MFN tariff review were focussed on a ‘zero production-zero tariff’ approach to the UK’s new MFN tariff schedule. This would pose particular problems for ACP exporters of bananas, palm oil, value added cocoa products, tuna fish and other fisheries products, beef products, and even sugar, given the UK’s structural deficit in sugar production. ACP governments will need to be prepared to lobby intensively to avert any move over to a ‘zero production-zero tariff’ approach to the UK’s new MFN tariff schedule, in areas where major ACP export products would be affected. · Opportunities for Increased Direct Exports to the UK In some sectors the introduction of MFN tariffs on mutual EU/UK trade will so undermine the commercial viability of this trade that it will simply cease. This includes many animal products such as beef, sheep, goat and poultry meat, and many basic dairy products. In other areas it will substantially reduce UK imports from the EU including for fisheries products and multiplicity of vegetable and even fruit products. In other areas it will increase the costs of goods processed in the EU prior to onward export to the UK (e.g. for value added cocoa products). All of these impacts will create opportunities for increased direct exports to the UK in areas where ACP countries enjoy duty free access and have an established production. This will be particularly the case in products where the reduced availability of migrant labour flows from EU member states will reduce the ability of UK producers to fill the gaps in supply. Where these opportunities lie will need to be assessed on a product by product basis by those ACP exporters with a capacity to expand direct exports to the UK. The availability of these opportunities should be factored in to strategies for the recovery of post-Covid 19 inter-continental air freight services. This process will need to be ACP private business led and be implemented in close association with partners in the UK. · Trade Diversion Effects In major livestock product areas a no-deal UK departure from the EU customs union and single market will so severely impact on mutual EU/UK trade that major export surges from both the EU and UK are likely. From an ACP perspective the worst affected sector are likely to be the poultry meat and dairy sectors, although other sectors could also be affected. ACP governments will need to ensure they have in place the trade policy tools to manage these import surges in areas where a sudden upsurge in imports could undermine domestic production or production, in areas where in response to the Covid-19 pandemic, efforts are underway to develop greater national food self-reliance. |
Sources:
(1) LSE Consulting’s Trade Policy Hub ‘Vulnerabilities of Supply Chains Post-Brexit’, September 2020
https://www.lse.ac.uk/business-and-consultancy/consulting/assets/documents/vulnerabilities-of-supply-chains-post-brexit-final-report.pdf
(2) thedairysite.com, ‘UK’s meat export market at risk as government delays securing Third Country status’, 29 September 2020
http://www.thedairysite.com/news/55926/uks-meat-export-market-at-risk-as-government-delays-securing-third-country-status/
(3) Hellenic Shipping News , ‘CLdN increasing capacity on UK Routes’, 6 October 2020
https://www.fpcfreshtalkdaily.co.uk/single-post/cldn-increasing-capacity-on-uk-routes
(4) The Irish Time, ‘Irish hauliers seek State help to bypass UK ‘land bridge’’, 21 September 2020 The Irish Times
https://www.irishtimes.com/news/ireland/irish-news/brexit-irish-hauliers-seek-state-help-to-bypass-uk-land-bridge-1.4359886
(5) Independent, ‘Nine new ferries set to launch, including ships for Stena and Irish Ferries’, 7 January 2019
https://www.independent.ie/life/travel/travel-news/nine-new-ferries-set-to-launch-including-ships-for-stena-and-irish-ferries-37686712.html