Summary
ACP supply contract negotiations for the delivery of products to the UK market along triangular supply chains are being complicated by the absence of an agreed framework for future EU/UK trade relations and the associated uncertainty around the level of new administrative and logistical costs the new border arrangements will generate. ACP exporters need to try to accommodate estimates of these increased costs into their tender offers for supply contracts currently under negotiation with UK supermarkets. If not, costly surprises could arise if supermarkets insist on current Delivered Duty Paid contract stipulations; which commonly involve all costs linked to the import process being carried by the foreign supplier. For direct ACP exports to the UK market, the prospect of a no-deal UK exit leading to a further revision of the UK’s MFN tariff regime, alongside uncertainty around the basis for the implementation of the UK’s new 260,000 tonne duty free quota for raw sugar imports, is overhanging contract negotiations for products such as bananas and sugar.
An article in The Grocer has highlighted the range of issues which arise in supply contract negotiations, given the uncertainties which surround the process of the UK’s withdrawal from the EU customs union and single market (1).
While focusing on issues related to UK imports of food products originating in the EU, a range of the issues raised will also apply to the contract negotiations for the delivery of ACP goods to the UK market via the EU, the EU market via the UK and the delivery of ACP goods to the Republic of Ireland via the UK ‘land bridge’. In particular, from an ACP perspective, there is profound uncertainty over how the extra costs generated by the introduction of new UK border controls on goods entering from the EU will be shared between different actors in the supply chain.
In terms of the costs of new customs declarations linked to UK imports from the EU, it has been estimated this will cost businesses in the UK up to £7 billion a year (1). These cost increases will occur regardless of the outcome of the currently stalled EU/UK trade negotiations (2). Part of these additional customs administration costs (which ignore additional logistical costs) will fall on ACP goods shipped to the UK market along triangular supply chains. This raises the question: who along the supply chain will be responsible for carrying the burden of these additional administrative and logistical costs which will arise as a result of the UK’s departure from the EU customs union and single market?
In addition, if the UK were to leave the EU customs union and single market without a comprehensive trade deal in place ‘average tariffs of 20% on food and drink’ would apply to UK imports of EU originating goods (1). While this tariff issue does not directly affect ACP exports to the UK via the EU, it would give rise to ‘proof of origin’ documentation requirements, which will be unfamiliar to many of the EU businesses which currently handle the onward trade in these goods to the UK market.
As The Grocer article points out, currently who carries the burden of the ‘financial risk of importing goods is determined by the ‘Incoterms’ set out in each commercial contract.’ It notes how ‘most food arriving at UK supermarkets is currently ‘delivered duty paid’, or DDP, meaning the supplier is primarily responsible for the import process.’ While it is possible to have contractual terms specifying an alternative distribution of the financial burden a new UK/EU border will create, this is likely to be a hotly contested issue (1).
It is highlighted how ‘from next year, if a supplier has agreed to deliver goods to a supermarket at a set price, there are concerns they will be forced to carry all the additional cost’ (1).
Shane Brennan CEO of the Cold Chain Federation highlights how there are ‘a whole range of complications around who owns what in the process’, with there being ‘lots of places where these decisions haven’t yet been made’. He went on to describe this issue as the biggest single Brexit risk to the food chain’, with potentially a ‘lot of nasty surprises’, if exporters did not stay on top of the issue of emerging areas of cost escalation and how these additional costs are to be distributed along the supply chain (1).
The Grocer article reports how Sainsbury’s has already ‘told suppliers they must continue delivering goods DDP and therefore bear the costs of all tariff and customs arrangements, while ‘Lidl also said it expected suppliers to pay EU import tariffs for goods delivered to its Irish business’ (1).
Logistics specialists are advising overseas suppliers to open negotiations immediately with supermarkets, otherwise they could be held to Delivered Duty Paid provisions in negotiated contracts, which mean the supplier carries the whole burden of any cost escalations which the introduction of the new EU/UK border controls generates. (1).
While major suppliers and manufacturers are likely to challenge the current approach being taken by UK supermarkets, smaller suppliers are likely to be less well placed to challenge such supermarket strategies.
In this context The Grocer article highlights the need to make a distinction between the process for passing on tariff costs and the process for passing on trade administration costs. It is argued; since tariffs are a tax they would normally be passed on to the retailer and eventually the consumer. However, customs clearance on the other hand, is an administrative burden and normally the importer has to carry this cost (1).
| Comment and Analysis While in terms of the volume of trade, these contractual concerns primarily apply to EU27 suppliers; it equally applies to ACP exporters using triangular supply chains in serving the UK market. This makes the terms and conditions of ACP supply contracts for delivery of products to the UK market along triangular supply chains which are currently under negotiation of considerable concern.This is particularly the case in regard to the additional administrative and logistical costs which the new EU/UK border will throw up for ACP exporters using triangular supply chains. Indeed, it is this dimension which is likely to be the most serious area of cost increases faced along ACP triangular supply chains. Unfortunately, this is also the most difficult area to address in supply contract negotiations.The seriousness of these cost implications will vary depending on how individual supply chains function and the unit value of the final product delivered relative to the additional costs which will be incurred. This will need to be assessed product by product and supply chain by supply chain. What is clear is that unless the issue of the distribution of additional costs along ACP triangular supply chains is taken up and addressed in current supply contract negotiations, ACP exporters could find themselves exclusively bearing the burden of these costs. This could potentially undermine the profitability of some of these triangularly traded ACP exports. There are also additional areas of uncertainty hanging over current ACP-UK supply contract negotiations for products like bananas and sugar. It has been highlighted how a no-deal UK departure from the EU customs union could lead to high levels of UK food price inflation, in a context where 85% of existing agricultural imports from the EU would face new high tariffs, with these products accounting for fully 40% of agricultural products consumed in the UK (3). This could give rise to high levels of UK food price inflation, in the context of the worst recession in 100 years. This politically unpalatable outcome could then generate demands for a revision of the UK’s MFN tariff schedule, so as to reduce these food price inflation pressures. Given UK farming concerns, this could lead to a focus on revising tariffs on food products where the UK has no domestic production interest. Under any move over to a ‘zero production-zero tariff’ approach, the tariff preferences enjoyed by ACP banana exporters would face erosion. Such a possible evolution of UK tariff policy in the face of a no-deal UK departure from the EU customs union is likely to complicate current banana supply contract negotiations. These negotiations have already been complicated in the case of Ghana, Cameroon and Cote d’Ivoire by the Covid-19 induced interruption of negotiations for UK-only ‘Continuity Agreements’. With Covid-19 related movement restrictions continuing to hold back the conduct of ‘face to face’ talks to conclude these negotiation processes, without an early UK commitment to a unilateral initiative to maintain current duty free-quota free access, similar to the Transitional Protection Mechanisms proposed in mid-October 2019, current banana supply contract negotiations could prove extremely difficult (see companion epamonitoring.net article ‘Continued Duty Free Quota Free Access to UK Market Secured but the MFN Issue Looms’, 28 October 2019). In the case of sugar annual supply contract negotiations, which are normally completed before the end of October, are facing the twin complications linked to the uncertainties over future UK tariffs to be applied to imports of sugar from EU27 countries and uncertainties over the basis of the implementation of the UK governments new 260,000 tonne duty free sugar quota. Taken together the volumes of sugar imports involved are equivalent to around of third of UK consumption. How these two major trade issues are resolved in the coming months will have a major impact on the UK sugar market. Against this background, the hard reality faced is that the principal UK raw cane sugar refiner may well use the opening of the UK 260,000 tonne raw sugar ATQ as a basis for negotiating down prices offered for ACP duty free sugar. This could potentially lead to a reduction of prices offered for ACP sugar up to the €98 per tonne currently charged on CXL quota sugar imported into the UK under the EU’s current sugar trade regime. Indeed, securing cheaper access to raw cane sugar can be seen as an existential issue for the UK’s sole dedicated raw cane sugar refiner, given the substantial under-utilization of capacity which has been a feature of the operation of its Thames refinery since the reform of the EU’s sugar regime. The final complicating factor in ACP supply contract negotiations for products which use triangular supply chains to serve the UK market is the nebulous issue of the reliability of the supply chain. This issue has already been thrown into sharp relief by the experience of the Covid-19 pandemic. Ongoing Brexit uncertainties can only compounded this issue, as supermarkets start looking for sources of supply at home or delivered via shorter more direct and reliable supply chains. |
Sources:
(1) The Grocer, ‘Suppliers and supermarkets set for post-Brexit Incoterms showdown’, 14 August 2020
https://www.thegrocer.co.uk/brexit/suppliers-and-supermarkets-set-for-post-brexit-incoterms-showdown/647411.article?
(2) Guardian, ‘Time wasting UK makes post Brexit deal unlikely says Barnier’, 21 August 2020
https://www.theguardian.com/politics/2020/aug/21/michel-barnier-brexit-time-wasting-uk-means-post-brexit-deal-unlikely-says-eu-chief-
(3) Dmitry Grozoubinski, ‘The UK’s New Tariffs under No-Deal: Unsustainable’, blog post
https://www.slideshare.net/DmitryGrozoubinski/the-uks-new-tariffs-under-nodeal-unsustainable