Summary
There area host of Brexit related uncertainties overhanging the negotiation of ACP-UK supply contracts for 2021, which threaten to increase costs to such an extent as to erode the profitability of a range of ACP exports to the UK market. ACP short shelf life product exports along triangular supply chains are likely to be most severely affected. The currency issue will also affect direct ACP exports. How these short-term issues are dealt with, could carry long term implications, especially for small scale ACP exporters. Public policy interventions to support Codes of Conduct for dealing with the distribution of additional costs, based on the principles enshrined in the EU UTP directive, could usefully be launched. In the EU, traders in short shelf life products would appear to have a long term vested interest in short term burden sharing initiatives; otherwise ACP exporters will be compelled to seek out new direct routes in serving UK markets.
The Grocer has highlighted the problems the profound uncertainties around the future basis for EU/UK cross border trade are throwing up in supply contract negotiations. There is no clarity on the level of extra costs the culmination of the Brexit process will give rise to or how these extra costs will be distributed between partners within any given supply chain.
While the most obvious area of uncertainty relates to the tariff treatment on mutual EU/UK trade, there are a multiplicity of additional non-tariff costs which are now likely to arise and which are difficult to accommodate within current commercial contract negotiations. Many of these additional non-tariff costs will also affect ACP supply chains which serve the UK market via distribution channels which require the crossing of an EU/UK border.
The Grocer article highlighted how normally ‘the party responsible for paying these costs, filing the paperwork, and taking on the financial risk of importing goods is determined by the ‘Incoterms’ set out in each commercial contract’ (‘incoterms’ – international commercial terms are a predefined set of commercial terms published by the International Chamber of Commerce and widely used in international commercial transactions).
Currently contracts to supply UK supermarkets are established on a ‘delivered duty paid’, or DDP basis. This means the ‘supplier is primarily responsible for the import process.’ However, The Grocer article noted how ‘alternative Incoterms can be specified to distribute the burden differently’, to ensure the whole of the burden of uncertainty is not placed on the shoulders of third country suppliers. This issue needs to be seen against a background where a situation could well arise of ACP suppliers having committed to supplying UK supermarkets through distribution hubs in the EU27 at a price established on the basis of historical costs, when in fact the UK’s withdrawal from the EU customs union will generate substantial additional costs, in serving the UK market along these supply chains.
These additional costs will primarily be generated in three main areas:
- New trade administration and inspection costs arising from the creation of an entirely new EU/UK customs border and autonomous UK phytosanitary import control regime.
- A need to adjust established cargo “Groupage” practices, to take into account the application of new UK/EU border controls, the basis of which has still to be clearly defined.
- Reduced availability of road haulage services along cross channel routes, as EU27 hauliers become reluctant to tie up vehicles in the extensive traffic jams which are now seen as inevitable in the south east of England from 1st January 2021; with a consequent dramatic increase in road haulage costs.
The question then arises: who along the supply chain will carry these additional costs?
Sainsbury’s has told its suppliers ‘they must continue delivering goods DDP and therefore bear the costs of all tariff and customs arrangements’. Shane Brennan, CEO of the Cold Chain Federation has warned ‘there’s a whole range of complications around who owns what in the process’, with ‘lots of places where these decisions haven’t yet been made’. He describe the issue of the distribution of the additional costs which the final stages of the Brexit process is likely to give rise to, as the ‘biggest single Brexit risk to the food chain’, adding ‘there are a lot of nasty surprises coming if people aren’t on top of this’ issue (1).
Against this background, the Cold Chain Federation CEO advised ‘suppliers to begin negotiations immediately with supermarkets, otherwise “they might find the bigger chains hold them to that [DPP] and say, ‘sorry it’s in the contract’. However, it has also been highlighted how the scale of the Brexit related cost increases could be such that suppliers simply withdraw from the supply contracts and seek markets elsewhere (1).
For some ACP exporters this could create a situation where exports are not simply disrupted for the duration of the Brexit related disruptions along EU/UK road haulage routes, but where established supply arrangements are undermined, potentially irrevocably.
There are particular concerns over the distribution of the additional border clearance costs which Brexit will give rise to. Conventionally these are seen as falling on the importer not the supermarket, since these are seen as simply a cost of doing business (1).
This situation will be compounded by the likely depreciation of the £ against other major currencies in the event of a no-deal outcome to the current EU/UK trade negotiations. This has been described as Brexit’s ‘hidden monster’ in the UK’s food and drink supply chain.
According to David Sables, CEO of Sentinel Management Consultants ‘suppliers importing food into the UK could be forced to bear the immediate brunt of the costs’ linked to a fall in the value of the £. The general expectation is that suppliers should manage currency fluctuations like any other variable cost and hence will have to ‘swallow’ any losses. It was highlighted how it can take up to three months for price changes linked to currency fluctuations to feed through into typical contractual arrangements (2).
Analysts have suggested that while ‘supermarkets typically helped suppliers to hedge currency’ in normal times, the current Covid-19 linked economic and trading circumstances are far from normal. Hence, it is argued past practice may be no guide to future action.
Trade in short shelf life products arriving across EU/UK border are seen as being particularly vulnerable. Nigel Jenney, CEO of the Fresh Produce Consortium, see’s currency fluctuations as a ‘serious concern’, with a situation likely to be generated where ‘somebody in the supply chain will likely not break even’. Against this background smaller scale exporters with limited capacity to manage currency volatility are likely to be the most exposed partner in the supply chain
These currency concerns are yet another source of potential loss for ACP exporters, which will need to be taken up and addressed in contracts currently being negotiated between ACP exporters and UK supermarkets.
The UK government’s insistence that the ‘rolled over’ UK only trade agreements will ensure continuity in ACP exports to the UK market has only served to muddy the waters in regard to the challenges ACP exporters using triangular supply chains in serving the UK market will face from 1st January 2021. For those ACP exporters using triangular supply chains in serving UK markets the UK governments ‘rolled over’ Continuity Agreements are likely to singularly fail to provide continuity in current trade into these UK markets.
| Comment and Analysis While these contractual issues are seen as primarily an issue in EU/UK trade, given the ongoing uncertainties around future EU/UK trade arrangements, the issue of the who along the supply chain will carry the additional non-tariff costs generated by the culmination of the Brexit process, will be of critical importance to ACP exporters of short shelf life products who use triangular supply chains in serving the UK market.This could see the ACP exporter being expected to carry the whole burden of additional border clearance and logistical costs as well as the whole of the currency depreciation risk. As Shane Brennan argued there would appear to be an urgent need to take these issues up in current supply contact negotiations so they can be explicitly and equitably addressed.However, along many ACP agri-food sector supply chains the issue arises as to how well positioned ACP exporters are to effectively call for a system of burden sharing in managing likely cost increases resulting from the culmination of the Brexit process. There would appear to be a need for the adoption of a proactive public policy approach on this issue, based on the principles which the UK government endorsed in the formulation of the EU’s Unfair Trading Practices directive (which drew heavily on the UK’s own Groceries Code Adjudicator experience). Without clear public policy guidance, there is a distinct possibility it will be the relatively small ACP exporters of short shelf life products who will find themselves wholly bearing the burden of the additional costs which are projected to arise along triangular supply chains in the first months of 2021 as a result of the culmination of the Brexit process (for details on the principles which should underpin public policy guidance see companion epamonitoring.net articles ‘Role of UK Groceries Code Adjudicator could be extended’, 17 July 2017, ‘Calls for Stricter EU Measures Against UTPs’, 1 November 2018 and ‘Impact of Yellow Vest Protests on Cameroonian Pineapple Exports Highlights Importance of Tackling UTPs along ACP-EU Supply Chains in Context of Potential ‘No-Deal Brexit’, 13 May 2019). Indeed, given ACP triangular supply chains will be worst affected, it can be argued there is also a need for public policy guidance at the EU level, to support the establishment of a Code of Conduct of Best Commercial Practices when dealing with developing country suppliers, given the serios costs increases which will be faced along these supply chains from 1st January 2021. It can be argued EU traders in short shelf life products themselves have an interest in supporting such burden sharing initiatives. In the absence of such burden sharing arrangements ACP exporters may be forced to seek out new direct routes to serving UK markets, which avoid disruptions along EU/UK road haulage routes. This would then divert this existing trade away from EU27 traders. This needs to be seen in a context where some freight forwarding industry insiders specialising in third country trade to the UK via the EU ‘are expecting to see a 20% reduction in volumes’ in the face of the additional costs which will be faced in moving goods across EU/UK borders (3) (see companion epamonitoring.net article, ‘Effective Engagement with Expanded Freight Forwarding Sector Seen as Critical to Future UK/EU Border Clearance Operations’, 26 November 2020). Any failure to get to grips with the issue of the equitable distribution of the additional costs generated by the culmination of the Brexit process would be likely to greatly compound the trade and production disruptions already faced in 2020 along ACP short shelf life products supply chains, as a result of the Covid-19 pandemic. The effects of these disruptions remain strong, given the resurgence of infections during the second wave of the pandemic, which is once again leading to partial, yet still extensive, ‘lock downs’ across Europe. |
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) The Grocer, ‘Currency is Brexit’s hidden monster, food and drink suppliers fear’, 23 October 2020
https://www.thegrocer.co.uk/brexit/currency-is-brexits-hidden-monster-food-and-drink-suppliers-fear/649663.article
(3) The Loadstar, ‘Not ready for Brexit means a hairy January for trade’, 9 November 2020
https://www.fpcfreshtalkdaily.co.uk/single-post/not-ready-for-brexit-means-a-hairy-january-for-trade