With Brexit now a done deal, Nick Peksa investigates what the new protocols between the EU and UK will mean for food and beverage trade. This article first appeared in ESM Issue 1 2021.
On 1 January 2021, the United Kingdom officially left the EU single market and customs union. Trade between the EU, Northern Ireland and the rest of Britain was one of the hardest issues to resolve. The UK desperately wanted to avoid a hard border between Northern Ireland and Ireland (an EU member), however, Brussels was wary of creating a back door into the EU bloc.
In a Thatcher-esque move, the UK leveraged its only bargaining chip, its coastal waters and fishing rights.
In late December, with the Brexit deadline looming and after four long years of discussions, the EU and UK negotiators finally reached an agreement in principle on the text of the new Trade and Cooperation Agreement (TCA) that will govern the relationship between the UK and the EU.
The foundation of the agreement centred around a few major points:
- an unprecedented free-trade agreement;
- ambitious cooperation on economic, social, environmental and fishery issues; and
- a close partnership for citizens’ security.
The EU-UK Agreement goes beyond recent EU free-trade agreements with other third countries, such as Canada or Japan, by providing an arrangement for zero tariffs and zero quotas on all goods. From an economic perspective, this was extremely important to the UK, as, under WTO rules, canned fish could have experienced a 25% tariff, while export tariffs on some dairy and meat products could have exceeded 40%.
The TCA, however, does not allow for the free movement of goods. All UK exports entering the EU will require customs checks and controls. The EU has very strict rules about what can enter its market when it comes to foods such as meat, milk, fish and eggs. Suppliers (‘authorised economic operators’) of agri-food consignments must self-certify that their produce fulfils all the necessary new ‘rules of origin’ (RoO) requirements.
Shipments of food products will require health certificates and will undergo sanitary and phytosanitary controls at national borders, to meet with EU standards.
Northern Ireland Protocol
In mid-December, the Northern Ireland Protocol was also agreed, in principle, and has formed a part of the divorce settlement between the UK and the EU. This accord was designed to prevent the formation of a hard border between Ireland and Northern Ireland. The specifics of this agreement are still in the process of being defined.
As a general guide, food products from Great Britain that arrive in Northern Ireland will be held to EU standards and will require border and paperwork checks. To avoid supply disruption and allow retailers to adapt, a three-month grace period has been offered.
At the time of writing, issues have already occurred as a result of the introduction of more stringent border controls. A number of retailers in Northern Ireland have already experienced stock-outs on some meat and fresh-fruit lines. As a pre-emptive measure, Marks & Spencer has announced a 5% reduction in the number of SKUs it offers. These supply issues will eventually resolve themselves, however, a set of terms relating to the new RoO could be far more damaging to the UK food industry.
New Rules of Origin
The new rules of origin could reshape the landscape of the UK export industry. The UK produces and exports around £22 billion of produce to overseas markets. A good proportion of UK exports to the EU is re-exported and may not originate from the UK.
This could be for a number of reasons – some products are not produced in the UK, or are simply not produced in sufficient quantities. The crux of the problem lies with produce imported into the UK from EU destinations. The new rule stipulates that re-exports to the EU will only be tariff-free if they undergo sufficient processing.
The new rule identifies that sufficient added value must be added to a product for it to be tariff-free when re-exported into the EU. The terms highlighted in the TCA as not providing sufficient value are known as ‘insufficient production’. The processes highlighted – either alone or in combination – do not qualify in changing the originating status of the goods and, therefore, would require an additional tariff.
The crucial issue here is that ‘insufficient production’ is cumulative. If you import cherries from the EU, de-stone them and package them, it is my understanding that this would require an export tariff. An example of sufficient processing would be importing tomatoes from the EU, chopping them, cooking them, and canning them. These processes are deemed to have added enough value.
Fishing Rights
At the start of the article, we mentioned the UK’s bargaining chip: its coastal waters. The EU states that the new arrangements for the joint management will take into consideration 100 shared fish stocks.
It notes, ‘EU fishing vessels will continue to have the current level of access to UK waters for a transition period of 5.5 years, with a gradual and balanced reduction of EU quotas in UK waters over time. From then on, the EU and the UK will hold annual consultations to agree on fishing opportunities with a view to sustainable management of fisheries and marine resources, while preserving the activities and livelihoods of fishing communities reliant on those waters and resources.’ UK fishery products will face the same customs checks upon entry to the EU.
Ending Thoughts
All negotiations require concessions to be made by both parties. The new TCA allows for free trade, however, suppliers are now faced with a number of difficulties that they will need to overcome. Extra time will be spent at crossing borders, while additional paperwork will be required, both of which will add costs to the agricultural supply chains. The speed of supply chains will reduce for products that are not produced locally, forcing retailers to move away from a just-in-time supply model to a more security-of-supply model.
In the long term, the UK fishing industry will flourish, however, packing and repacking export industries may suffer price inflation as a result of additional tariffs. The changes in RoO may create opportunities for the UK farming industry, but, at the same time, it may result in manufacturers changing their base of operation to an EU destination.
From a European perspective, there could be an opportunity for EU retailers to compete for market share in Northern Ireland – if they perceive the market size to be large enough – or, if Northern Ireland is deemed to be unprofitable and the consumer is neglected, could this start the ball rolling towards Irish unification?
For details on the EU-UK Trade and Cooperation Agreement, visit bit.ly/2XxDEtU. For more information, contact nick.peksa@cost-insights.co.uk.
© 2021 European Supermarket Magazine – your source for the latest retail news. Article by Nick Peksa. Click subscribe to sign up to ESM: The European Supermarket Magazine.
