Before May had even had the chance to bring the issue forward to a Parliament vote, several ministers resigned, most notably Brexit Secretary Dominic Raab. He had himself only recently took on the job following the resignation of his predecessor, David Davis, during the summer. Another cabinet minister, Esther McVey, also quit alongside junior ministers Suella Braverman and Shailesh Vara.
May’s chances of getting the deal voted through the British Parliament now appear scant at best, with high resistance within her own party and junior coalition partner the Democratic Unionist Party (DUP), never mind the opposition. The political turmoil is leading to growing calls for her resignation and the specter of a leadership challenge. All the while, the deadline to the passing of the Article 50 transition period winds down, with just months left to the UK’s official leave date of March 29, 2019.
Jan-Willem Thoen, Senior Director at PwC NL Brexit office notes to FoodIngredientsFirst that the food industry is specifically hard hit by the Brexit uncertainty, especially the fresh products sector. “This relates to the checks that need to be done in harbors for fresh goods, which are time consuming,” he says. While many clients in other industries are already stockpiling to looking beyond the end of March 2019, in order to have some emergency stock, this is of course not possible for the fresh foods industry.
But even for the longer shelf-life goods, this presents its own challenges too. “For the longer shelf-life goods, these companies will stockpile to an extent. But if both the supermarkets and producers are stockpiling, it will use a lot of raw materials and can provide a big disruption for the packaging divisions. This is not just about a couple of weeks around the Brexit date, but also on the supply chain going forward,” he explains.
An interesting new perspective is on the logistical issue of distribution capacity due to traffic jams and other delays, which may require more warehousing and trucks. “The one thing that did not pop up yet in the Brexit debate is that the considering the amount of trucks that are stuck in traffic, is there sufficient capacity of transport anyway? More trucks and warehousing will be required. I understand that warehousing in the UK is already really an issue,” he notes.
Thoen paints three potential scenarios in the aftermath of Brexit, all of which have a great degree of uncertainty “which is bad for business.”
Their first scenario being considered is that the current deal will be accepted as it is and that both parties move into a transitional arrangement with the Northern Ireland “backstop” border arrangement in place (see below). “That in itself would be relatively good news for the agrifoods business and business in general, as at least for almost the next two years there will be some stability in terms of how the situation will look. If the deal is accepted, there will be a 21-month transition period, in which we effectively say that the UK is not an EU member, but we will treat them as one,” he says. This would in effect be a continuation of the status quo and gives business more time to prepare. “Afterwards it is a bit like ‘kicking a can down the road’ because ultimately either there will be a free trade agreement or the ‘backstop’ with the customs union kicks in,” he notes.
The second scenario is a very imminent “no deal” one. “This would bring this moment of strong disruption very close indeed, in just over 4 months. This would really bring an issue, especially on the fresh foods sector, given that as of March 30, all kinds of formalities would need to be dealt with, levies may apply and all checks are required. The big question is whether authorities are ready for that compliance and whether companies are ready? The answer will definitely be ‘not completely’,” he notes, adding that he is impressed by the Dutch government’s activities on this issue so far, however.
The third scenario relates to the aftermath of the messy UK political environment, which could mean a whole set of different circumstances altogether. “We don’t know whether Mrs. May will still be there a couple of months down the line. That could result in a different leader and a no deal Brexit. It could also result in new elections, and, for example, a different party could take charge with a different approach. In that sense we think there is still opportunity under the European treaty to extend the exit date. If the worst comes to worst, perhaps politicians are willing to consider pushing the Brexit date back,” he notes.
Thoen does believe that Brexit will eventually happen, however. “I think that if we look at the political landscape in the UK, if there is a vote, both large political parties say that we should respect the vote. If there is a referendum we should vote on it, but reversing the original deal is a very slim chance. Although it keeps on coming back, so never say never,” Thoen notes.
The food industry was cautiously welcoming on news of a deal between the EU and UK on Wednesday evening. In response, Food and Drink Federation (FDF) Chief Executive, Ian Wright CBE said: “We would welcome any clarity relating to a potential agreement with the EU. While this is a step in the right direction, uncertainty remains. Food and drink manufacturers will have to continue planning for a variety of scenarios until our politicians have cast their judgment on the suitability of this deal. This will result in businesses incurring significant costs and devoting additional time and effort to such endeavors. Until the withdrawal agreement implementation bill receives Royal Assent, the specter of a ‘no-deal’ Brexit looms large over our industry.”
In light of the subsequent political news, a spokesperson for the group told FoodIngredientsFirst that their position remained the same, but may change in the light of events.
The British Retail Consortium has also been calling for clarity for some time and has claimed that a “No deal” Brexit could lead to severe food price hikes with items like cheese, beef and fresh produce being among the worst affected.
A statement from Helen Dickinson, BRC Chief Executive, reiterates the need for clarity. “Until an agreement is approved by both Parliament and EU member states, we have continuing uncertainty and the risk remains of consumers facing higher prices and reduced availability of products in March 2019. We need to secure a withdrawal agreement that can protect frictionless, tariff-free trade throughout the transition period,” it says.
European agricultural group Copa-Cogeca has a different stance, welcoming the initial deal as an essential step towards an orderly Brexit, further minimizing the prospect of a “no-deal” scenario which, it claims, would be catastrophic for both EU and British farmers and agri-cooperatives. It cites progress in two key issues; the Irish border compromise and that recognition of the existing stock of EU approved geographical indicators would be legally protected by the current withdrawal agreement.
At the Annual Convention of the European Dairy Association (EDA), which was held in Dublin yesterday, EDA President Michel Nalet acknowledged the effort of both negotiation teams to come to a withdrawal agreement in what the group called ‘a good day for dairy’.”
“The European dairy industry is integrated across borders. This is especially true for the island of Ireland but applies also to the rest of Europe. We, therefore, welcome the news that the UK and EU negotiators have reached a deal on the withdrawal agreement and on the political declaration on the future relationship between the EU and UK. We have consistently called for both sides to avoid a no deal situation and to ensure the closest possible future trading relationship. We now look to EU and UK leaders to sign off the agreement as quickly as possible to allow the EU and UK parliaments to ratify,” Nalet stated.
“It is in the interest of the dairy industry and of the citizens, in the Union as well as in the UK, that this withdrawal agreement secures the free movement of milk and dairy products between the UK and the EU. We call now to the decision makers on both sides to act responsibly,” he added
The ensuing political fallout is likely to have changed the mood. As the group notes, there are 700,000 dairy farms across the EU, 12,000 milk and processing sites, and more than 300,000 people working in the sector. “The dairy sector is the industrial and societal backbone of rural Europe and beyond. Even more importantly, dairy matters to consumers. Affordable and high-quality milk, cheese, butter and other products, rich in protein and healthy natural fats, are a mainstay of European diets,” a statement reads.
But the whole food industry is susceptible to the potential of a no deal Brexit whereby the UK would merely be trading with the EU on WTO terms going forward.
In a paper entitled “Brexit Monitor – The impact of Brexit on the AgriFood industry” published earlier this year that laid out the benefits of continued tariff-free trade between the parties, PricewaterhouseCoopers (PwC) noted how heavily reliant the UK is on food imports from the EU. “The UK’s food and beverage production is below 60 percent of domestic consumption, and it is particularly reliant on EU imports for fruit, vegetables and meat – especially pork and chicken. Overall, 27 percent of the food consumed in the UK originates from the EU,” the report notes.
In 2015, the UK imported food and drinks worth €31 billion from the EU. The main countries of origin were:
• The Netherlands: fruit and vegetables (€1.9 billion) and meats (primarily poultry and further processed meats).
• Ireland: mainly meats (€1.8 billion, mainly beef and further processed meats), dairy (€0.8 billion, over 50 percent cheese), and fruit and vegetables.
• Germany: a large variety of food categories, with meats (mainly processed) and fruit and vegetables (both at over €700 million), followed by confectionery, bakery and dairy products.
• France: primarily dairy (cheese and chilled products) and fruit and vegetables.
• Denmark: meat (€560 million, mainly processed meat and raw pork).
On the other side, PwC noted that the UK exports the majority of its AgriFood products to the EU. In total, 52 percent of the UK’s total AgriFood exports goes to only four countries: Ireland, France, the Netherlands and Germany.
On the exports side, Scotch whisky is the biggest UK AgriFood export product, accounting for 25 percent of the UK’s food and drinks exports value, with sales of £4 billion (approximately €5 billion) in 2015. “Overall, 40 percent of all exported Scotch whisky goes to the EU. However, as the EU has set whisky tariffs at zero for all markets, the costs for importers from the EU would not rise post-Brexit. On the other hand, if the UK loses access to the markets with which the EU has negotiated Free Trade Agreements, whisky importers from key markets such as South Africa, South Korea and Peru may face higher costs,” the paper argues.
The draft withdrawal agreement, which was agreed between the EU and UK this week, is all about how the UK leaves the EU rather than being about any permanent future relationship. The legal basis for a transition (or implementation) period, beginning after Brexit is due to happen on March 29, 2019. It would be 21 months during which the UK would continue to follow all EU rules (providing governments and businesses with more time to prepare for long term change). During the transition, the UK would remain under the jurisdiction of the European Court of Justice (ECJ).
The biggest area of contention around Brexit has been the long land border between Northern Ireland (part of the UK and therefore leaving the EU) and the Republic of Ireland (which will remain part of the EU). Virtually all sides are agreed that the superfluous border that has existed there since the Good Friday Agreement in 1997 with no checks or physical infrastructure should be given up following Brexit. This has led to the creation of the so-called “backstop.” If there was no long-term trade agreement and no extension of the transition, that's when the so-called “backstop” would kick in.
A “backstop” would take the form of a temporary customs union encompassing not just Northern Ireland but the whole of the UK. The draft agreement describes this as a “single customs territory.” Northern Ireland, though, will be in a deeper customs relationship with the EU than the island of Great Britain and even more closely tied to the rules of the EU single market.
The backstop would only cease to apply if “the Union and the United Kingdom decide jointly” that it is no longer necessary. In other words, the UK will not have a unilateral right to bring those arrangements to an end. For some Brexiteers, that is simply unacceptable and this has been one of the key stumbling blocks within the Conservative Party itself. Many argue that the terms of this week’s agreement would merely leave the UK in a purgatory situation for years whereby they would still have to follow most EU rules but would have none of the voting rights.
With the much-debated deal between the EU and UK looking highly precarious to sell within the UK to both Brexit hardliners and “remainers,” the possibility of a no deal Brexit remains. On the other hand should the political storm lead to a leadership challenge, potentially an election and perhaps even a second vote of the issue, debate around whether Brexit will happen at all will intensify. This would generally be perceived as the most welcoming news for both the UK, Irish and continental European food industry sectors, which have now endured over two years with little clarity on the issue, since the vote results in June 2016.
By Robin Wyers & Gaynor Selby
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