Deal... or No Deal? – Brexit Preparations for the UK Juice Industry
With Brexit only six months away and the proposed extension period ending less than two years thereafter, UK and European manufacturers are still unclear about the effects on their industry. Under a ‘No-Deal’ scenario, which is a real possibility, value chains will be forced to make adjustments. For the UK juice industry, the origination of fruit and the location of processing facilities might temporarily or permanently be impacted.
UK depends on imports for fruit juice
The UK is one of the largest fruit juice markets in the world. Although some ingredients are grown domestically, most are imported. The leading flavour, orange, is completely sourced from abroad, while the second most popular flavour, apple, has some domestic sourcing, but faces competition from cider- and fresh markets. Imports in 2017 were 1.83 million tonnes, worth just over USD 1 bn. Belgium, the Netherlands, and Germany are the leading suppliers of the UK juice industry. Part of these imports do, however, originate elsewhere.
There are three different ingredient streams entering the UK: i) juice that originates within the EU (33% of value), ii) juice that originates outside the EU and reaches the UK via another EU country (60% of value) and iii) juice that originates outside the EU and is transported directly to the UK (7% of value). We think that the latter stream may take on greater importance following a ‘No-deal’.
MFN tariff will impact EU sourcing most severely
It is still unclear how Brexit will evolve. Without a deal, the UK will fall back on WTO-rules and MFN-tariffs. These tariffs are quite protective, and the UK will try to negotiate less restrictive trade-deals with its trading partners. As deals between the EU and e.g. Canada or Japan have shown, it is, however, difficult to reach agreement, and negotiations will take time.
Both EU and non-EU sourcing will be impacted by MFN tariffs, and the price of juice in the UK will increase as a result. As EU ingredients enter the UK freely today, they will be impacted most severely, and their competitive position will deteriorate. UK juice manufacturers will substitute (some) Spanish orange juice and Polish apple juice concentrate with competing offerings from Brazil and China. For Spanish and Polish exporters, it will be difficult to replace these lost volumes.
Terminals and processing plants to move onshore
Currently, juice terminals in Rotterdam, Antwerp, and Ghent are important depots that service the entire European market. Some processing happens near these ports too, which maximises economies of scale. Today, the final product can travel freely throughout the EU, but after no-deal Brexit, that is no longer the case for the UK. It might be beneficial to have terminals and/or processing options within the UK, depending on whether tax savings outweigh diseconomies of scale.
UK customs authorities are always going to charge the MFN tariff on entry, regardless of origin. An ‘ad valorem’ tariff will be levied and it might therefore be better to add value to the product after the final border crossing.
For juice originating from outside the EU, it is unclear whether the EU will also charge tariffs when the product passes through. No import duty is due for passing through EU ‘Free Zones’ (e.g. ports). It is, however, debatable whether Inward Processing (IP) rules apply (and no tax is due) if processing happens in the EU. According to HMRC, “to get IP authorization on these goods, you’ll need to provide evidence to show why you cannot use EU-produced goods instead”. To avoid EU tax, it might be necessary for UK juice companies to process non-EU ingredients domestically.
Apart from tax, companies are also worried about custom delays. If non-EU juice is imported directly into the UK, waiting times for custom clearance would be reduced.
Flexibility is key in uncertain times
UK juice manufacturers must identify sourcing and value chain alternatives, but with much uncertainty still surrounding Brexit, it will be unwise to implement any changes immediately. MFN tariffs might be introduced and hit the industry hard, but these tariffs will not stay around forever. A trade deal with the EU is a UK priority, but independent deals with e.g. Brazil and China will also be high on the agenda and could make juice even cheaper than it is today. As the outcome of trade negotiations depend on a favourable deal for all products, not just fruit juice, and negotiations might take a long time to finalise, flexibility is key for dealing with the immediate impact of a potential no-deal Brexit and future developments in UK trade policies.
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Francois SonnevilleSenior Analyst - Beverages Read more