Lack of Trade Deal Will Hit EU-UK F&A Trade Hard
The absence of an EU-UK trade deal on January 1, 2021 would cause significant economic losses on both sides for companies active in food & agriculture supply chains. The British prime minister, Boris Johnson, warned the world to prepare for a hard Brexit scenario. We therefore urge companies in the food supply chain to be prepared for loss of export and import opportunities and for a future in which additional efforts and administrative costs will have to be made to continue any remaining cross-border trade.
The Hard Brexit Becoming Reality After All
As we wrote in January 2019 in the note “Consequences of a ‘Hard Brexit’ for Food & Agribusiness: EU Market Closes for UK, While UK Will See Food Price Inflation,” a hard Brexit would hit EU-UK trade in food and agribusiness products hard. Soon after we published that note, an agreement was reached on the withdrawal, including a transition period until the end of 2020. During this transition period, trade could continue as usual, tariff free and without additional border checks. Now that the negotiations have stalled about a deal on the future trade relationship between the EU and the UK as of January 1, 2021, the ‘hard Brexit’ we explored in January 2019 seems to be emerging as a reality after all.
High EU Import Tariffs, Low UK Import Tariffs
A certainty of a no-deal scenario is that the EU will consider the UK a third country as of January 1, 2021 and will apply import tariffs on UK food and agriculture products, just as the EU does on imports from other third countries. These import tariffs can be characterized as follows:
This means export volumes out of the UK to the EU will shrink to almost negligible levels in most cases. UK sheep-sector and grain & oilseed exports especially will be hit, as the UK has export surpluses for these products. Also, in the case of meat and dairy products, the UK is an exporter to the EU for specific products. Importers in the EU of UK products will have to change to suppliers in the EU, while UK exporters will have to find other export outlets.
We are less certain about the import tariffs the UK will apply when importing EU agricultural goods. The UK has published tariff schedules that are almost the same as the tariff schedules the EU applies at import. However, if the UK actually levies such tariffs on food imports from the EU, this would result in significant food price inflation. Being a large net food importer with a weak economy, we expect the UK government will want to avoid that and, therefore, will not levy import tariffs on food imports. Some sensitive products may be exempted, for example sheep meat, in order to protect domestic producers. What we can be sure of is that EU suppliers will meet more competition in the UK market because, under WTO rules, any preferential tariffs granted to the EU will have to be granted to other countries as well in the absence of a bilateral trade agreement. We expect that, in the case of sugar, the risk of replacing EU supplies with other third-country supplies is highest in the short term. In the case of meat, this risk is lower because several private sector standards – for example, those related to animal welfare, will be difficult for non-EU suppliers to meet in the short term. We expect fresh produce (e.g. flowers, fruits, vegetables) trade from the EU to the UK to continue because there are no alternative suppliers.
Costly Border Controls
A second certainty is that controls between the UK-EU border will return. Importers and exporters from both sides will have to invest time and money in meeting and proving adherence to (quality) standards (sanitary and phyto-sanitary regulations, food safety, labelling, origin, intellectual property rights on plant and animal genetics, etc.). The costs of crossing the border will increase as a result. Furthermore, the time spent at the border will increase, at least in the first years, which could have serious negative consequences in the case of fresh produce.
Weakening of the British Pound
The third change we expect following the lack of a trade deal is a further weakening of the British pound to parity with the euro. This will benefit UK farmers, as they will become more competitive vis-à-vis imports. However, for consumers, domestic food prices will rise because imports will become more expensive priced in British pounds. Food price inflation will be the result. Overall, the weakening of the pound and the already weakened economy will have a negative impact on food purchases by consumers. Consumers will trade down (i.e. replace expensive products with cheaper alternatives). This will be felt by both UK and EU food producers.
The Fisheries Dilemma
A particular case in the Brexit context is the fisheries sector. In the absence of a fisheries agreement, EU vessels lose access to UK fishing waters, while UK fishermen – who catch mostly fish species that are not consumed in the UK – lose access to the EU market. Economic losses on both sides will be the result.