Summary
This Report is intended to inform public and parliamentary debate and to influence the Government’s objectives as it begins phase 2 of the negotiations on leaving the European Union.
The processed food and drink sector is the largest manufacturing sector in the UK and contributes £28.8 billion to the economy. Exports were worth £22 billion in 2017 and they continue to grow. The sector directly employs 400,000 people throughout the country, a third of whom are EU nationals. It is characterised by just-in-time delivery of products with short shelf lives and is heavily integrated with supply chains spread across the UK and the EU for sourcing raw materials, processing goods and selling them. Many manufacturers have factories in both the UK and the rest of the EU.
The success of the UK processed food and drink sector has been so far highly dependent on participation in the Single Market and Customs Union: free movement of goods and people have tipped the UK export balance towards an over reliance on the EU as a trading partner with 60 per cent of UK exports going to EU markets. 50 per cent of total UK food and drink exports go to five countries, four of which are EU member states.
It is crucial that the sector is able to remain competitive when we leave the European Union as failure to do so would not only impact businesses and workers but also consumers at the till point and the choice available to them in shopping aisles all year round.
The sector would undeniably suffer from reverting to WTO tariffs in the event of a ‘no deal’ scenario. The EU’s Most Favoured Nation tariffs under WTO rules would be disastrous for UK exports and must be avoided at all cost. It is unrealistic to expect that the sector will stop relying on the EU as its main export destination at least in the short term. Consequently, the negotiation of a free trade agreement with the EU should be the number one priority for the Government. Should the UK lower or remove its tariffs on imports in the future, the consequences for British farming could be extremely damaging and the positive impact on prices for goods to households is likely to be very limited.
UK competitiveness would also be adversely affected by any additional delays and bureaucracy encountered at the UK-EU border, given the prevalence of cross-border just-in-time supply chains in the sector. The Government should seek to secure as few additional impediments to trade between the UK and the EU as can be negotiated. Frictions at the border between Ireland and the UK are of particular concern as the sector is highly integrated across the two countries. A credible solution to avoiding a hard border must be found as soon as possible.
The EU regulatory regime in food and drink is also highly integrated, and the UK is a full member of the European Food Safety Authority (EFSA). EU food regulation is associated with high safety and quality standards and already allows divergence. The majority of the evidence was in favour of remaining aligned with EU regulation as it is favourable to exports amongst other things but some opportunities from divergence were identified in a few sectors. Nevertheless, all were unanimous in rejecting any ‘race to the bottom’ as UK consumers would not tolerate any lowering of standards. Most stakeholders also supported the UK continuing its membership of EFSA after Brexit.
The UK food and drink sector could stand to benefit from substantial growth opportunities beyond the European Union in the coming years. However, the sector does not see this as achievable without replicating all existing EU trade deals with third countries and negotiating preferential agreements with other countries that include mutual recognition. The Government’s priority in terms of opportunities for trade beyond the EU after Brexit should be to secure the roll-over of existing and forthcoming trade agreements. Moreover, the opportunities are both relatively slight and distinctly uncertain, when set against the benefits to the consumer of free access to the current range of products facilitated by conformity with agreed standards.
The Government should also seek a deal on immigration that enables the sector to access the full range of skills it requires and ensure that the arrangements for intracompany transfers and posted workers are flexible, rapid and unbureaucratic. The processed food and drink sector and the hospitality sector rely heavily on EU labour at both unskilled and highly-skilled levels for meeting its existing skills gap. Although it is possible to meet some of this demand with UK nationals eventually, it will take time and will require a robust skills strategy. In the meantime, the sector needs to be able to access EU labour seamlessly.
On research and development, the sector benefits greatly from access to EU labour, funding and facilities. The Government should seek to maintain the UK’s membership of collaborative EU R&D programmes, and secure UK participation in future programmes.
Overall, we conclude that more than anything UK businesses need clarity and certainty about the future of our relationship with the EU. The Government is almost out of time to negotiate an orderly trade system after the transition that will provide businesses with the certainty they need to invest and innovate.
Published: 22 April 2018