The impact of Brexit on the processed food and drink sector Contents

2Impact of tariff barriers

The impact of ‘no deal’

Figure 1. Food and Drink Federation, Exports snapshot 2017, p1

8.The UK currently exports the majority (60.2 per cent) of the food and drink it produces to the EU: seven out of the ten top export markets for the UK are EU countries (Ireland, France, the Netherlands, Germany, Spain, Belgium and Italy).16 Half of the UK’s top 20 markets are EU countries but the other half are non-EU countries with the United States, China and Hong Kong leading the way.17

9.Because of our membership of the Single Market and Customs Union, goods can be exported to European markets without tariffs and with minimal non-tariff barriers.18 The Prime Minister has expressed the Government’s intention to leave the Single Market and Customs Union when we leave the EU.19 The extent and conditions of our future access to the Single Market will be determined during the negotiations. Were the UK to agree a free trade agreement with the EU, it could mean keeping the status quo as far as possible. But were it to fail to do so, it could result in a significant increase in tariffs and customs checks at the border between the UK and the EU.20

10.It is in the interests of the EU and UK that a preferential free trade agreement21 is negotiated in time before March 2019 or before the end of the transitional period. However, concerns have been expressed about the Government’s and the EU’s ability to negotiate a deal within the amount of time remaining.22 In the absence of a free trade agreement with the EU, trade between the UK and EU would automatically revert to World Trade Organisation rules (‘WTO rules’) and the UK would be free to set its own tariffs.23 The impact of reverting to WTO rules would vary depending on the product and would mostly have consequences for UK food and non-alcoholic drinks as there are no WTO tariffs for spirits (see Box 1).24

Box 1: The EU’s Most Favoured Nation tariffs on processed food and drink

The average Most Favoured Nation tariff on imports to the EU for:

Source: World Trade Organisation, World Tariff Profiles 2017, European Union profile, Part A.2 Tariffs and imports by product groups, p82

11.The Government’s EU Exit Analysis Cross Whitehall Briefing25 has made it clear that processed food and drink would be one of the most severely impacted sectors under a ‘no deal’ scenario. In this scenario, the EU’s WTO Most Favoured Nation average tariffs for food and drink would apply. They are significantly higher than for other goods, especially for agricultural products, with peaks of more than 100 per cent on some products. The Government’s analysis predicts a decrease in the sector’s output (gross value added) of over eight per cent under WTO rules as a result of additional trade barriers and the sector’s share of trade with the EU.26

12.As a result, an overwhelming majority of witnesses argued that a no deal scenario would not be an “acceptable outcome” for the sector27 and “could pose a real threat to UK food and drink and the trade in our sector’s products”.28 We heard that

A favourable trading environment means a tariff-free trade agreement with the EU27, or, if there are tariffs, avoiding a ‘cliff edge’ scenario and minimising any additional costs associated with these.29

13.The Food and Drink Federation (‘FDF’) told us that the impact of no deal on the sector would be “pretty catastrophic”30 and that

Anybody who thinks that a disorderly exit is anything other than very, very bad for the UK, and in particular for UK shoppers, is wrong.31

14.The FDF said that the availability and choice of products and the profitability of businesses would be impacted.32 Likewise, many witnesses warned that “a move to WTO tariffs […] would lead to a substantial increase in costs for our business”.33 Although the largest manufacturers were confident they could absorb these “unwelcome” costs, they expressed strong concerns about the knock-on impact on their suppliers.34 For instance, Diageo told us that

It will not add cost to the price that you pay for Baileys if you go to a pub. As I said, our concern is not directly for Diageo, but for the supply chain. Those are the people who will be affected, because there may be tariffs on the dairy inputs moving across the border, and there will be administration delays that we, as a large company, can swallow, but smaller suppliers may find more difficult.35

15.According to the Institute for Fiscal Studies, UK consumers would also be negatively affected at the price point because a large proportion of the food that is consumed is imported:

Currently around 30 per cent of the value of food purchased by households in the UK is imported, and the major source of food imports is the EU. In comparison, only 17 per cent of overall consumer spending is on imported goods. This means that changes in the costs of imports—for example, through changes to tariffs or movements in exchange rates—are likely to have a particularly big impact on food prices.36

16.Witnesses also argued that higher tariffs could mean an increase of sale prices to consumers both as a result of more expensive imports and less competitive exports.37

Abolishing tariffs on all imports

17.Some witnesses were more optimistic and told us that if no free trade agreement was agreed, exiting the EU could be a unique opportunity to abolish tariffs on EU and non-EU imports to facilitate trade.38 For Tim Martin, the Chief Executive of Wetherspoons, this would also lead to lower food prices for UK consumers.39 However, the Institute for Fiscal Studies stated that the impact of liberalising UK tariff barriers on prices faced by consumers at the till would be minimal. They argued that because import prices only affect a small proportion of the price that households pay for goods, any reduction in import prices through lowering of tariffs would only have a limited impact (provided that businesses pass savings onto sales prices):

Of every £100 spent by UK households, only £26 is affected, directly or indirectly, by the import prices of goods on which tariffs are charged (reflecting the dominant role of services in the UK economy).` `[…] Simple arithmetic suggests therefore that even cutting all tariffs to zero could only reduce prices overall by 1.2 per cent at most. That assumes the full 4.6 per cent tariff rate, that firms fully pass through the costs of existing tariffs to households, and that tariff rates are fully reflected in the prices charged by UK and EU firms. These are strong assumptions and, in practice, the impact of tariff cuts on retail prices is likely to be less than this.40

18.The Government has argued that the future of the UK’s trade balance may lie with non-EU countries:

As the European Commission’s own ‘Trade for All Strategy’ suggests, 90 per cent of global economic growth in the next 2 decades will come from outside the` `EU, so it is likely that a greater proportion of UK trade will continue to be with non-EU` `countries41

19.However, as highlighted by the Environment, Food and Rural Affairs Committee, this could make products manufactured in the UK uncompetitive, when set against cheaper products produced at sometimes lower standards in other countries.42 The National Farmers’ Union has expressed strong concerns about the impact of deregulating import tariffs:

British farming would be severely damaged as cheaper imports are allowed in while British exports remain subject to high tariffs abroad.43

Another representative from NFU said

Anyone who makes these trade deals will need to think: What are the consequences of making the average plate of food 10p cheaper a day? We have high standards, but we need to face up to the fact that British agriculture is not the most competitive in the world. We are comparative minnows in terms of economies of scale, and we will be competing with countries in Africa and South America where the national living wage either does not exist or is very low. The really worrying thing is that by bringing cheaper food from abroad, we will be exporting our environmental concerns to countries that are less concerned about the environment or animal welfare than we are.44

20.In this respect, we welcome the Government’s commitment in its evidence to us not to water down the UK’s high standards for animal welfare, food safety, and food traceability.45 It may also lead to an increased reliance on imports from non-EU countries. This could make it challenging to rely on just-in-time deliveries at a reasonable cost. The resulting increased transport emissions may not be compatible with the objectives of the Climate Change Act 2008 or our commitments under the Paris Agreement. In the course of this inquiry, we have not heard any arguments in favour of imposing high tariffs or in support of a protectionist approach to trade.

21.Should the UK continue to export the majority of its products to the EU, a no deal scenario with WTO tariffs would have a seismic impact on the sector’s performance and the competitiveness of exports, especially for some of the UK’s top ten processed products, such as chocolate, cheese, beef, pork and soft drinks. A no deal scenario would be unviable and unacceptable to the sector as, at least in the short term, the EU is the UK’s main trading partner. It would also have serious repercussions for importers of UK products in the EU and the rest of the world.

22.We welcome the Government’s intention to negotiate a new trading partnership with the EU as early as possible. Striking a free trade agreement with the EU should be the number one priority in order to protect the UK processed food and drink sector’s competitiveness in the short term.

23.The current UK trade deficit in food and drink means that imports will continue to play a crucial role at least in the short term. We agree that leaving the EU creates new opportunities to import more low-price products from non-EU countries. However, the impact of removing external tariffs on imports could be extremely severe for British farming and have a limited impact on prices for consumers. The Government will have to carefully balance the impact that non-EU imports could have on the competitiveness of UK businesses and the cost of timely deliveries with the merits of continuing to rely primarily on EU imports.

16 Food and Drink Federation, Exports snapshot 2017, p1

17 Same as above

18 House of Commons Library, Brexit: trade aspects, Number 7694, 9 October 2017

20 House of Commons Library, Brexit: trade aspects, Appendix - Free trade agreements, Number 7694, 9 October 2017

21 Under WTO rules, the principle of non-discrimination requires WTO members not to treat any member less advantageously than any other: if one country is granted favourable treatment, the same must be done for all the others. The only exception is free trade areas and customs unions. For this reason, trade agreements are sometimes called preferential trade agreements or free trade agreements as they are an agreement between two or more countries to give each other preferential treatment. (House of Commons Library, Brexit: trade aspects, Number 7694, 9 October 2017)

22 Council for Responsible Nutrition BRF0016, para 25; Q8 [Ian Wright]

23 House of Commons Library, Brexit: trade aspects, Number 7694, 9 October 2017

24 Q86 [Dan Mobley]

25 Exiting the European Union Committee, EU Exit Analysis: Cross Whitehall Briefing, 8 March 2018

26 Same as above, p19

27 Scottish Whisky Association BRF0018, para 1.2

28 Food and Drink Federation BRF0010, para 8

29 Unilever BRF0019, para 4

30 Q13 [Ian Wright]

31 Same as above

32 Same as above

33 Unilever BRF0019, para 8

34 Q67 & Q72 [Dan Mobley]

35 Q76 [Dan Mobley]

36 Institute for Fiscal Studies, ‘How might Brexit affect food prices?’, 27 July 2017

37 Scottish Whisky Association BRF0018, para 7–8; Food and Drink Federation BRF0010, para 7&44; PAGB BRF0006, para 1.2; ALMR BRF0003, p2;

38 Q84 [Tim Martin]; Tate & Lyle BRF0012, para 19

41 Department for International Trade, Preparing for our future UK trade policy, 9 October 2017

42 Environment, Food and Rural Affairs Committee, Third Report of Session 2017–19 - Brexit: Trade in Food, HC 348, para 50–57

44 Same as above

45 Defra BRF0008, para 18

Published: 22 April 2018