Brexit Vote Leads to Immediate Uncertainty Over Tariffs, Quotas and Farmers' Support
24 Jun 2016 --- The UK exit from the European Union will lead to immediate questions for the food industry in terms of tariffs, quotas and farmers' support. Any “divorce” from EU systems will take time, of course – even the most generous timescales says this will be over at least 2 years. However, the impact on investment, should this decision be confirmed and ratified, will be immediate.
The effect on the exchange rate (£ to $ as well as Euro) can already be seen. The pound has already dropped 8% since it became clear that a Brexit vote would occur, with the value at its lowest rate since 1985.
“Overall it is clear that since the UK food industry is a large exporter to Europe, a lower exchange rate will be beneficial short-term. However, this also means that dollar-denominated raw materials will be that much more expensive, as will imports – and the UK is one of the biggest import markets in Europe,” notes Innova Market Insights London-based analyst Heather Johnston.
“Tariffs and quotas will not change immediately but any negotiation is highly unlikely to bring better terms than previously as a member of the EU, and of course if the UK wants to sell within the EU, CE standards and all the other food safety, quality and nomenclature rules will still apply,” she adds.
“Farmers are well aware of their dependence on the Common Agricultural Policy (CAP) the results in Scotland and Northern Ireland were undoubtedly influenced. Global pricing is bad news for dairy, and not very good news for anyone else. There are many places that can produce food more cheaply than the UK and it would take the erection of some very stiff trade barriers (and a big increase in food prices) to prevent imports doing to British agriculture what they did in the 1930s. There's a reason so many UK houses were built then – agricultural land had no value,” she notes.
This morning the “Vote Leave” campaign claimed victory over its “Britain Stronger in Europe” rival, after 52 percent of Britons voted to support their plan to leave the 28-nation club. A morning of triumph and jubilation for the Brexit camp has been overshadowed by an average 21 percent fall in the share prices of the top five British banks. Euro stoxx bank futures had earlier indicated record falls of 18 percent.
UK prime minister David Cameron has already resigned over the government defeat on this issue. Speaking outside his Downing Street office, Cameron said he would remain in his position for the next three months and expected to depart by the start of his Conservative Party's annual conference in October.
The impact in the food industry is likely to be profound. According to the Food and Drink Federation in the UK, 71 percent of its members wanted to remain part of the Union. Overall most believed it is preferable to remain with the status quo, due to concerns that should the UK exit the EU then they will have to agree to EU food regulations should they want to export to the EU, but will have no role to play themselves in how regulation is formed.
Ian Wright CBE, Director General at the trade body, the Food and Drink Federation (FDF) responded to the vote to leave by stating: "In March we released the results of a poll of our members which showed 70% support for britain to remain in the EU. It's inevitable in the light of those results that the majority of FDF members will regard this as a disappointing result for the food and drink industry."
"Now FDF will work on behalf of our members and all those across our industry to find a way through this very challenging period that we face. We'll focus on working with the Government to understand what this means for trading, market access and regulation to secure the best outcome for British food and drink manufacturing business and their customers."
In a detailed comment following the result, British Retail Consortium CEO, Helen Dickinson, said: "Keeping the cost of goods down for consumers and providing certainty for businesses must be at the heart of the Government’s plans for life outside of the EU.”
“Now that a decision has been made to leave, it is important the Government moves quickly to explain the process of disengagement from the EU. Without clarity, retailers, other businesses and hence the economy will suffer from a prolonged period of uncertainty.”
“We are already seeing the commencement of a period of considerable volatility as financial markets react to any emerging information that might indicate how the new relationship to the EU might be shaped. Retailers should be prepared for the possibility of significant swings, particularly in the exchange rate and consumer confidence.”
“In order to keep prices down and to deliver the best possible choice for consumers, retailers' top priority in the short term will be to ensure the continued ease and minimum additional costs of importing EU goods into the UK for sale to customers. A prolonged fall in the value of the pound will impact import costs and ultimately consumer prices, but this will take time to feed through. In its exit negotiations the Government should aim to ensure that the trade benefits of the Single Market (i.e. the absence of customs duties) are replicated in the UK's new relationship with the EU.”
“However, it is important for us all to remember that, even if the government serves notice to leave the EU tomorrow, the process of leaving the EU will take a couple of years, during which time the UK remains a member and EU rules over free movement will continue to apply. Retailers will continue to focus on serving and delivering for their customers day in, day out in a highly competitive market as they do today,” Dickinson noted.
“In addition to goods traded with the EU, the Government will need to define the rules that will apply to goods traded with other countries. The BRC stands ready to advise them on this. In the slightly longer term, it’s important for the Government to explain how it will handle legislation that was previously the responsibility of the EU. This is likely to be a time-consuming and resource intensive process affecting a wide range of stakeholders. We are sure the Government will put in place a clear and effective process for consulting interested parties as it reviews these regulations. The British public has opted to leave the EU and it is now up to the Government in conjunction with our EU neighbours to make the most of that decision,” the statement concluded.
The business of food employs approximately 400,000 people a year in the UK and is Brits' largest manufacturing sector, according to The Guardian. Of those workers, around 38 percent are foreign-born immigrants, a key point being raised by supporters of the Brexit who would like to see much stricter immigration policies throughout their nation.
Since joining the EU, the common policies held for agriculture, trade, and movement of goods have been key to the UK's food system. The Common Agriculture Policy itself swallows up 40 percent of the total EU budget. In turn, the other nations of the European Union have been integral trade partners for Britain, and have been the UK's primary export market. Additionally, the British people depend on their fellow European states to provide a quarter of what they consume every year.
Because of these deep economic ties, many British leaders who oppose the Brexit fear the trade repercussions the food industry could face. Elizabeth Truss, the Secretary of State for environment, food, and rural affairs warns that a leave vote would be a risky "leap in the dark" that could endanger the livelihood and success of the nations' farmers and food distributors.
Last month Truss said that the food and farming industry could benefit from an extra €360 billion in EU funding to help SMEs and larger processors grow their businesses. She pointed out that between 2011 and 2015, dairy companies in the UK invested just €468m in their businesses, compared to €1.4bn in Germany and €785m in Ireland – highlighting the opportunities that additional funding could bring to the UK industry.
Environment Secretary Elizabeth Truss said: “Unlocking access to our share of €360 billion of European funding will help unleash the talent and ambition across our world-leading food and farming industry, from supporting punchy start-ups to developing the very latest technology in production methods.”
“Last year our dairy exports hit £1.4 billion so we know there’s a growing appetite for quality British dairy products. The funding will help innovative businesses produce more high-demand products such as yogurts and cheeses in the UK, creating more jobs, increasing productivity and making the sector more resilient.”
But the vote has gone the other way and now the true impact will be heavily assessed. “The UK's role as a center of production for international companies operating across the EU will end, unless specific trade agreements are negotiated, or very generous ‘sweeteners’ are given to the companies,” says Johnston.
“There are some ‘half-way house’ options, notably the European Free Trade Agreement (EFTA). But all options require case by case negotiation. The economic blowback is likely to be strong, over the summer and a general election becoming a strong possibility in the short term. The point about ratification is that we have no tradition of rule by referendum in the UK, and Parliament could ‘make haste slowly.’ The next couple of weeks will be crucial,” notes Johnston. “The worst-case scenario is the break-up of the United Kingdom – Scotland to remain in the EU, Northern Ireland to join Republic, also in the EU, and an England split irrevocably between London and the rest,” she concludes.
Few fellow EU markets will be more impacted by the decision than the Republic of Ireland. According to Bord Bia (the Irish Food Board) the decision by the UK to exit the EU represents a significant challenge to Ireland’s agri-food industry. Speaking this morning, Aidan Cotter, Chief Executive, Bord Bia pledged that Bord Bia would continue to support and work with industry to maintain and build on this vital trading relationship against the background of any new trading arrangements that will be negotiated.
“The UK is Ireland’s largest customer for food and drink. Despite its continuing and expanding global reach, the UK has continued to represent a growth opportunity for the Irish food and drink industry, driven by a strong economy and an increasing population. The UK is a net importer of food and Ireland as an exporter is considered a perfect match. The immediate focus of food and drink exporters concerns the development in the sterling versus euro relationship and how to manage the increased volatility that has emerged following the vote. The resilience of the Irish food sector, the longstanding and strong trading relationship between Ireland and the UK, and the close ties between both countries will help the Irish food industry navigate through these uncertain times.”
“Our London office is in close engagement with Ireland’s leading customers across the UK and we will work closely with industry and with the Department of Agriculture, Food and the Marine as negotiations commence,” concluded Cotter.
Finally, the fallout from the UK’s exit from the EU will also be felt in the product development space. “Other EU markets are the leading destination for UK food products and uncertainty about potential tariffs returning could impact exports,” notes Lu Ann Williams, Director of Innovation at Netherlands headquartered, Innova Market Insights. “But the UK has traditionally also been a leading beacon for new product innovation in the food industry, often driving trends in convenience and premiumization, through its highly developed on-the-go market,” she adds. “With more isolationism occurring at the result of the Brexit and potentially reduced exports, it’s possible that we will see less creativity spread through to the continent too.”
By Robin Wyers
