Brexit: what’s happening and what should we expect?

Brexit

Where are we? A recap – some key dates:

  • 11pm 31 January 2020: the UK left the European Union
  • June 2020: last opportunity for UK to request extension of transition period
  • 01 July 2020:political declaration that both sides should have reached agreement on fishing rights and access for financial services
  • 15 October: EU summit and target date for new deal agreement
  • 26 November 2020: trade deal must be negotiated & presented to the European Parliament for it to then be ratified
  • 31 December 2020: this is the cliff edge! If no deal is secured, then UK falls back on to WTO terms
  • 2021: Negotiations continue

 

Brexit brinkmanship as negotiations get tough.

Key battle lines for the trade negotiations:

There are a number of key ‘battle lines’ in the current round of Brexit trade negotiations. To understand the impact and likely outcomes of these negotiations, it is important to consider the different preferences and positions of the UK and of the EU with regards to each of these areas…

The first of these is the EU’s insistence upon maintaining a level playing field, enabling fair and open competition. The UK does not want to be tied to EU standards, whilst it can generally be seen that the EU has concerns that the UK could gain competitive leverage by having autonomy over state aid, labour and the environment whilst also having access to the single market.

Another contentious area is fisheries. The UK aims to be an ‘independent coastal state’ and to negotiate with the EU over access & quotas for fishing on an annual basis. The EU is keen to agree long term access and maintain the status quo. Whilst fishing contributes only 0.1% of UK GDP, it is politically important, rather than economically. The conflict comes as it is also politically important for the EU; it is critical for coastal communities and large fishing fleets, despite only employing 180,000 across the EU. There are two key issues which continue to arise in the negotiations and are proving complex to resolve and agree upon:

  • Where fish can be caught (and in what quantity)
  • Where fish can be sold

 

Until new markets are found, the  EU remains a vital market for the UK  as 75% of exports head to the EU and much of the UK landed fish stocks are not widely eaten domestically, as consumer demands for herring and mackerel are not high. Our UK consumer demand is, instead, for UK, Icelandic, Norwegian and Chinese landed cod, and haddock.

Proportion of UK fish exports to the EU as % of total exports (HMRC)

  • 92% Herring
  • 89% Cod
  • 85% Mackerel
  • 82% of Shellfish (tariffs could collapse this industry)

 

It should be noted that the English fishing industry does not currently fully utilise its full quota allowance, and currently sells more than 50% of its quota allocations to European fleets. This is a lesser situation in Scottish fishing industry, which adds a further layer of complexity to this ‘battle line’ issue.

Thirdly, let us consider financial services, which account for 7% of UK GDP. Future access to the European market is crucial for the City of London as well as EU consumers and businesses who rely on its deep pool of capital. The EU is offering ‘equivalence frameworks’ that can be withdrawn with just 30 days’ notice. However, the UK seeks a longer, more stable regime, that allows time to resolve any disagreements before access is withdrawn.

Next up is the timetable itself. It was widely cited that the EU would see the tight timetable as an advantage, as the UK could be seen to have more at stake and a greater amount to lose. The EU negotiation may well therefore employ tactics that reflect this viewpoint. The UK is demonstrating an attempt to nullify this by stating that it is happy to prepare for no deal perhaps even contemplating a ‘no deal’ Brexit as an easier baseline to negotiate from? Most expect the real trade-offs and ‘bartering’ to start this autumn as the negotiations step up. It should be noted that, at the time of writing, the odds of a deal being agreed are currently around 50% and appear to be diminishing, though history tells us that these types of negotiations tend to go down to the wire.

Trade agreements are designed to remove barriers to trade, and encourage convergence, such as the removal of tariff’s and non-tariff barriers, partly by way of aligning standards and regulation. Brexit represents a unique scenario whereby fully aligned trading partners are negotiating a divergence in standards and regulation whilst trying to chart a pathway that is acceptable to both parties. This was always going to be a tough pathway to navigate. If an agreement cannot be reached by the end of the calendar year, we can be sure that discussions will continue as ultimately both parties will require a basic free trade agreement as a bare minimum soon.    

Finally, the structure of the agreement is an area that continues to present a possible barrier to moving towards an agreement. The EU’s stance is a preference for one large comprehensive agreement. However, the UK are favouring a simple, overarching agreement, with multiple separate individual agreements. This is to ensure that the UK is not tied or restricted, which links back to the points made under the section on a ‘level playing field’. The UK’s ambition is to enable an agreement which allows it to pick and choose commitments without compromising the main overarching trade deal.

BIP (Border Inspection Posts) – £700 million investment & possible WTO intervention

What about the WTO, we hear you say? The WTO bar is very low, so trading on these terms on their own is not a position of strength. The UK is liable to challenge from the WTO regarding plans to not undertake border checks of EU products for the first 6 months to alleviate border disruption. This approach would discriminate against WTO members as their goods would have to be checked. Therefore, the UK’s plan would compromise WTO core values which aim to remove trade discrimination. What is more, opening borders to all countries without checks creates a very high level of risk. The UK’s leading transport associations have recently warned that Brexit border preparations are inadequate and risk causing severe disruptions to supply chains. This remains a concern for the availability of short shelf-life goods, particularly fresh produce that will be primarily sourced from Spain during the winter months.

Let’s not forget the US trade agreement and the Agriculture Bill…

EU regulations, welfare and production standards are not enshrined in law. This may open the way for US market access for agricultural goods, potentially with what may be perceived as lower production standards, though this isn’t currently a stated aim of the UK Government.

Business fatigue and stockpiling – bad timing?

All of this is taking place in conjunction with Covid-19. This has placed businesses at risk and has led to weaker company balance sheets.

There are also fatigue and financial constraints regarding stockpiling goods. And, because of the time frames, we are about to enter uncertainty at the same time as we experience the annual ‘golden quarter’ – i.e. Christmas stockpiling by supermarkets.

The fallout from the Internal Market Bill, devolution, and the Northern Ireland/Ireland Protocol?

The UK Government’s plans regarding the Internal Market Bill have hit the headlines recently with some controversy. There are a few aspects that are worth illuminating including the Irish border once again:

  • The Internal Market Bill
    • The aim is to provide a framework post Brexit to ensure the free movement of goods and services throughout the United Kingdom and Northern Ireland. The UK Government are planning to legislate new powers that will both protect this new internal market and override any laws that are a threat to it. In the context of negotiating new trade deals with international partners it needs to strengthen its negotiating hand by guaranteeing access to all four nations. Its principles are founded upon the EU’s own internal market principles. It is very controversial as it breaks international law, and the Withdrawal Agreement, an international treaty that was only signed seven months ago. The UK is one of five permanent members of the United Nations Security Council, an organisation with an objective of upholding international law.
  • Devolution
    • Welsh and Scottish Governments are unhappy with the Internal Market Bill and view it as a Westminster power grab. They are concerned about potential impacts upon their legislative powers under the devolution settlements. Devolved administrations want to continue to use their powers to regulate their own markets and, to date, have had no obvious roles in the process of agreeing new trade deals. Devolved administrations are, however, responsible for various areas that will be covered by many of the ‘new deals’, such as food standards.
  • Northern Ireland / Ireland Protocol
    • The challenges faced by maintaining an open border on the Ireland of Ireland whilst allowing regulatory divergence, continue to hinder negotiations, largely because supply chains within the Island of Ireland are so integrated. The revised Brexit withdrawal agreement which included the Northern Ireland Protocol was enacted by Parliament on 23 January 2020 to facilitate the UK’s departure from the EU and became an international treaty between the UK and European Union on 24 January 2020. It was designed to protect the Good Friday Agreement and avoid a hard border on the Island of Ireland in the event of a no-deal Brexit which in effect created a customs border across the Irish Sea. The Internal Market Bill cuts across the Northern Ireland Protocol as it requires that no new checks or administrative processes are exercised on the movement of goods between Great Britain and Northern Ireland in order to allow unfettered access between the two, which the Government states is necessary to conclude future trade deals.

A summary of key financial impacts

  • Expect 8% as a minimum if an agreement is not reached
  • If an agreement is reached, likely to be somewhere between 0-8%. However, the final figure is dependent on the terms and level of comprehension
  • As we are set on regulating our own standards, 3-8% is probably most likely. This will be driven by non-tariff costs
  • Market realignment – lamb, carcass imbalances, fish
  • Non-tariff barriers – EORI number (economic operators registration identification number). Obtain customs agent or freight forwarding costs.
  • Border disruption – recently raised by leading transport trade bodies
  • Exchange rate volatility
  • Tariffs: average 19% on 1/3rd of goods = circa 6% overall …
  • Tariff examples – schedule of tariffs last updated May 2020
    • Bacon loins – £72 per 100kg or 72p / Kg
    • Chicken – £27 per 100kg or 27p / kg
    • Cheddar cheese – £139 per 100kg or £1.39 per kg
    • Sparkling wine – £26 per 100HL (hectolitre) or 26p litre

For more information about any of these issues, please contact the team at allmanhall. As food procurement experts, we are working with all our suppliers to mitigate the risks posed by a no-deal Brexit, and the uncertainty and changes to catering needs and processes, based on the current situation. By working with allmanhall, you will enjoy catering cost savings, with hands on support. And we can help with the procurement of all catering-related items – from disposables and kit, to cleaning products and essential equipment.

Now, more than ever, caterers are in need of independent, procurement professionals, providing expert advice. And allmanhall are here to provide it.

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