Rabobank: ‘Main concern are new customs regulations’

    According a note from Rabobank on the impact of the Draft Brexit Deal on European Food and Agribusiness the main concern in the future trade relations between the EU and the UK are new customs regulations at the British border after the end of the transition period. For perishable goods, like cut flowers and fresh vegetables every delay in the supply chain influences the quality of goods. It remains unclear if pre-clearance of phytosanitary control is possible for wholesalers delivering flowers and vegetables to the UK in the future.

    The self-sufficiency rate of the UK for fruit, vegetables and flowers is less than 50 percent, so the UK imports lots of fresh produce. The UK import value of flowers and plants is about EUR 1.2bn, of which more than 85 percent comes from EU countries (EUR 867m from the Netherlands). The import value for fruit and vegetables is over GBP 11bn. In 2017, approximately 76 percent of the UK’s vegetable imports and 41 percent of the country’s fruit and nuts imports originated from the EU. So the UK is highly dependent on supply of fresh produce from the EU.

    The main concern in the future trade relations between the EU and the UK are new customs regulations at the British border after the end of the transition period. For perishable goods, like cut flowers and fresh vegetables every delay in the supply chain influences the quality of goods. It remains unclear if pre-clearance of phytosanitary control is possible for wholesalers delivering flowers and vegetables to the UK in the future. If not, some companies might consider building warehouses for logistics, because of possible delays at the border.

    British producers

    Although at first hand one might think a Brexit offers opportunities for British producers of fruit, vegetables, and flowers, as imports will become less competitive. However, they strongly depend on the availability of migrant workers from Poland, Bulgaria and Romania for their expansion. Furthermore, the propagation materials (seeds, cuttings, young plants, in vitro) are imported from the continent. So British companies will still have to rely on supplies from the continent.

    Under this deal, trade will continue unchanged during the transition period of almost two years, with a possible extension for another two years. Both parties have the intention to establish a comprehensive free trade area without tariffs and with ambitious customs arrangements. This agreement could be realised during the transition period, and enter into force straight after the transition period.

    From then on, the UK can implement new trade deals with other countries. As a result, European companies run the risk of increased competition on the UK market. The cost of customs controls for trade with the UK under such an agreement could deteriorate the competitive position of European suppliers on the UK market. As a result, some trade flows could be redirected from third countries to the UK directly, instead of via the EU, and cross border value chains may have to be reorganised.

    The UK can pursue its own policies for quality standards, support to agriculture, environmental standards, etc. In food and agriculture for example, this entails the risk that phytosanitary, veterinary and food quality standards will start to differ between the EU and the UK.

    Part of a EU-UK Customs Territory

    Furthermore, UK farmers run the risk of lower income support compared to their EU peers. In the absence of a deal on the future relationship after the transition period, the UK will be part of a EU-UK Customs Territory. This should facilitate a continued free flow of goods with minimal red tape as long as an agreement on the future relationship is not yet in place.

    Fisheries are exempted from this EU-UK Customs Territory. Being part of this EU-UK Customs Territory, means the UK cannot implement new trade deals with third countries.

    Questions that remain are: will this draft deal get approval by the European and UK parliament? How long will the transition period last? Will the EU and the UK reach an agreement on the future trade relationship before the end of the transition period? What will this future trade relationship look like?

    Soft Brexit

    Rabobank characterizes the current draft deal as a soft Brexit, aimed at an orderly and gradual exit of the UK out of the EU while minimising the economic damage on both sides. Trade will continue unchanged during the transition period of almost two years, with an extension possible of another two years. Both parties have the intention to establish a comprehensive free trade area without tariffs and with ambitious customs after the transition period. If this agreement is not reached in time, an EU-UK Customs Territory starts. Either way, both should facilitate a continued free flow of goods with minimal red tape after the end of the transition period.

    Specific risks in the long run for trade in agricultural products between the UK and the EU are veterinary, phytosanitary and food safety standards. In the future, these standards could deviate between the UK and the EU, with a negative impact on trade, because exporters have to provide proof/guarantees that the product meets the different standards in the destination country.

    Despite a strong desire on both sides for an agreement on the future relationship between the UK and the EU, uncertainty about this future agreement is high. A lot of issues need to be resolved.

    Although the ambition is for a comprehensive trade agreement, experience learns that sensitive products are oftentimes exempted from full liberalisation in bilateral trade agreements. Typically sensitive products from an EU point of view are: sugar, beef, pork, poultry, dairy. While for the UK, likely candidates for sensitive products are sheep, beef, and whisky – products for which the UK needs access to the EU market to prevent significant domestic price drops.

    Longer waiting times

    Overall, based on this deal it can be expected that in the short run, the UK will remain close to the EU, but over time will increasingly go its own way in international trade. Fresh produce will face higher costs and longer waiting times at the border, although this very much depends on the specific arrangements that will be developed over time for customs controls.

    European exporters of globally-traded commodities such as meat, dairy products, grains, and sugar will potentially face increasing competition on the UK market, although this very much depends on the future trade deals the UK will establish with third countries and their ability to meet UK quality standards. The further-processed consumer foods and beverages sectors might face a relocation of supply chains, with separate UK and EU supply chains versus today’s situation where these supply chains can run over both regions.

    Finally, products imported from third countries via the EU, might, in the future, increasingly be imported directly by the UK, to prevent a border crossing and therefore save on associated costs and time.

    Source: Rabobank

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