How Brexit Will Impact the Food and Drink Industry

Brexit is undoubtedly the defining political issue of our times, and despite the EU referendum taking place more than two years ago, very little about the UK’s withdrawal from the political union is known for certain. As a result, most of the country’s industries are facing their own challenges in terms of understanding the way things could play out, and how this could affect them. Here at Virtual College, we like to keep our fingers on the pulse of all the sectors that we work with. In this article, we’re going to consider food and drink, and how some of the most likely outcomes from the Brexit negotiations could affect this important industry.

State of play

First, it’s important to understand the size of the food and drinks industries in the UK. In addition, there are broadly three areas of importance within the sector; there’s the manufacturing and production industry, there’s retail, and then there’s also catering and hospitality. All will change as a result of Brexit. The food and drink sector also includes the UK’s largest manufacturing industry, with more than 400,000 employees in this industry alone. Processed food and drink GVA totals almost £30bn each year, and once you add catering and retail to this, the figure exceeds £100bn. Employee numbers for all food-related industries as a whole is more than 3.5 million. It’s easy to see the potential scale of the Brexit impact.

Currently, the UK is in the final stages of agreeing a withdrawal deal with the European Union. It’s intended that this deal will establish the post-withdrawal relationship between the UK and EU, which includes major considerations including the customs union and single market, and the UK’s attempt to replicate these in a new, separate agreement. Prime Minister Theresa May has stated that the deal is 95% complete, which would reassure most businesses that there will be some form of agreement in place come March 2019 when the UK is due to leave. However, critically, the remaining 5% contains the trickiest of sticking points; the Irish border situation, amongst others. Given that the EU has insisted that nothing is agreed until everything is agreed, we’re still at the stage where no deal is still very much a possibility, despite many elements of the future arrangement theoretically agreed. And the Prime Minister’s new deal - that sees us leave the customs union and single market but replicate them to some degree - is still not widely understood.

So how might the potential outcomes affect food and drink?

No Deal

The food and drinks industry has repeatedly made it clear that no deal simply cannot be an option. It would have negative consequences in all areas of the industry, including manufacturing, retail, and catering and hospitality, with raw and processed food manufacturing and exports being the biggest vulnerabilities.

Food exports from the UK are valued at more than £20bn each year, and 60% of them head to the EU. Should the UK be forced to trade with the EU under WTO rules, additional tariffs will have to be added to these exports, making British produce considerably harder to sell on the continent. This would threaten a huge amount of business, with a potentially crippling impact on revenue and ultimately livelihoods.

Further issues would be brought about at the border. Currently, the UK’s food and drink standards are entirely integrated with the European Union, and it’s very likely that the same if not similar standards would continue. However, it may well be insisted that additional checks are placed on UK goods to ensure that standards are being met, which could add additional time and strain onto British businesses. Much like many manufacturing industries, food and drink often relies on the ‘just in time’ principle, which would struggle with additional delays; supply chain management would broadly become much more difficult.

This is true for the opposite direction too. Retail, catering and hospitality relies heavily on importing food from the EU, and this could become considerably more expensive for many British businesses as a result of tariffs, or more likely, border issues and delays. Indeed, there have been concerns over food shortages given the potential for additional expense and delays. The UK could simply not impose certain checks on EU goods given similar or identical standards, but this would likely fall foul of WTO rules, opening up the UK to legal action from other WTO trade partners.

Free trade agreement

Some form of free trade agreement that allows near frictionless passage and sale of goods between the UK and EU is seen as being essential, and is the goal for the Conservative government. It would protect trade and ensure the British products remained competitive on the European market and vice versa.

However, there are still some potential issues that would arise as result of being a third party to the single market itself, even if frictionless trade was achieved. While the customs union’s primary function is setting a common tariff on goods from outside the union coming in, the single market is about flowing trade between countries inside the market, and people are key to this. The so called ‘four pillars’ of the single market mean free movement of goods, capital, services and labour. It’s this last one that’s a sticking point.

The EU insists that free movement of people must come with all of the benefits of the single market, so naturally no deal that the UK might agree can be as beneficial as it is now without this element. Perhaps the larger issue however is that the food and drinks industry views free movement of people as a major benefit in itself, because the industry is heavily reliant on workers from the continent. Migrant labour from the EU accounts for around a third of the 400,000 people working in the food and drinks manufacturing industry, with hundreds of thousands more also working in retail and catering. It’s easy to see how a lack of clarity on future movement rules could pose a major risk to businesses. These workers are found everywhere from manufacturing, to retail, to catering, and should they find it harder to work in the UK, the roles may not be so easily filled.

Opportunities

There are potential opportunities that Brexit could bring to food and drink, but they come with caveats. Leaving the customs union would mean that the UK would be free to negotiate trade deals with other countries from around the world, and there’s undoubtedly plenty of business to be done. As things stand, countries within the EU cannot negotiate their own trade deals with other countries, because a common external tariff has to be placed on all imports to the trading bloc. Some have argued that the UK’s food exports to the wider globe have been hampered because of this, and that we are over-reliant on exporting to the EU. Destinations such as China could be considerably more lucrative with the removal of certain tariffs imposed by the EU, particularly as it is a strong market for luxury goods, which the British food and drinks industry can supply.

However, it is deemed very unlikely that the volume of trade threatened by WTO tariffs can be replaced by such global deals, making the point somewhat moot. Trade deals can take a very long time to conclude, which is not something that most businesses will have if the UK crashes out without a deal. In addition, the simple logistics of distance mean that trade with our closest neighbours is always likely to be more cost effective and competitive than it is with distant partners.

Another, and potentially more contentious subject, is that of regulations. We’ve already discussed the fact that the UK is fully integrated into the EU’s standards, and post-EU this could be up for change. This is particularly true for any attempts to agree deals with places such as the US, who would almost certainly insist on a reduction in food standards versus the EU’s. However, amongst food and drink producers, the EU’s common standards are popular, and switching to a new standard could be costly and time intensive. Food hygiene legislation for example is currently dictated by EU law, along with a host of other standards including animal welfare. In addition, British consumers are not likely to take kindly to a reduction in expected food standards, which could have a significant impact on retailers and restaurants.

Summary

The situation is highly complex and constantly evolving, but it does seem that no Brexit outcome is likely to have an immediate positive effect on the food and drinks industry. It could be argued that the ability to negotiate trade deals may yield results in the future, but this is highly uncertain. In the short term, a no deal scenario would have immediate and severe consequences for this industry. Even a well-negotiated free trade deal would also not be without its consequences. Keep an eye on our food and drink sector page for further information in this ever-changing area.