Mays 12-point plan includes leaving EU Single Market

May's 12-point plan includes leaving EU Single Market

The UK government has now provided a clearer idea of its objectives for the Brexit negotiations. Ben Cooper looks at where Theresa May's "12-point plan" leaves food companies within the UK and beyond its borders.

Ever since the UK voted to leave the EU, food manufacturers – along with many others – have been calling for greater clarity from the government about its plans. A fortnight ago Prime Minister Theresa May provided the clarity food companies were seeking, if not necessarily the news many wanted to hear.

Most significantly, the "12-point plan", followed up today by a White Paper also outlining the government's plan and negotiating objectives, confirmed for the first time that the UK would not be seeking to remain in the EU Single Market, seeking instead a "bold and ambitious free trade agreement" with the EU. 

If the UK is to forge its own trade agreements beyond the EU, another aim enshrined in the plan, it can no longer be bound by the Common External Tariff and that rules out remaining in the EU Customs Union. May said the UK would push for its own customs union with the EU or associate membership of the existing union. 

Clarity brings little comfort

The response from the Food and Drink Federation (FDF), which represents UK food manufacturers, could be viewed as the epitome of putting a brave face on it.

FDF executive director Ian Wright welcomed the "additional clarity" but his statement serves to show how much uncertainty remains. For example, he said we was "encouraged" that the Prime Minister "hopes to adopt a phased approach to Brexit".

The FDF was positive about other aspects of the plan but in a sense there was nothing to welcome, nothing tangible at least. The plan represents a set of aspirations for the government. The Prime Minister wanted her speech to be something of a rallying cry. "I want Britain to be what we have the potential, talent and ambition to be," she told the assembled audience of high-ranking diplomats. "A great, global trading nation that is respected around the world and strong, confident and united at home."

The UK food industry is duly getting behind her, hoping she will in turn be sensitive towards the food sector's requirements of a post-Brexit settlement. 

UK food sector exposed 

When one considers the exposure of the food sector to the impact of Brexit, it is little wonder Wright found as much to praise in May's speech as he could. In addition to its dependence on workers from EU countries, the EU accounts for 70% of UK overseas trade in food and drinks, both in exports and imports.

May insisted that "no deal for Britain is better than a bad deal for Britain". In other words, if a satisfactory deal cannot be reached, the UK government is prepared to walk away and revert to World Trade Organization (WTO) rules. This sets out the strong initial negotiating position that the government clearly feels is necessary, but the implications for the food sector of such an outcome would be grave. It is essentially the worst-case scenario food companies have had to entertain as a possibility since the referendum.

While some eminent experts, such as former Chancellor of the Exchequer Nigel Lawson, believe the WTO scenario would not be the disastrous outcome some predict, this is a minority view and one that looks at the economy as a whole. Reverting to WTO rules would be worse for some sectors than others. In particular, highly regulated industries, like food, have far greater exposure to non-tariff barriers. 

David Lowe, partner at UK-based international law firm Gowling WLG and head of its Brexit unit, believes the food sector would be likely to suffer disproportionately. "Any business's reaction to ending up on WTO rules will depend on their subsector because the WTO rules establish different rules on different sectors and different sectors are impacted differently by regulation," Lowe says. "Food is heavily impacted by regulation, and therefore you can see how on balance the food industry is likely to do worse out of that scenario." 

The FDF contends the significance of the food and drink industry to the economy means it "must be a top priority in any consideration of sectoral deals with the EU". The government may agree, but if it does that only underlines further the challenge the UK faces in coming to an agreement with 27 other member states. As Lowe points out: "Agriculture tends to be a very big problem in any international trade deal."

The impact of Brexit beyond the UK

It is not only UK food companies that are suffering under the uncertainty Brexit has created. Food companies from outside the EU that may either have operations in the UK or be considering locating there are also affected.

In October, the FDF's Wright said he had not seen "signs of any decanting" but said if the UK came out of the Customs Union and obtaining the required labour became more challenging, "you could see that happening". He added: "we're a long way from that at the moment". Whether he could be quite as sanguine now is open to serious question.

A survey commissioned by Gowling WLG in September/October revealed that Brexit had become a material factor influencing location plans for US firms. Senior executives from some 600 US-based firms which export to Europe, across a variety of sectors including food and beverage, were asked if they were more likely to "bypass the UK in order to do business with the rest of the EU as a result of the Brexit vote". Some 61% said they would be, while 39% said they would not. They were also asked if they had a base in the UK and whether they were considering relocating it to elsewhere in the EU as a result of Brexit. Some 45% said they were, while 43% said they were not. 

Food companies and sectors across the EU also face potentially huge logistical and economic challenges if a mutually favourable divorce cannot be agreed or is substantially delayed. In the meantime, the uncertainty represents a business risk in itself.

In addition to the threat to trade Brexit poses, food companies across the EU, like their counterparts within the UK, depend to a significant degree on supply chains which have been established on the basis of unfettered movement of goods across EU borders. 

After 25 years of the Single Market, food supply chains across the EU have become "completely interlinked", Alexander Anton, secretary general of the European Dairy Association, explains. "Let's call it what it is. Brexit is for the food and drink industry more than a challenge. It's close to a catastrophe." 

Anton also expresses concern that the EU food and sector will not have as great an influence over the negotiations as some other sectors. "We know we are not in the first row when it comes to the negotiations," he tells just-food. 

Apart from the UK food industry itself, the food sector most threatened by Brexit is Ireland's. In an interview with just-food in November, Paul Kelly, director of Irish food body Food Drink Industry Ireland (FDII), spoke of the "huge exposure" the Irish food industry has to the UK market, and the threat a "hard" Brexit would represent. 

The UK accounts for some 41% (EUR4.4bn) of Irish food and drink exports, including 56% of meat exports, 30% of dairy exports and as much as 70% of prepared consumer foods. In view of this, FDII has called for a raft of exemptions from EU rules to allow the Irish food sector to receive exceptional support in response to the "the increased likelihood of a hard and disruptive Brexit". 

In fact, FDII published its report putting the case for extraordinary measures only the day before the UK revealed its 12-point plan and confirmed the worst fears of many Irish food companies. FDII is yet to comment on the plan itself but as it prepared its report it clearly had a very good idea which way the wind was blowing. 

In marked contrast to the upbeat and optimistic tone May sought to strike the following day, Kelly said: "The hardening of EU and UK negotiating positions mean we must plan for a very difficult Brexit process and the high possibility of a divisive outcome." Food companies in Ireland, the UK and across the EU will be hoping he is wrong.