The UK’s Food and Drink Federation is warning businesses in the sector that they could face a hidden ‘hard Brexit’ once the country leaves the EU as a result of rules of origin.

The UK government has set out its intention to negotiate a free trade agreement with the EU after it leaves the single market next year.

However, a report, written by Global Counsel, which the FDF jointly commissioned with the National Association of British and Irish Flour Millers (NABIM), says to benefit from preferential access businesses on both sides will need to comply with origin requirements.

Rules of origin are the complex requirements that determine whether or not a product is produced ‘locally’ in the UK or the EU – its economic nationality. If it is not deemed to be sufficiently British, in the UK’s case, it may not qualify for preferential tariff rates.

The report’s title – Rules of origin in an EU-UK FTA: A ‘hidden hard Brexit’ for food and drink exporters? – suggests this is an issue that has not yet been fully understood.

Ian Wright, director general of the FDF, said: “Rules of origin are a big piece of the Brexit puzzle for the food and drink industry. If we fail to secure sufficiently generous rules as part of a preferential trade agreement with the EU, food and drink manufacturers will be the ones who suffer this hidden hard Brexit. They could be facing an increase in exporting costs, or a complete ban of entry to the market.”

The report points out ingredients in many food and drink products are a mix of domestic and international goods, many of which are not produced in the UK or not in sufficient quantity throughout the year to meet consumer demand.

It says under existing models applied by the EU, many UK manufactured products would not qualify for preferential tariffs. It gives the example of UK chocolate producers – which export GBP530m (US$739.8m) of products each year to the EU – and says they could face tariffs of 27% or more depending on the value of UK refined cane sugar originating from other countries and the volume of Irish milk in their products.

Alex Waugh, director general of NABIM, said: “Flour millers in the UK source 80% of their wheat from the UK, but also use grain from Canada, the USA and other European countries to make a range of flours with different baking qualities.

“If the rules of origin adopted in many of the EU’s trade agreements were to apply in a trade deal between the EU27 and the UK, flour milled with even a small proportion of these grains, and many food stuffs made from it, would no longer be considered ‘of UK origin’ and would therefore be subject to very significant duties.”

The levels at which global content will be allowed in such food and drink products will be set during negotiations to determine the UK’s future trading relationship with the EU.