EU Referendum

Brexit: the only way is down


I suppose I should be grateful that, over the past few days with my work on the "stabfest", I've only been called racist by three commenters – one of whom is our statutory naysayer who would disagree with me if I wrote that rain was wet.

For a brief period, though, I'm back on safer ground as we look at a recent development on the Brexit front, brought to us courtesy of the Grocer, one which points to a rather predictable outcome of our withdrawal from the Single Market.

The headline gives the clue as to what is happening, telling us: "Food exporters set to permanently cut ties with EU due to Brexit", with the legend that exporters are "increasingly concerned" that the second half of 2021 will see short-term Brexit disruption evolve into the permanent loss of certain EU markets.

Bluntly, this is precisely what I expected as the long-term prospects for continued food exports become evident. Neil Hammill, commercial director at Cambridge Commodities tells the sorry tale, noting that many exporters responded initially to the Brexit challenge by putting "band aids on bullet wounds".

However, says Hammill, many were now weighing up whether to stop exporting the goods which are encountering the worst "frictions" when they arrival at the EU border. Predictably, these are predominantly products of animal origin, but organic foods are also problematical.

For all the determination to make things work, Hammill "senses" that a substantial portion of the export trade is going to end in the "too hard box" What's left, he says, might be a business that's 75 percent of the size.

Alex Matheson, a partner at food and drink distributor Fresh Marketing, takes up the story. When the trade deal landed in December last year, he says, he expected the first few months to be "a bit chaotic" but that the business would find a way to make things work.

Five months down the line though, "some of our routes are becoming completely unworkable". There are occasions, Matheson says, when "hundreds of hours" had been spent trying to work out how to send £2,000 worth of goods.

“It’s not sustainable for us, it’s not sustainable for the customers, and it’s not sustainable for the brands. The only sensible thing for the importer to do is find the products from somewhere else,” Matheson added.

Matheson's business partner, Barney Mauleverer, fills in some more detail. Spain, Portugal and Italy in particular are throwing up "horrific issues", he says. Local officials are enforcing their own interpretations of the rules, different to elsewhere in the EU.

One of the delights is a new requirements on export health certificates for composite products. "Often Spain insists that we need a health certificate, the UK says we don't", Mauleverer adds.

This is something I reported on in March and, contrary to some news stories, new rule coming into force were supposed to have made thing simpler. Spain, though, doesn't seem to have got the memo.

There is, of course, a facility to deal with this built into the TCA, through the partnership council and committees, which can act now that the Agreement has been ratified by the EU. But it says something for the way that the Brexit process has been handled that the committees – which deal with the nuts and bolts of the workings of the Agreement – still don't seem to have been established.

In the ensuing confusion, Fresh Marketing has been forced to ship goods via Belgium for the Spanish market. Food intended for Portugal is being redirected via Malta. Says Mauleverer: "I think these importers are going to give up and turn their attention to lower hanging fruit".

And there, he has hit a very large nail squarely on the head, addressing an issue which has gained scarcely any traction in the UK media. The point is that, with the UK leaving the Single Market, considerable burdens are placed on the importers.

Thus, doesn't matter how much the UK side is prepared to adapt, unless UK firms are prepared to set up subsidiaries in EU Member States to handle imports. Without that, direct imports from the UK will be highly problematical for EU firms, many of which will find it easier to purchase from within the EEA.

This even seems to be dawning on Sandra Sullivan of the Food & Drink Exporters Association. She says that many companies had hoped at the start of the year that new trading rules with the EU would change. "But the fact is this is EU legislation", she says. "It's the rules. That's now sinking in and companies are starting to change their business models".

She points to one major tea brand that has now completely stopped organic exports because "it's just too difficult". Organics, it seems, have been one of the food sectors worst hit by Brexit, with difficulties including re-exporting goods that arrived in the UK from third countries.

That is the extent of the Grocer report, so the wider implications haven't been spelled out. After the initial "muddling through" phase, where companies were seeking to get their stuff through at any price, we are now entering a second phase.

In this, exporting companies, even if they are able to get their products to their EU customers, are asking whether it is profitable for them to do so. And they are finding that for many products, exporting to the EU isn't worth their while.

On the other hand, EU-based customers will be asking themselves whether importing directly from the UK is worth the hassle. Unless they can but from an EU-based subsidiary, many will decide to look elsewhere. And that process will gather momentum over time, possibly taking some years before the full effect is felt.

To deal with the new situation, we are certainly going to see changes in trading patterns. It is already the case that the "groupage" trade is products of animal origin is dead in the water. Only those exporters which can fill a container of truck are going to find trade worthwhile.

But perhaps the big "killer" is going to be the change in legal liability – which probably hasn't dawned on all the traders yet. But, as long as the UK was in the Single Market, its exporters retained the legal liability for products sold anywhere in the EU.

Under the new regime, importers assume that liability so that if, for instance, a UK-produced food causes food poisoning, the importer carries the can – as it will for any regulatory infractions, such as incorrect labelling or non-permitted ingredients.

As and when importers become aware of this – and there are indications that some EU companies are as slow on the uptake as their UK counterparts – we can expect then to exhibit a growing reluctance to continue trading relationships.

Then there are issue such as VAT, which seem to be having a two-way effect, with many EU businesses reluctant to export to the UK, or are setting limits on the values of consignments.

Trade arrangements with the EU, therefore, are very far from settled and, although we are hearing the loudest cries of pain from the food industries, other sectors will be going through similar problems and their own learning curves.

On that basis, it is and always was wrong to draw any long-term conclusions from the last quarter's trade figures. As I have suggested, it may be years before we see the full impact of Brexit. But, if the food industries are any guide, the only way is down.

Also published on Turbulent Times.