Brexit and the flour milling industry
Decisions about post-Brexit trading relations with the EU and the rest of the world could have an enormous impact on flour millers and their ability to remain competitive and in business. nabim has, therefore, taken a role in ensuring in collating and sharing the views of UK flour millers so that their needs are considered in negotiations.
nabim is seeking to ensure:
1. that millers continue to have access to the range of wheat that they need to make the flours that customers require, on terms as close as possible to those that exist today. That means maintaining access to wheat from the EU and third countries without duties, and continuing to encourage the production of suitable wheat in the UK; and
2. that UK based millers can continue to supply their customers in the European Union without the payment of duties and with a minimum (ideally nil) of additional paperwork and inspections. In the jargon, as frictionless as possible.
Bearing in mind that the EU tariff on flour imports is €172 per tonne, maintaining a secure supply of flour to EU customers will depend on the UK either remaining within a customs union with the EU, with common tariffs; or the establishment of a preferential trade agreement that allows tariff free trade in flour. nabim has been working hard on both scenarios and briefed widely on the importance of avoiding tariffs for trade in flour and bakery goods, especially in relation to Ireland.
The EU and UK reached agreement in December 2017 on a transition agreement, with draft legal text largely signed off in March 2018. This was translated into an agreement finally signed off by the UK government and the EU member states in November 2018. However, to come into effect it has to be ratified by both the UK and European Parliaments, an outcome which for the time being looks very much in doubt.
The Negotiated Deal
The deal reached between the UK and EU negotiators would do three things if it is ratified:
- unlock a transition period after March 29th when the UK will no longer be a member of the EU, and will forfeit rights of representation in the Council and the European Parliament, but will in almost all respects be treated as if it were a member. This period will last until the end of 2020, although it can be extended by up to 2 years.
- It sets out some aspirations for a future relationship between the UK and the EU. These foresee a comprehensive free trade agreement with no tariffs on goods in either direction, but neither side is committed to anything specific.
- However, it also contains a backstop position, which would apply at the end of the transition period unless it were superseded by an agreement with which both sides are happy. The backstop is designed to prevent the re-emergence of a hard border in Ireland and would mean that all of the UK was within a customs union for goods (except fish), ie no tariffs; and regulations applied in Northern Ireland would mean that no checks were required in North-South trade on the island of Ireland. There would also be no checks required on trade between NI and mainland GB, although some would most likely be required on trade between GB and NI, and also between GB and the Republic of Ireland.
It is the backstop provisions that are proving most politically controversial, as some people don’t like the idea of the UK being tied to a customs union with the EU, and others don’t like the special status accorded to Northern Ireland seeing it as either a division in the UK or an exception that favours one part of the UK over others. The idea that an end to the backstop has to be mutually agreed is also proving controversial. On the EU side, it is argued that backstop arrangements effectively give the UK access to the EU market with nothing in return and no guarantee of regulatory convergence.
The Ratification Process
Both the European and UK Parliaments have to sign off on the agreement before it can be passed into law. The exit agreement (including the backstop arrangement) is a legal treaty, whereas the statement about the future relationship is not. If the exit treaty is not ratified by 29th March, unless there has been an agreed extension of the timetable or the UK has rescinded its notice of withdrawal, the UK will leave the EU without an exit deal – the famed “no deal” scenario. This puts both sides under increasingly acute time pressure.
At present, there is not a majority in favour of the agreement in the UK Parliament, with many voices calling for changes and a massive defeat for the Government on 22nd January. However, the EU Council has so far made clear that “significant” amendment (for example to the backstop arrangement) is not possible without reopening the entire negotiation. If this were to happen, it would almost certainly require an extension of the timetable or the UK would leave without a deal. Some have suggested that this is an intention of “no deal brexiteers” arguing for change. On the other hand, there are also voices calling for an extension of the negotiating period, which is permitted under the Article 50 withdrawal process if both sides agree, in order to allow for negotiation of a different agreement. For this renegotiation to be worthwhile, it would have to include changes to the withdrawal agreement, and not just to the statements about the intended future relationship. So that might mean the UK changing its “red lines” on immigration, the jurisdiction of the European Court of Justice (and other EU courts), the single market etc – ie the UK agreeing to changes that would keep it closely tied to the EU; or both sides either agreeing a different mechanism for avoiding a hard border in Ireland or accepting that a hard border might emerge. At present, neither seems very likely, although on each side there have more recently been small indications of greater flexibility. It is this point which the UK is seeking to address in the period between 30th January and 14th February.
It is said that there is a majority against “no deal” in the UK Parliament, but unless something else is agreed, that is the default outcome. Therefore Parliament has to agree on an alternative for that to be progressed. It is expected that in the coming weeks there will be a series of debates and votes in Parliament, with the next scheduled to take place on 14th February. These could lead to: acceptance of the negotiated agreement; agreement of an alternative (which will almost certainly require a delay in EU departure); or lack of agreement on any course of action, which may result in an extension of EU membership and possibly a second referendum, or departure without a deal. It is also possible that at any stage there could be a vote of no-confidence in the government, leading to a general election.
In summary, provided that the agreement can be confirmed, it looks as if tariff free trade with the EU can be maintained at least until 2020, and most likely well beyond that date. However, this final agreement is looking increasingly difficult to achieve by 29th March, increasing the risk of the UK leaving without an agreement
In the longer term, both sides say they want to achieve a preferential trade agreement, without tariffs on goods. These agreements are always accompanied by rules which define what constitutes goods from the countries concerned - so called Rules of Origin. These are needed to make sure that, for example, goods from China are not freely imported into the UK and then re-exported to the EU, avoiding EU tariffs. nabim has been leading efforts in the UK food sector to establish what the UK's negotiating position should be. Our objective is that when a trade agreement is reached, the Rules of Origin should allow millers to continue to use wheat from third countries in their grists when flour or bakery goods are exported to the EU. We produced an initial report that was well received by UK government and others available at http://www.nabim.org.uk/events-and-publications/rules-of-origin-report-2018/ and are now working to develop a draft text so that negotiators can be well prepared. Although intended for use in EU negotiations, this work will also be helpful to UK discussions with other potential trade partners.
Our activity in this area is designed to ensure that if there is a trade agreement, it actually delivers tariff free trade for the range of products millers and their customers export to the EU.
The withdrawal agreement also contains text about what might be considered "goods on the market" which can continue to trade freely once the agreement comes to an end. This will also be relevant in the event that everything falls apart and the UK leaves the EU in March 2019 without an agreement. Working with the Brexit Arable Group (a mechanism for discussion with government convened by nabim) we are working through scenarios which will help members in contingency planning. In brief, goods will be considered to be "on the market", and therefore available for trade within the UK and EU under existing rules, if (a) they have been produced and (b) there is a contract for sale already in place at the relevant cut-off date. If there is no deal, it is likely that gods will have physically to be in the destination jurisdiction to be considered “on the market.” For this reason, and because of potential logistical problems, businesses are already beginning to stockpile products as a buffer to manage disruption.
Should discussions break down completely, meaning that tariffs are introduced on trade between the UK and the EU, use of the import processing relief (IPR) system, which exists in the EU and the UK will replicate, could help to substantially mitigate the impact of tariffs. Basically, this would allow the import of EU wheat tariff free, provided that it was processed and then re-exported. The resulting flour exports would be subject to a reduced tariff on entry to the EU, the exact amount depending on the relative value of the wheat and flour traded. This mechanism is far from ideal, but could be used to reduce tariffs on flour to a level similar to the cost of freight from mainland Europe to the island of Ireland. nabim is working with customs specialists to provide advice to members on the use of these schemes
Securing Access to Wheat
The fall-back tariff on wheat imported to the EU is €95 per tonne. However, there is a system which effectively allows high quality wheat to be imported duty free and a large quota permitting the import of lower quality wheat at a tariff of €14 per tonne or less.
From the beginning, DEFRA officials have said that the UK will transpose existing EU legislation on market regulation into UK law, and this will include the existing tariff architecture. This would ensure continuing access to wheat from third countries on existing terms (i.e. including the system which allows imports of high quality wheat tariff free). They have continued to confirm this position as discussions have progressed. Uncertainties relate to the availability of EU wheat, although this would be resolved by the interim measures described above or agreement of a preferential trade deal. There are also uncertainties in relation to the availability of quotas, which might be used to import quantities of lower quality wheat at a reduced tariff. The EU and UK have agreed a division of quotas based on historic usage but other countries are not necessarily supportive of this division, and it is not clear that historic usage will remain unchanged by Brexit. However, should there be problems in sourcing wheat from the EU, there are likely also to be problems for UK wheat exports to the EU, meaning a change in the national supply/demand balance.
At this stage it is difficult to say how growers might react; the likelihood of an interim agreement will provide opportunity for clarity to emerge. In the meantime, nabim's aim is to maintain maximum flexibility from a regulatory perspective so that millers’ choices remain wide.
In the UK, DEFRA is in the process of developing a new agriculture and environment policy for England and Wales. This is likely to result in a change in support mechanisms from 2019/20, with an anticipated drop in direct payments to larger farmers. Along with other sectors of the food industry, nabim has emphasised that the new government policy should be used to underpin the supply of food (including grain) that customers want to buy.
In brief, basic UK regulation should allow the continuing availability of wheat from third countries on the same basis as today; discussions with the EU suggest that the same will apply to wheat from Europe, but tariffs might apply in the event of a disorderly Brexit; and although the support regime in England and Wales will change, the impact is likely to be gradual, beginning in 2019/20.
What Happens Next?
nabim will continue to pursue the objectives set out above. There have been many twists and turns at a political level, and the risk of a “no deal” Brexit has risen since the beginning of 2019. Businesses should therefore be considering at what point contingency plans for this eventuality ought to be put into action.
Members with a close interest are encouraged to participate in our regular Brexit calls, please contact Joe Brennan if you would like to know more about, or to be involved in these. Summary notes from previous calls can be accessed by nabim members in the 'nabim Brexit Teleconference' page.