So now we know the result – the UK public has voted to withdraw from the EU. But what does that mean for Food and Drink businesses, and what happens next?
The UK currently remains in the EU, so nothing will change immediately. The rules envisage a 2 year process of withdrawal from the EU, which isn’t very long to negotiate a brave new world for UK trade and governance. Here are some of our thoughts on how things might pan out in key areas for the sector, but this is an unprecedented process and the only certainty at the moment (aside from the referendum result) is that we will be living in uncertain times, at least in the short term.
It is probable that the UK will now have to renegotiate terms of trade agreements previously concluded by the EU. To what extent and on what terms non-EU countries will be willing to establish trade agreements direct with the UK remains to be seen. Existing tariffs imposed on goods coming into the UK from outside the EU would be significantly reduced if default World Trade Organisation rules were applied without the UK adopting its own tariff regime. This could result in cheaper imports undercutting UK food producers but might also be beneficial to manufacturing and food service businesses further along the food supply chain.
The UK will certainly have to negotiate new trading terms with the European Single Market and the level of tariffs to be levied on goods imported into the EU from the UK will be significant for many in the food and drink sector. The EU currently levies tariffs on many food products coming into the single market, so this could have a negative effect on the sector unless the UK is able to negotiate beneficial terms.
Labelling and food safety
Like Norway and Switzerland, it is very likely that if the UK wishes to trade with the EU it will have to abide by many of the existing rules and regulations affecting the food and drink sector. Governance around labelling, food safety, and health claims will remain if the UK wishes to export food products to the EU.
The governance around labelling and food safety is well embedded in existing UK legislation and it is unlikely that there will a rush on the part of the UK government to make significant changes to these rules. With the exception of the regime around health claims, the rules are largely viewed as working fairly well as they are. The health claims regime is viewed as problematic by many but the UK will have to continue to abide by them for the purposes of trading with the EU. In time there may be calls for this regime to be addressed for food products sold within the UK and to other countries, but that would result in dual labelling requirements for exporters to the EU and we suspect this issue is not high on the Government’s list of matters to deal with in a post-Brexit UK.
Currently the UK Food Safety Agency shares information with its EU counterparts about food safety and food fraud issues. This process is designed to protect the general public and food businesses from criminal activities in the food and drink sector. It is possible this arrangement might continue on a renegotiated basis post-Brexit, but there are no guarantees.
Protecting consumers does carry a cost for businesses and, yes, the European Union's Directives have imposed obligations on the UK to meet certain standards including product safety, obligations for product recall and rights of return.
However, the UK built its own consumer laws, before it joined the EU in 1973, and much of the recent Consumer Rights Act 2015 was a UK creation. It therefore appears, given the UK’s stance in raising consumer protection standards, very unlikely that Brexit will have any large impact upon consumer rights protection.
Brexit does not mean any sudden change to the level of protection that UK registered trade mark proprietors, including EU Trade Mark (formerly Community Trade Mark) holders, will receive. Mechanisms will probably be established to determine how to convert EU Trade Marks into UK national marks and it is likely that there will be some sort of filing fee to cover the huge administrative burden. The important thing to note is that rights remain safe and there are likely to be provisions for continuity of protection.
Free movement of EU nationals across the EU will no longer apply to the UK, unless this arrangement continues as part of a renegotiated trading arrangement between the UK and the EU. A change to these rules would mean that the existing pool of labour for the UK food and drink sector will be significantly reduced. Currently, 38 per cent of food manufacturing employees in the UK are foreign born nationals and 65 per cent of agricultural workers are non-UK EU citizens. In addition, approximately 80 per cent of seasonal workers employed at the primary production end of the food supply chain are sourced from the EU – UK workers are reluctant to take on such short term, uncertain employment. This could result in labour shortages and/or price increases for the sector as it is forced to take on alternative, more expensive, labour.
Existing challenges for the food and drink sector include the cost and impact of the national living wage and the forthcoming apprenticeship levy for businesses with an employee paybill of over £3 million. These will remain in place for UK food businesses for the foreseeable future, regardless of a Brexit vote, because they are initiatives introduced by the UK government outside of any EU regulation.
The existing subsidy regime under the EU Common Agricultural Policy (CAP) will go. On average 55% of farmers’ income is currently received via direct subsidies under the CAP. No guarantees have been given about what, if anything, will replace this post-Brexit – although it is generally accepted that some form of alternative subsidy regime will be introduced. The fear is that the general public will balk at matching the expenditure of £3 billion currently received from the EU, so primary producers may find that their incomes are reduced. This could result in many going out of business and could also have a direct impact on food prices as businesses further up the food supply chain (particularly supermarkets) are forced to increase prices to ensure security of supply.
There is no doubt that the uncertainty created by the EU referendum vote has impacted on deal flow and corporate confidence when analysing the data from the first quarter this year compared to the same period last year. That market uncertainty is likely to continue for a time as businesses try to establish exactly what a post-Brexit UK will look like, so deal activity is not likely to rise significantly in the short term. It will be interesting to see whether Brexit will lead to some change in the strategy of overseas companies seeking a UK deal as an entry point to Europe before accessing the wider market. However, in the long term, given its financial, regulatory and legal frameworks for doing business, it is difficult to imagine the UK not remaining an attractive opportunity for investors.