Rules of origin demands expose UK food industry to a 'hidden hard Brexit,' report warns

16-Mar-2018 - Last updated on 16-Mar-2018 at 14:09 GMT

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The UK's food and drink sector is facing a ‘hidden hard Brexit,’ a report warns, as the supply chains used by UK producers within the EU are vulnerable to future rules of origin requirements.

The report by the Food and Drink Federation (FDF) and the National Association of British and Irish Flour Millers (NABIM) thinks failure to comply to the rules could cost UK firms exporting to the EU over €15.1bn (£13.3bn) annually.

“Rules of origin are a big piece of the Brexit puzzle for the food and drink industry,” said Ian Wright FDF’s director general.

“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.”

What are rules of origin?

The rules of origin refer to guidelines that decide whether a product is produced 'locally' in the UK or the EU. If a food is deemed ‘British’ it could qualify for preferential tariff rates.

The issue arises in the make-up of UK products, which are almost always a blend of goods from the UK and abroad.

By sourcing worldwide, these ingredients can meet the production shortfall in the UK or its production in sufficient quantities throughout the year.

For example, UK chocolate producers that export €601m (£530m) of products annually to the EU could face tariffs approaching 27%.

This is dependent on the value of UK refined cane sugar that comes from the world's poorest countries and the volume of milk originating from Ireland in their products.

In a similar vein, wholemeal bread and the flour used in the manufacturing process is milled in the UK from a blend of grains procured from a range of growers in Canada, the US and the UK, reflecting both global price and harvest quality.

Prospect of ‘very significant duties’

“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,” explained Alex Waugh, National Association of British and Irish Flour Millers’ director general.

“If the rules of origin adopted in many of the EU's trade agreements were to apply in a trade deal between the EU 27 and the UK, flour milled with even a small proportion of these grains, and many foodstuffs made from it, would no longer be considered 'of UK origin' and would therefore be subject to very significant duties.

“This would add, for example, €0.10 to the cost of a loaf in Ireland, which is mainly supplied with flour from the UK. Negotiating the right agreement is therefore crucial to the entire food supply chain, including consumers.”

The report feared that manufacturers would face the prospect of either a costly restructuring of their supply chains or de factor barring from future EU-UK trade.

This would be because of the EU's Most Favoured Nation (MFN) tariffs, which are prohibitively high for food and drink, rising to more than 100% on many of the UK’s products.

Recommendations set out

The report sets out a number of recommendations the UK and EU can take to minimise disruption in food and drink trade.

These include a basic de minimis allowance for non-local content in all goods, set at 10% by value in addition to any other product specific allowances.

The EU and the UK could also ensure that any origin requirements imposed on EU-UK trade were cumulative, meaning that goods originating in either market were treated as originating in both for the purposes of meeting origin requirements.

For example, French wheat used in a UK biscuit, could be treated as local content in the free trade zone created by an EU-UK FTA and vice versa.

“This would help protect the dense networks of sourcing and supply that exist inside the single market for food and drink manufacturing today and give business more choice and consumers ultimately lower prices,” the report said.

The report also suggested the EU and the UK could simplify the administrative burden of complying with origin requirements especially for small importers and exporters.

This could include wider use of self-certification, extended validity for origin designations to minimise reapplications and exemptions for low value shipments.

In addition, both the EU and the UK would need to improve the availability of clear origin determination guidance to traders, especially small and medium-sized enterprises (SMEs).