By Dr Richard North
This post is by my friend and colleague for over 30 years, Dr Richard North. First of all, he is an excellent researcher who has consistently produced work of the highest quality, which is based on his thoroughness coupled with his emphasis on using primary sources wherever possible. Secondly, he has unparalleled knowledge of the workings of the EU, which originates from his experience of working in Brussels. Thirdly, he has been pro Brexit for many years but in his recent blogs the theme is not pro or anti but specifically focuses on how an orderly Brexit can be achieved. Because of his unique knowledge and insight he is ideally placed to provide an informed critique of the official UK Government approach to Brexit. Remarkably he produces a blog EVERY DAY and has covered all aspects of the negotiations. He also describes in detail the implications for the various business sectors. I have no doubt this is without question the absolutely best source of information on Brexit available. If only the Prime Minister and the Cabinet would utilise it we would not be heading for one of the greatest social and economic disaster the UK has ever faced. This is illustrated very neatly by the challenges faced by the food supply chain. Here is the latest blog, which demonstrates the ignorance and naivety of some of the leading lights in business. Scary stuff!
I am most grateful to Richard for permission to re-post his blog of 13th August 2017. The original can be sourced here:
This link will enable you access all his other blogs and the commentaries.
Food and non-alcoholic beverages imported into the UK is valued at approximately £35 billion a year. By value, they account for 40 percent of food consumed annually in the UK, with EU imports accounting for about 70 percent of food imports – or about a third of our total consumption.
The £35 billion cost represents landed prices, which include cost of production and shipping, plus any tariffs paid. To this must be added distribution, etc., costs and retailers’ margins, to get to the over-the-counter spend. Likewise, UK production values represent farmgate or ex-factory prices, so distribution and retail margins must also be added.
At a rough figure, the total import/production cost of the UK food supply (the net cost) is in the order of £120 billion (UK production less exports, plus imports).
Actual consumer spend (direct and indirect) is difficult to calculate. The retail spend in the grocery sector (including supermarkets) is about £192 billion, but to that must be added specialist shops, restaurant sales and institutional meals (works canteens, hospitals, etc). At a very conservative estimate, that puts the consumer spend (final cost) at about £240 billion – about twice the net cost.
As to the effect of Brexit on food costs, there have been various studies on the impact of tariffs, with one suggesting that the price of imported fruit and vegetables will rise by up to eight percent.
Elsewhere, it has been claimed that the average tariff on third country imports is 22 percent, which means that falling back on WTO MFN tariffs would have that level applying to EU produce.
Actually, this is flawed. The average tariff does not represent the amount paid. For that you need the trade weighted average – a figure adjusted for the relative volumes of the different products imported. That, currently, is closer to four percent.
Should we then apply MFN tariffs to EU produce, the “basket price” – the increase across the range of goods bought – would thus work out at that four percent. But, since EU imports are only 30 of total food consumption, the effect on the net price 1.2 percent. If that was then passed through without a multiplier, the cost to the consumer would work out at 0.6 percent – considerably less than food inflation and less than the effect of currency fluctuations.
However, people such as JD Wetherspoon’s chairman, Tim Martin, argue that, far from triggering an increase, we could actually see price reductions if the UK went for a unilateral “zero tariff” policy. This would mean that the current zero tariff arrangement with the EU would continue, and we would no longer be paying tariffs on third country goods.
Indeed that would mean a saving by, overall, a four percent reduction on 12 percent of our food supplies, passed through unchanged to retail level, would account for a less than 0.3 percent saving – about 14p on the average £56.80 weekly shopping basket. This would be easily lost in normal price fluctuations.
What this points to – and tends to reinforce – is that the effect of tariff changes, either up or down, would be marginal. They are simply not a significant issue.
That is not the case, of course, with non-tariff barriers. And here we have J Sainsbury CEO Mike Coupe, who has obviously got the point about leaving the EU without a trade deal.
“There is a very straightforward fact”, he says, “which is that thousands and thousands of lorries cross the channel carrying food every day”, adding that, “It’s inconceivable that there isn’t some kind of arrangement put in place”.
Exactly a week ago, he was warning that fresh food “could be left rotting at the British border” if “strict customs controls for EU goods are put in place after Brexit”.
“If you take our fresh produce supply chains, for example”, he said, “we put things on a lorry in Spain and it will arrive in a distribution centre somewhere in England, and it won’t have gone through any border checks”.
Making the obvious point, he then said: “Anything that encumbers that has two effects: it adds cost, and it also has a detrimental effect on freshness – if you’re shipping fresh produce from a long distance, even a few hours of delay can make a material impact”.
Interestingly, Coupe claimed that the repercussions of supply chain disruption were “not fully recognised” in Westminster, leading him to warn that if it gets nearer to March 2019 and a solution has not been found, retailers and food producers will “make that point and make it very strongly”.
What Coupe also managed to do, though – albeit unwittingly – is demonstrate that he had “not fully recognised” the impact of Brexit on his business. “Our wish”, he said, “would be for unencumbered trade relations to remain”, clearly not realising that, with or without a trade deal, the UK was never again going to see ” unencumbered trade relations” with the EU.
He talks of problems if “strict customs controls for EU goods are put in place after Brexit”, clearly not realising that strict border controls will be necessary in any event, given the UK’s newly acquired status as a third country. It is not a question of if but when. Furthermore, Coupe does not seem to be making the distinction between customs controls, and sanitary and phytosanitary (SPS) checks. But then, Weatherspoon’s Tim Martin seems to be having the same problem. The “free trade” that he advocates “also facilitates customs clearance”, which has him rejecting the “bloodcurdling stories about the need to turn half of Kent into a lorry park”.
That the SPS checks require physical intervention, therefore, has completely passed Martin by, with him failing to understand that up to half of all consignments must be inspected.
Nor does he appreciate that the checks must be carried out on both sides of the border. As long as we maintain any checks on third country produce (and we have pledged to keep EU-style controls in place), we must subject EU goods to the same regime, to avoid falling foul of WTO non-discrimination rules.
Bizarrely, though, Martin shares his ignorance with the UK government which is still asserting that the Irish border question can be resolved “by letting big companies notify customs authorities electronically before goods are shipped, as well as setting up schemes for ‘trusted traders’ who would face minimal bureaucracy”.
In addition, small firms would be exempted to facilitate trade while rural roads would be monitored with numberplate recognition cameras to prevent smuggling, a suggestion that has already been rejected by the EU. Crucially, though, there is no mention of the SPS checks that must be carried out, or that these will be the factor causing the greatest disruption, especially as the necessary infrastructure is not yet provided and there are no plans for installing it.
Between the government and business, therefore, it seems that there is an almost complete failure at all levels to come to terms with the UK’s coming status as a “third country”.
Even the pharmaceutical industry is suggesting that problems can be resolved by ensuring “maximum alignment between EU and British pharmaceutical regulations”. Yet no amount of alignment will overcome the requirement for holders of market authorisations to be established in the EU, a requirement set to cause havoc in the industry.
And then we have James Dyson, speaking yesterday to Andrew Marr, further demonstrating how business figures are failing to grip the implications of Brexit. Confronting the EU’s supposed demands for “”billions and billions to leave”, he argues that we should “walk away”.
“I’ve been dealing with the EU and the EU countries for the last 25 years, on IEC standards and energy labels and all that kind of thing”, he says. “There’s no way to deal with them. You have to walk away. And if you walk away they’ll come to us. Because they want to export all their products to us, and so they’ll come back to us”.
This, in Dyson’s view, puts us in an “incredibly strong position”, leading him to repeat that, “We shouldn’t give them any money, we should just walk away. And they’ll come to us”.
It’s small wonder that the EU is planning for the collapse of the Brexit talks, making “technical preparations” for when the UK becomes a third country. Barnier warns: “A failure of the negotiations would have consequences on multiple domains, [not] just on the ability of British planes to land in Europe, the United Kingdom leaving the single sky, or on dogs and cats to cross the Channel”.
David Davis, having rejected Barnier’s two-week deadline, seems content to let this happen. But since Davis too seems to lack any understanding of the consequences of a “no deal” Brexit, one can see why he is relatively relaxed about the prospect.
More and more, this is the living embodiment of the proverb, fools rush in where angels fear to tread. Whether grocer Coupe, pub owner Martin, vacuum cleaner maker Dyson, or ex-sugar salesman Davis, they all have that much in common.