FOOD & DRINK AND BREXIT

FOOD & DRINK AND BREXIT BRODIES BREXIT GUIDE.

What might Brexit mean for the food & drink sector? On 29 March 2017 the UK s Article 50 Notice was delivered to the European Council in Brussels, triggering the formal process for the UK s exit from the EU. Immediately following delivery of the notice, the UK Government s Department for Exiting the European Union issued a White Paper on the Great Repeal Bill (entitled Legislating for the UK s withdrawal from the European Union ), which focuses on the legal changes required as a result of Brexit. The Government s aim is one of stability: to ensure that the same rules and laws will apply on the day after exit as the day before. The intention is that the Great Repeal Bill will repeal the European Communities Act 1972 (giving effect in UK law to the UK s exit from the EU), while at the same time ensuring that the body of EU law (known as the acquis ) as it exists at the time of Brexit is preserved in domestic UK law. Pre-Brexit EU law would therefore generally continue to apply unless and until such time as the UK Parliament (or, where appropriate, the devolved legislatures) decided to change it. The UK Regulatory Regime The UK s Article 50 Notice stated that negotiations around Brexit and the UK s continuing relationship with Europe should be run in tandem, but the EU wants a phased approach that deals with the immediate terms of exit first. It is hard to see how either agreement could be finalised without a clear view of what the other will look like, at least in principle. The future UK-EU relationship is an issue of particular importance for the food & drink sector in light of the significant volumes exported from the UK to the EU, and vice versa. Food & drink businesses will be considering many of the Brexit-related issues that apply to business generally, including on contracts (e.g. the geographic scope of EU distribution arrangements, and the enforceability of choice of law and jurisdiction clauses), post-brexit protection of IP and the impact of currency fluctuations. However, this briefing focuses on a few key considerations of particular relevance to the sector. Much of the legislation applying to food & drink comes from the EU, either in the form of directly-effective EU regulations or via directives that have been given effect by domestic UK legislation. This includes rules on labelling, food safety and additives, and the making of health and nutrition claims. The Great Repeal Bill will transpose EU law into domestic law, and provide for EU-derived domestic regulations to continue to be in force post-brexit. The sector can therefore expect continuity of regulation, at least in the short-term. However, the Prime Minister has made it clear that the UK does not intend to remain part of the EU s Single Market. As such, the UK will no longer be bound to follow existing EU food & drink regulations, or adopt new ones. While it is possible that the UK will agree to keep those rules in return for a free trade agreement with the EU, the sector should plan on the basis that there may be scope for changes in future. Food & drink businesses should therefore be considering whether they would benefit from changes to the UK regulatory environment once EU limitations no longer apply, and in particular whether they would prefer a lighter-touch regulatory regime (e.g. on matters such as labelling see below for more). If so, they should be making those views clear to the UK Government, to ensure that they are taken into account during Brexit negotiations.

A separate Scottish dimension? For Scottish businesses (and businesses elsewhere, in the UK and abroad, that sell into Scotland), it is worth noting that food safety and consumer protection is devolved to the Scottish Parliament. To date the Parliament s freedom of action in this area has been constrained by the requirements of the overarching EU framework on food safety issues, but post-brexit this will no longer apply. The Great Repeal Bill White Paper suggests that the UK Government is minded to replace such EU frameworks with UK-wide equivalents, to guard against the possibility that regulatory divergence would lead to trade barriers within the UK. However, the Scottish Government takes the view that areas that are already devolved, even if currently limited by EU constraints, should not be subject to any new UK restrictions post-brexit. Food & drink businesses should consider what outcome they would prefer, as the sector s views may be influential in deciding where responsibility for food safety in Scotland will ultimately lie. Trade 25 May2018 UK-EU trade Having decided that the UK will be outside the Single Market, the UK Government has said it will instead seek the greatest possible market access through a bold and ambitious, fully reciprocal, comprehensive free trade agreement (FTA). As well as removing tariffs and quotas, such an agreement could take in elements of the Single Market regime such as the ongoing adoption of certain EU regulations. Tariffs In the absence of an FTA, trade will revert to standard World Trade Organisation (WTO) rules. UK exports to the EU would therefore be subject to the standard tariffs that the EU imposes on third country goods. That could have little or no impact on some products (e.g. Scotch exports to the EU would be unaffected as the EU imposes no tariff on whisky), and a weaker pound may help exporters remain competitive in EU markets notwithstanding new tariffs. However, parts of the food & drink sector would inevitably be impacted, particularly meat and other agricultural products which are subject to some of the EU s highest tariff rates. Imports from the EU would become subject to UK tariffs, with the UK Government indicating that it will, at least initially, simply adopt the EU s rates. While this could make EU imports less competitive, and so divert UK consumers towards UK products, it would also increase the cost of importing ingredients, raw materials and other inputs from the EU. Unlike with exports, a weaker Sterling would compound rather than mitigate this effect. Sectors with highly-integrated supply chains, including some elements of the food & drink sector, may be particularly affected by the introduction of tariffs. The food & drink sector will therefore be keen to see an FTA agreed, but in the meantime individual businesses should be assessing where they would be exposed to tariffs and how they might respond (e.g. by identifying potential alternative customers and/or suppliers). Non-tariff barriers UK products that are exported to the EU will of course have to continue to abide by EU regulations, but the key question for the sector is what shape the UK s own regulatory regime should take if and when control reverts to the UK Parliament (and, in some areas, potentially to the devolved legislatures). The reason for the EU s harmonised approach to food & drink regulation is that different regulatory systems create non-tariff barriers to trade, as goods that can be sold under one system may not necessarily be capable of sale under the other without modification. This need for modification creates a barrier to smooth trade between the different jurisdictions. However, the perception within both the UK Government and the sector tends to be that EU rules are overly restrictive. It therefore seems unlikely that the UK would adopt stricter rules, but would it make sense to adopt a looser regime even if it meant creating some barriers to UK-EU trade? There are essentially three options for the UK:

Remain harmonised with EU regulations on an ongoing basis Adopt new regulations that are less restrictive, but still compatible with EU requirements Adopt regulations (less restrictive or otherwise) that are incompatible with the EU rules This would facilitate UK-EU trade, as compliance with the harmonised rules should guarantee that UK goods would meet the rules governing sale in EU and EEA countries. It is therefore conceivable that a UK-EU FTA will provide for continued harmonisation. However, this approach would mean the UK having to adopt future EU rules without any input into their development. A lighter touch regime that reduced compliance costs for food & drink to be sold only in the UK may be popular in at least some parts of the sector. As long as the UK and EU regulations were compatible, such that goods meeting the EU s stricter requirements would by definition also meet the UK s, EU imports could still be sold in the UK and UK exporters could sell their EU-compliant goods in either market. However, the increased costs of complying with stricter EU rules could place EU products and UK exporters at a competitive disadvantage in the UK market compared to non-exporting UK businesses. A UK-EU FTA may therefore limit the extent to which UK rules can depart from those of the EU. This would put barriers in the way of both exports and imports, as goods capable of sale in the UK could not also be sold in the EU without modification (e.g. with different labelling) and vice versa. The difficulties this option would introduce suggests that the UK s food & drink regulatory environment is unlikely to depart significantly from the EU s post-brexit, at least not to the extent of creating incompatible rules. Customs and other border checks Whether or not an FTA is agreed, the UK s decision to leave the EU customs union means some checks on UK-EU trade may be inevitable. Inside the customs union, the UK and other Member States charge the EU tariff applying to imports from third countries (either the standard tariff or the rate agreed in an FTA between the EU and the exporting country). Goods are then free to travel between EU countries without further customs controls. However, once the UK leaves the customs union, exports and imports will have to be checked to ensure that the appropriate tariff has been applied. If an FTA is in place there may be no tariffs on UK-EU trade, but the EU will want to ensure that goods originating elsewhere are not being shipped via the UK in order to avoid paying the appropriate tariff. The reverse will also be true in relation to post-brexit UK imports. In that scenario the UK would be in a similar position to Norway, which as an EEA (European Economic Area) country is inside the Single Market and so not liable to EU tariffs, but outside the customs union. Issues have arisen from this arrangement in the past, including when Chinese garlic was imported into Norway and then smuggled across the Swedish border in order to avoid the EU s much higher tariff on garlic. Norwegian imports into the EU, like imports from non-eea countries, are therefore subject to rules of origin checks to establish whether the goods originate in Norway or elsewhere. This is relatively straightforward for primary goods such as agricultural products, but the rules can be complex in relation to goods that are the result of a combination of third country and domestic components or labour. For example, a pie exported to the EU that contained American meat, but was otherwise made with UK ingredients and packaged in the UK, would have to be assessed to establish whether it qualified as a UK-origin or US-origin product. The applicable tariff would then be set accordingly.

Modern customs controls (whether for tariff payment or rules of origin checks) need not be particularly time-consuming or cumbersome, and are today often based on electronic self-certification. Accordingly, while UK-EU trade is very unlikely to be quite as smooth as trade within the customs union, exporters and importers alike should be pushing for both sides to adopt efficient systems that limit post-brexit friction as much as possible. This will be a particularly important consideration in respect of the land border in Ireland. Food & drink businesses may also face challenges over and above those faced by other trading businesses, as the EU has phytosanitary, animal welfare and other food safety checks that (like tariffs) currently apply to trade with third countries but not to trade within the EU. EU law also allows Member States some individual discretion on matters such as food safety, but controls how strict their rules can be in relation to EU products. Once EU law ceases to cover UK food & drink products (and indeed EU imports to the UK), additional border controls and internal sale restrictions may be imposed. This could potentially be avoided if the UK agrees to retain EU standards on third country imports and domestic production, though that would limit the UK s freedom to adopt lighter-touch regulation at home and (potentially) to agree new trade deals abroad. Trade with non-eu countries Leaving the customs union will mean the UK can negotiate trade agreements with third countries, a task that the EU handles for its Member States. The UK Government has expressed a desire to be a world leader in free trade and to sign agreements with countries around the world in short order following Brexit, including countries that have been unable to secure a deal with the EU. The United States, Australia and New Zealand have been floated as priorities, and there have also been suggestions that the UK should look to join pre-existing multilateral frameworks such as NAFTA and the Trans-Pacific Partnership. The UK cannot sign or formally negotiate agreements while a member of the EU, but high-level discussions have been taking place and the Government has flagged an expectation that a number of agreements will be put in place as soon as, or shortly after, Brexit takes place. The key question is whether the Government has the capacity to agree these deals within the limited time available, particularly as both the UK and third countries may need to know what the UK-EU relationship will look like in order to understand what will be possible. The flip-side of leaving the EU, and in particular the customs union, is that the UK will cease to benefit from the more than 40 trade agreements that the EU has entered into with countries including South Korea, Mexico and Chile. Accordingly, trade with those countries would revert to WTO rules, with their standard tariff rates applying to UK exports and UK tariffs applying to their goods in return. The UK is therefore likely to try to extend those agreements so that they apply to the UK in its own right, either by making the existing agreement tri-partite or replicating its terms in a bilateral deal. That would of course require the agreement of the other country (and potentially also the EU), but countries such as Iceland have already indicated a desire to limit any disruption to their trade with the UK. There may therefore be a illingness to reach agreement, even if only on transitional arrangements that preserve the existing position while a new deal is worked out. Food & drink businesses that rely on existing EU FTAs to export or import goods should assess how their supply chains would be affected if those FTAs cease to cover the UK, and make clear to the UK Government which deals should be preserved if possible. The sector should also be assessing the potential for new FTAs with countries that do not already have deals with the EU. Those may bring opportunities to open up new foreign markets, but may also introduce new competition in the UK market if existing tariff barriers (e.g. on Australian beef or New Zealand lamb) are lowered. Finding the right balance will be key to success, and UK food & drink businesses should be making clear where their priorities lie.

Protected Geographical Indications (PGIs) The UK has a number of food & drink products that currently benefit from PGI status under EU law (or the similar Protected Designation of Origin (PDO) and Traditional Speciality Guaranteed (TSG) designations), including Scotch whisky, Stornoway black pudding and Cornish pasties. This means products not produced in the location in question (and in some cases, such as Scotch, not prepared using traditional methods) cannot pass themselves off as the authentic product. It seems likely that any FTA between the UK and EU would continue this protection for UK PGIs in return for the UK continuing to protect EU PGIs such as Champagne and Parma ham. The EU s FTAs often require other countries to protect EU PGIs, so there is some doubt whether UK PGIs will continue to be covered in those countries post-brexit. Food & drink businesses that benefit from PGIs (or PDOs) in third country markets should establish what their status will be post-brexit, and if necessary press the UK Government to prioritise continuing that protection in any extended or new FTAs. People There is no immediate impact of triggering Article 50 on the freedom of movement of EU nationals to the UK (and of UK nationals to the EU). EU nationals can continue to come and work in the UK for the time being. The future position of EU nationals living and working in the UK is however uncertain. It is anticipated that at the point of Brexit there may some sort of amnesty for those EU nationals already working in the UK. Certainly, the UK Government has consistently said that it expects the legal status of EU nationals in the UK to be protected and will treat their status as an early priority in the Brexit negotiations, and the EU has indicated it is amenable to that. However, the UK Government has also said that it is simply not possible to control immigration overall where there is unlimited free movement of people to the UK from the EU. It intends to introduce an Immigration Bill which will set out the proposed post-brexit immigration system. The timetable for that is not clear, although the Government has said it will first consult with businesses and communities across the UK to get a comprehensive understanding of the needs and interests of the different geographical parts of the UK and its different economic sectors. This will allow a workable immigration system to be developed for the whole of the UK. A points-based immigration system (such as that already in place for non EEA/Swiss nationals into the UK) may form the basis of a future system but it is simply too early to say. Any future system which seeks to place immigration restrictions on EEA/Swiss nationals could have implications for workers seeking to come to the UK now with a view to remaining post Brexit, and also for employers ability to continue employing such nationals after Brexit if they cannot remain in the UK lawfully. However, differential treatment in recruitment processes now between UK and EEA nationals could result in discrimination complaints. Given the uncertainty, employers in sectors such as food & drink who currently rely on EU workers (and will continue to do so in the future) are keen to understand what their workers can do to evidence and secure their current status before Brexit. EU nationals who have been continuously living and working in the UK for five years will generally have acquired permanent residence under existing EU and domestic law, which will allow them to remain in the UK indefinitely. Such individuals can apply for a document certifying that permanent residency and indeed must do so if they are also considering applying for British citizenship. Becoming a British citizen (or a dual national) is possible for EEA nationals who hold permanent residency documentation and have been permanently resident in the UK for a period of six years. Becoming a British citizen (or dual national) can, however, have unforeseen consequences for an individual relating to tax, pensions and certain other rights under EU law. EU nationals considering applying for British citizenship are therefore advised to take specialist immigration advice before making their application.

Our Brexit Advisory Group offers the one-stop shop for pragmatic and informed legal advice For the latest legal updates or to arrange a private business planning session visit our Brexit Hub: brodies.com/news/brexit Key contacts Eric Galbraith +44 (0)141 245 6253 eric.galbraith@brodies.com Charles Livingstone +44 (0)131 656 0273 charles.livingstone@brodies.com Christine O Neill +44 (0)131 656 0286 christine.oneill@brodies.com Lynne Marr +44 (0)131 656 0241 lynne.marr@brodies.com brodies.com