Overview
On March 2, 2021, the UK signed a trade partnership agreement with Ghana. Recently, Cadbury, which is wholly owned by Mondelez, has announced that it is moving some production of its iconic Dairy Milk chocolate bars from Germany to the UK. This note, which is in two parts, considers the connection between the trade partnership agreement between the UK and Ghana and the relocation of Cadbury’s Dairy Milk chocolate production to the UK from the EU and the implications this will have in terms of supply chain management.
According to media reports, Mondelez is making a £15m investment at the Bournville site in Birmingham and from 2022, 12,000 tonnes of Dairy Milk chocolate bars will be manufactured there. The company stated that it was “meeting the need for a highly efficient and robust supply infrastructure of Cadbury Dairy Milk tablets.”
Whilst some production will remain in Ireland, Germany, Hungary, and Poland and the investment will not lead to the creation of any new jobs, the move is welcomed as a boost for the UK post-Brexit when hundreds of UK companies are considering switching operations to countries inside the EU.
The relocation of manufacturing facilities from the EU to the UK can also be viewed as strategic in terms of supply chain management. According to the Cadbury factsheet, Cadbury buys its cocoa beans from Ghana in West Africa. The cocoa beans are first dried and then exported from Ghana to the UK. Once they arrive in the UK, they are roasted and mixed with milk to be made into milk chocolate.
Since the trade partnership agreement has just been signed and is going through the internal process to become law in Ghana and the UK respectively, import tariffs remain payable on the imports of dried cocoa beans from Ghana into the UK.
At present, on the assumption that some of the dried cocoa beans imported from Ghana are subsequently supplied to Cadbury’s manufacturing plants in the EU, there are potentially (at least) two UK-related points of entry where relevant import tariffs must be paid: i) when they enter the UK from Ghana; and ii) when they enter a Member State of the EU from the UK, although the latter depends on what Cadbury does to dried cocoa beans whilst they are in the UK.
Once the relocation is complete and Cadbury can start producing 12,000 tonnes of chocolate bars in the UK, there will be no need to export (as many) dried cocoa beans from the UK to the EU. As a result, it is expected that this new supply chain infrastructure will result in a significant reduction of import tariffs. It is worth noting that the trade agreement between the UK and the EU will be of no use in the current supply chain as the dried cocoa beans from Ghana do not qualify as originating in the UK, thus no preferential tariff treatment is available. As a supply chain strategy, Cadbury in the EU would be better off importing cocoa beans directly from Ghana rather than via the UK, as there is a trade agreement (EU-Ghana Economic Partnership Agreement) already in place.
When the trade agreement comes into force between the UK and Ghana, Cadbury UK can rely on it and claim preferential tariff treatment when it imports dried cocoa beans from Ghana.
There may be other reasons for Cadbury’s homecoming. The UK government website shows that as of January 1, 2021, there are 33 trade agreements with the UK that are fully ratified. Parties to these trade agreements include Japan, Singapore, South Korea, South Africa, and Switzerland. This means that Cadbury can rely on those trade agreements and export Dairy Milk tablets manufactured in the UK to those countries tariff-free so far as they satisfy the rules of origin requirements under the trade agreements to qualify as originating in the UK. It is not known how many chocolate bars Cadbury currently exports from its manufacturing plants in the EU to overseas markets under the EU’s existing free trade agreements. But what is clear is that Cadbury will not and should not lose out as a result of returning some manufacturing to the UK.
Further to the tariff-oriented supply chain strategy in light of the free trade agreements between the UK and non-EU countries, Cadbury would also be better off switching production from its European plants to the UK with a view of non-tariff barriers. Before Brexit, businesses including food manufacturers could rely on common regulations between the UK and the EU. Post-Brexit, however, if Cadbury had continued manufacturing all of its chocolate bars in the EU and importing them into the UK to be sold in the UK market, it might have faced regulatory divergence in terms of product safety, packaging or labelling for example, which would have added significantly to the cost of its products. Moreover, because Cadbury is now planning to produce 12,000 tonnes of Dairy Milk chocolate bars in the UK, it does not have to worry about customs delays at ports, which could have led to shortages or impacted on the shelf life of the chocolate bars so long as they are intended for UK consumption.
Global sourcing of ingredients and raw materials is a necessity for companies competing in today’s global market. Cadbury’s recent decision to restructure its supply chain has demonstrated an efficient business model, where it is worthwhile optimising supply chains in light of the tariff and non-tariff barriers faced by businesses engaged in trade in goods in the context of Brexit.
