What is the EU's new Unfair Trading Practices Directive?
Tom Wills, Policy Advisor, welcomes the EU’s forthcoming law on Unfair Trading Practices and explains what it is, what it does and who it will affect.
The agriculture and food sector brings together businesses of hugely different shapes and sizes, from small-scale family farms to huge multinational enterprises. Large retailers and brands dominate the market, meaning that smaller suppliers are vulnerable to being treated unfairly.
This unfair treatment can include cancelling orders at the last minute and failing to pay on time – practices that create insecure incomes and poverty amongst suppliers. Research has consistently demonstrated that the European food sector is rife with this kind of abuse, with a 2011 survey finding that 96% of food businesses had experienced unfair commercial practices.
Estimates suggest that this equates to an overall cost to food suppliers of €30-40 billion each year. In order to find these savings, businesses seek to reduce their costs in whichever way possible. They may compromise on food safety, wages or the terms of employment offered to workers. This translates to poverty amongst those that work to put food on the shelves, and leaves consumers with no certainty that the food in their shopping basket is not the result of exploitation.
Just before Christmas, EU leaders agreed in principle to a new law to tackle unfair trading practices in agricultural supply chains. This new law, known as the Unfair Trading Practices Directive, aims to tackle this situation and support suppliers of agricultural products to get a fairer deal from their trading relationships.
This is the most recent step in a lengthy process that began in 2008 with a declaration of the European Parliament. Over the intervening decade, Traidcraft Exchange have worked with civil society organisations around Europe, including many in the fair trade movement, to push for a law on Unfair Trading Practices. We are delighted that it will finally come to pass in 2019, particularly given the fierce opposition of many industry groups who are perfectly content with the status quo.
This blog is an introduction to the forthcoming Directive – what it is, what it does and who it covers. I will also look at how the Directive can be used to support fairer returns for producers in developing countries.
Paulo De Castro, the Italian Socialist MEP who has overseen the legislative passage of this Directive
What is a Directive?
There are two types of EU law: Regulations (which have immediate legal force across the EU) and Directives (which need to be passed into the national law of each member state, or ‘transposed’; meaning that countries have a bit more discretion on how the law is shaped).
The Unfair Trading Practices law is a Directive, and once it has been given formal sign-off (expected in March) it will need to be transposed into the law of each of the 28 Member States within the next two years.
What is an unfair trading practice?
In the past, the European Commission has defined Unfair Trading Practices (UTPs) as follows:
Unfair Trading Practices are practices that deviate from good commercial conduct and are contrary to good faith and fair dealing. They are usually imposed unilaterally by one trading partner on another. The food supply chain is particularly vulnerable to unfair trading practices due to large differences in bargaining power.
In this Directive the EU has been more specific, defining 15 practices that qualify as UTPs and are therefore outlawed. The following practices are banned:
Late payments (defined as longer than 60 days, or 30 days for perishable products)
Cancellation of orders at short notice (less than 30 days)
Making unilateral changes to a supply agreement
Requiring payments from the supplier that are not related to the product
Requiring the supplier to pay for the deterioration or loss of a product once it has passed into the buyer’s ownership
Refusing to provide a written supply agreement if requested
Acquiring, using or disclosing the supplier’s trade secrets
Carrying out (or threatening) commercial retaliation when a supplier exercises their rights under this Directive
Requiring a supplier to pay for the cost of customer complaints
Meanwhile, the final six practices are banned unless there is a proper supply agreement in place that specifies otherwise:
Returning unsold products to the supplier (without paying for them)
Charging a supplier for the stocking, displaying or listing of their products
Requiring a supplier to pay for the costs of promotions
Requiring a supplier to pay for advertising
Requiring a supplier to pay for marketing
Requiring a supplier to pay for the fitting out of premises
Who does this law cover?
This law covers the buying practices of businesses that purchase agri-food products:
If they are in a larger size category than their supplier and;
If they are based in the EU or;
If they are outside the EU, but are purchasing from an EU supplier
This can include retailers, brands, processors, and even public bodies like local government or the NHS.
The European Union’s member states
Suppliers of agri-food products are able to access protection under this law:
If they are in a smaller size category than their buyer, and have an annual turnover of below €350m and;
If they are based in the EU or;
If they are outside the EU, but selling to an EU-based buyer
This might include farmers, processors and brands. Of course, businesses in the middle of the supply chain will often be both buyers and suppliers.
The question of ‘size category’ has arisen because the EU was reluctant to introduce a law that would give large suppliers – the Nestlés and Unilevers of this world – even greater heft. So, taking size as a proxy for market power, for the purposes of this Directive suppliers are categorised into six size bands. The Directive has force on any relationship between a supplier that is in a smaller category than the buyer.
The bands are as follows:
Before we move on from discussing scope, it is worth noting that the definition of agri-food is broad. Agri-food covers everything in this list, as well as foods made out of any of the products on the list, such as processed meals. That means that the law applies to the trade of everything from vegetables to honey to lasagne, as well as things that we might not think of like tobacco, wine and flowers.
And… what does this actually do?
The law requires the 28 EU Member States to designate an ‘enforcement authority’: a public body with the power to investigate suspected incidents of unfair trading practices and to punish buyers which are found guilty (through penalties such as fines).
Some member states already have some form of legislation aimed at tackling unfair trading practices. But this law means that for the first time there will be a shared minimum standard for fair trading practices enforced around Europe. When companies such as Tesco, Lidl, Aldi, Carrefour and others have a presence in a number of European countries, it makes sense to have a law that is applied consistently across the continent.
This will provide regulatory certainty to buyers, confidence to suppliers that they will be able to access protection regardless of where their European buyer is based, and prevent countries engaging in a ‘race to the bottom’ in a bid to attract businesses with laxer regulation that allows abusive purchasing.
What impact will this have on farmers and workers in developing countries?
In 2016, the European Union imported €100bn of food, meaning that hundreds of thousands of farmers and growers around the world rely on their trading relationships with the EU market. This law could make a massive difference to those people, and we worked closely with MEPs to ensure that this Directive covers non-EU suppliers to the EU market.
Farmers in developing countries are often particularly vulnerable to UTPs. They are less likely to have links with alternative markets and may have less access to legal support, a functioning union or the necessary information to challenge the unfair practices of a big European customer.
Knowing that an order will not be cancelled provides producers with predictable incomes and means that they are more likely to invest in their businesses or in other expenses such as improving housing or paying for the education of their children.
That’s all very well, but will suppliers actually complain?
The success of this Directive does rely on suppliers coming forward. Many suppliers, especially those based overseas, may not have the time, training, support or language to understand the implications of new EU laws. It’s crucial, then, that Member States work with trade attachés, producer associations and even international NGOs to ensure that vulnerable producers are able to access their legal rights, including providing resources where necessary.
However, even suppliers who are aware of the law may be reluctant to complain. Many are used to being on the receiving end of bullying purchasing practices and rely on keeping their buyer happy. Indeed, a recent survey of suppliers to UK supermarkets found that half of them were reluctant to raise a complaint with the UK regulator, the most common reason being the fear that they would be identified by the buyer and suffer commercial retribution.
We hope that the national enforcement authorities are aware of this dynamic, that they will do everything they can to reassure suppliers that complaints will be made confidentially, and that every provision will be made to ensure that their identity is not disclosed. Enforcement authorities will need to be proactive in reaching out to suppliers in the food supply chain (from farmers to brands) to establish themselves as a supportive and trusted body.
A hard-won feature of this Directive is that it allows other organisations (such as NGOs, producer organisations and unions) to make complaints on behalf of suppliers, thereby making it more likely that complaints will be made to highlight illegal practice.
Furthermore, it’s not as if the only situation in which this Directive will tackle UTPs is when an enforcement authority successfully investigates and fines a rogue buyer. Experience from national-level anti-UTP enforcement shows that the very existence of a law, and the potential of being hit with a fine, is enough to ensure that buyers hold themselves to a higher standard in their supply chain relationships.
What about the United Kingdom?
Given the context of Brexit, the United Kingdom is a special case. How this Directive affects the UK will very much depend on how and when the UK leaves the EU.
I have written a complementary blog which gives some more detail on the particularities of the UK situation.
The key point is that if it leaves the EU, the UK will be treated the same as any other country in the world as far as this Directive is concerned. Specifically, any farmer exporting food to the EU that is being subjected to illegal practices by their buyer will enjoy the same protections as an EU farmer, and would be well-advised to make a complaint to the enforcement authority in the country in which the buyer is based.
Additionally, any food importer that is buying agri-food from an EU supplier will fall within the remit of this law and therefore will have to ensure that its buying operations comply with the terms of the Directive.
Trying to achieve greater parity between the powerful and the weaker parts of a supply chain after generations of inequity is going to be a long and slow process. This Directive is a huge step in the right direction. EU organisations that are interested in ensuring that the law is as effective as possible should engage with the government in their country, ensuring that the law is transposed properly and well-enforced. In four years’ time there will be a review of the Directive, and this will also serve as an opportunity to push for improvements.
Anyone with questions about how this law might work, what it might mean and how it can be harnessed for good should get in by contacting firstname.lastname@example.org.
Tom Wills is Policy Adviser at Traidcraft Exchange. @thomasrhwills