No deal could add £7.8bn to the cost of retail goods

New research from Retail Economics and Squire Patton Boggs shows that £7.8bn could be added to the cost of retail goods if the UK fails to agree a deal with the EU. The risk of higher costs from new tariffs is greatest for food and drink from the EU.  

  • First, the exposure of the UK market to imports from the EU is the highest compared with any other retail sector, with more than 70% of UK food and drink imports originating from within the EU. 
  • Secondly, the standard rate of tariffs that would apply to imports of EU food and drink is far higher than the rate for non-food goods, with duties for some meat and dairy products rising to 80%.  
  • Thirdly, to continue tariff-free trade in food and drink post-Brexit, the EU is likely to demand compliance with a wide range of non-trade regulations which may be difficult for the UK to accept.  
  • Fourthly, potential alternative non-EU sources of food and drink are limited by either high tariffs and/or non-tariff barriers. 
  • Finally, any new immigration system for EU citizens would need provision for non-graduate labour to ensure that the UK retail industry has access to the workers it needs or we could see a rise in labour costs due to competition within the industry and its supply chain.

This research outlines three possible trading models for the UK’s long-term, future relationship with the EU; each model has different implications for the cost of sourcing imports, both from the EU and beyond.  Analysis is provided across eight key sectors within the retail industry, including an outline of a range of opportunities the UK Government should pursue in the event of a ‘no deal’ scenario. 

Trading models

  • 1. Most Favoured Nation (‘Hard Brexit’) – Significant impact on cost of trade. 
  • 2. Free Trade Agreement - Could avoid tariffs on imports from the EU, but would at least introduce some new costs in the form of customs declarations and compliance with rules of origin.  
  • 3. Customs Union - Import costs remain similar to current levels for sourcing from both the EU and from the rest of the world.  

Risks

  • No deal could cost retail industry £7.8bn in additional tariffs
  • Food and Drink exposed to highest degree of risk. 72% of imports originate from the EU totalling c. £30 billion in 2017. Some duties for meat and dairy products could be subject to tariffs up to 80%. 
  • Chocolate could face tariffs of around 30%. 
  • Food and drink products from outside the EU must comply with non-trade regulations when they are imported. The most significant of these are veterinary certificates for all animal products. Average approximate cost of complying with veterinary certification = £350 per container; most of this is storage charge at port pending veterinary approval (£120/day). Average time for consignments clearing veterinary checks is two days at port. Other food and drink products must also demonstrate compliance with other non-food regulations, including pesticide residues and GMOs.
  • Clothing and Footwear retailers face the largest disruption for non-food. Imports totalled £9.8 billion in 2017 with an average weighted tariff of 11%.
  • Turkey poses specific challenges for the £2.9 billion of retail imports entering the UK. Currently, there is duty-free access to the UK because it’s in a customs union with the EU.  When the UK leaves the EU’s customs union, it will also be leaving the customs union with Turkey and trade will revert to MFN terms. £1.4 billion of these imports are from Clothing and Footwear. 
  • Losing access to valuable EU workforce could increase competition in the retail job market driving up costs for retailers.

Opportunities

  • New EU/Vietnam FTA agreed, awaiting implementation. When implemented, the agreement will immediately remove almost all tariffs on carpets and furniture.
  • The Taxation (Cross-border Trade) Bill contains provisions to allow temporary suspension of MFN tariff rates. EU/Mercosur FTA would significantly reduce tariffs on imports of beef from Brazil.  
  • EU/Japan FTA will immediately remove all remaining tariffs on Health and Beauty.
  • The UK is to review all existing EU anti-dumping measures. This may lead to removal or reduction in duties on ceramic tableware and bicycles.
  • More flexible working solutions that attract, retain and develop the best talent, with a focus on students, working families, pensioners and those seeking to return to work.

Retail imports into the UK - 2017

Retail sector

Imports from EU (£m)

Imports from non-EU (£m)

Duties under WTO framework (£m)

Risk category

Food and Drink

£30,035

£11,400

£6,024

High

Electricals

£17,093

£18,400

£220

Moderate

Health and Beauty

£12,941

£5,900

£43

Low

Clothing and Footwear

£9,898

£17,400

£1,070

High

DIY and Gardening

£6,529

£4,400

£251

Moderate

Furniture and Flooring

£4,682

£5,400

£133

Moderate

Sports, Toys and Leisure

£1,360

£4,000

£28

Moderate

Homewares

£1,115

£3,700

£72

Moderate

Total

£83,655

£70,600

£7,841

 

Richard Lim, Chief Executive, Retail Economics, said: “Should the Government fail to agree a deal with the EU, the retail industry faces a debilitating wave of rising costs from import duties. Extensive research has been carried out which reveals an additional £7.8 billion could be added to the cost of retail goods should a hard Brexit scenario become a reality following a transition period. Food retailers would face the toughest challenge, given that almost three quarters of what we eat is imported from the EU. Some tariffs on meat and dairy products would rise to more than 80% causing an inevitable surge in food inflation to hit families. 

“The retail industry is already delicately poised between an outlook of softening consumer demand and mounting cost pressures, evidenced by recent high-profile retail administrations. Additional costs of this magnitude will amount to a ‘tipping point’ with some retailers unable to remain commercially viable. 

“Retailers need to scenario plan for a range of outcomes while feeding to Government their view of a viable trading framework post-Brexit. The clock is ticking for those needing to form actionable strategies in order to thrive in such times of uncertainty, or indeed, survive.”

Matthew Lewis, head of the Retail Industry Group at Squire Patton Boggs, added: “This is the first of a series of focused reports and monthly updates over the next year looking at the various ways Brexit will affect UK retail businesses; they are intended to highlight both the risks and opportunities (whether economic, legal or tax-related) across multiple retail sectors. The reports are equally relevant to those that supply, support and work with retailers as everyone in the sector, from logistics to shopping centres, will be impacted by any deal the Government makes.  

“Our first Review, on the costs of sourcing products abroad, shows that no businesses will be unaffected, regardless of the outcome of the final trade negotiations.  For all retailers in the UK now is the time to start scenario planning, to consider their contracts with suppliers, to assess risk-exposure to possible new compliance rules and customs controls and logistical delays, and to review how best to support staff and identify solutions for longer term recruitment. 

“There are over 170,000 EU citizens working in British retail. Although greater reassurance has now been given to EU citizens already in the UK (both before we leave and during the transition period), there is no clarity yet on the immigration restrictions that will be imposed on those EU citizens arriving from 2021. Losing access to this valuable workforce could increase competition in the retail job market and further drive up costs for retailers.”  

Methodology

Retail Economics has conducted extensive research to model the potential costs faced by retailers under a scenario of Most Favoured Nation (MNF) tariffs being applied to EU imports. Calculation are based on data provided by HMRC for 2017 and tariff line duties from the World Trade Organisation (WTO). 

Thousands of Harmonized System Codes (HS) have been categorised into retail sector classes and matched with corresponding trade data from HMRC. Average weighted tariffs have been calculated and used to derive the total cost of duties by retail category and for the overall industry.

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