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The price of a no-deal Brexit

As the reality of a no-deal Brexit nears, retailers face increased costs as a result of import tariffs on clothing and weaker sterling. The question is: who pays?

With fashion and textile exports to the European Union after Brexit predicted to be hit with tariffs totalling up to £870m per year, and import duties of between 8% and 12% on an expected 140 clothing categories – increased this month from 97 – the impact of a no-deal Brexit will hit every fashion retailer, supplier and manufacturer in the country.

On Tuesday, the EU’s chief negotiator, Michel Barnier, said a deal was “still possible” but will be “more and more difficult”. The Brexit deal hangs in the balance ahead of tomorrow’s crucial EU summit.

In the event of a no-deal Brexit, there is one certainty: costs will go up. The question is whether retailers will absorb these costs, pass them on to shoppers in the form of price rises, or ask suppliers to take the hit.

In plans unveiled last week, the government announced changes to UK tariffs in the event of a no-deal Brexit. The latest guidance states that import duties of between 8% and 12% will now apply to a range of clothing items that were previously subject to no charges, including women’s and girls’ blouses and men’s and boys’ cardigans and pullovers.

Under the Generalised Scheme of Preferences, developing countries such as Cambodia, Sri Lanka, the Philippines and Pakistan will not be subject to tariffs, but others, such as Turkey, whose annual fashion exports to the UK are estimated at £1.8bn, will be. Imports from the EU will have no tariffs added for the time being.

There’s going to be price inflation. The days where people can absorb the costs have gone

Menswear supplier

However, Adam Mansell, chief executive of the UK Fashion and Textile Association (UKFT), said the new tariff regime would result in an unbalanced relationship between UK exporters and EU importers: “If [UK exporters] are selling into Italy, they’ll get an 8% tariff, but Italian weavers can sell [into the UK] with no tariff at all. It’s giving away the largest negotiating position any government has in terms of a free trade agreement.”

On the specific impact of a no-deal Brexit, Mansell added: “The import and export paperwork from India and Pakistan won’t change, but that trading relationship with the EU will be much harder for smaller suppliers and brands who haven’t had to do this before. 

“It will take a significant amount of learning. We are going to have double testing on certain products, double labelling and double certificates.”

One menswear supplier said that in many scenarios prices will rise: “I don’t see anyone absorbing [price increases]. The import supply base has already taken a 20% hit on the exchange rate because of the slump in the pound. If you add in Brexit and more downward movement [in sterling], what’s going to happen?

“There’s going to be price inflation. The days where people can absorb the costs have gone.”

You can’t just wave a magic wand. This idea that businesses are ready [for Brexit] is just bonkers

Retail analyst Richard Hyman

However, another supply source said suppliers would bear the brunt of any increases as retailers try to maintain prices for customers: “I think most retailers will try to squeeze their suppliers. 

“Consumers generally don’t get hammered [by price rises]: it is suppliers or retailers who are trying to go direct who get hit. I wouldn’t want to be a supplier selling in sterling right now.”

For many retailers, one option could be to shift production to cheaper export markets but, as retail analyst Richard Hyman observes, fashion sourcing cannot easily be changed overnight: “It takes years to switch your sources of products. You can’t just wave a magic wand. This idea that businesses are ready [for Brexit] is just bonkers.”

Setting up EU “mirror” businesses to avoid tariffs – as product will be considered to have originated within the EU – may help some UK companies to alleviate the pain of a no-deal Brexit but this is not always an option, particularly for smaller companies without the necessary capital to do so.

One footwear multiple retailer told Drapers: “You have to be pragmatic. How you are capitalised will affect what you will do. The guys who have more control over their own businesses seem to be less bothered by Brexit and a no-deal. Also, those who sell their own goods have more work to do to secure their supply chains. Those selling Nike or Timberland [for example] spread the risk a bit.

“If a retailer has borrowings, their banks may have asked them to explain what they are going to do in different scenarios. We’ve assessed our options and costs, but haven’t implemented those plans yet.”

 You go to HMRC or the tariff websites and it is hellishly complicated

Supplier

Hyman believes that, despite the threat to near-sourcing supply chains from potential new tariffs, value retailers such as Primark, which has said it will maintain its pricing, are well placed to ride out the storm: “However badly these changes impact the market, they will affect Primark less. Given that this is going to affect everybody, Primark will still be the cheapest [of the retailers].

“Over the next couple of years, household spending will be even more challenged, and that drives more consumers to value outlets. It is the middle market that could get squeezed. The ones who are struggling now will be most affected.”

As they brace for the impact of Brexit, some retailers and suppliers have found their hands tied by the sheer complexity and uncertainty.

Commenting on the lack of information available, one supplier said: “The thing is, we don’t know [what will happen]. You go to HMRC or the tariff websites and it is hellishly complicated. No one knows what will happen, but everyone is thinking, ‘my margins will be cut at some point’.”

Another supplier told Drapers he had done no preparation at all, as the cost and uncertainty meant he could not be sure any investment would have made business sense: “We’ve completely ignored [Brexit]. We couldn’t plan for all the eventualities that come with no deal.” And he warns of dire consequences: “I understand that one womenswear retailer went under because they brought in their stock early [for] the original Brexit date. That murdered their cashflow and stopped them paying people. It was the waste of time and money that killed them.”

 

The Drapers Verdict

In the event of no deal, costs will certainly rise, but those with the most flexibility will be able to decide how their pricing regime reflects the market after Brexit best.

The industry will want to mitigate cost increases and price rises for customer as far as possible, but making sweeping changes to supply chains or ordering stock to arrive before the deadline could backfire badly.

Trying to make sense of Brexit is an unrewarding and near-impossible task The government has to understand that the uncertainty will have consequences, and needs to be on hand to ensure solvent successful businesses are not ruined by Brexit, whatever the outcome of negotiations. 

 

Readers' comments (2)

  • I know it doesn't suit the editorial but ....
    What % of garments imported into the UK come from the EU?
    Are duties applicable immediately after a 'no deal' Brexit?
    Does the possibility exist that an independent UK will complete free trade agreements with countries where we do actually manufacturer garments?
    Isn't there a school of thought that Sterling is at an 'artificial' low caused by three years of doing nothing?

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  • Anon has made some important points, my understanding is that imports from the eu will NOT be subject to additional tariffs, the issue for many is Turkish imports especially important in the denim sector that will be subject to tariffs. The £ strengthens or falls on a daily basis as the possibility of clarity rises and falls. I believe we should be more concerned at EU US trade war which has subject many British manufacturers to a 25% tariff and is under reported.

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