Brexit will increase costs for businesses and, ultimately, prices for consumers. The question is by how much.
"Prices will go up for three reasons: import customs duties, the cost of compliance and the risk of delays," says Carol Lynch, partner BDO Customs and International Trade Services.
The general feeling is that, combined, they will increase the cost of doing business by an average of 10 per cent. Though averages conceal as much as they reveal, it’s a significant figure to contend with.
“It’s a very significant cost to the bottom line that is going to affect very many businesses, particularly those on low margins and also if you deal in perishable goods,” says Lynch.
If you deal in both, as large parts of the food and dairy sector do, or indeed if you eat them, that’s a double whammy.
According to an ESRI report by Martina Lawless and Edgar Morgenroth, published a year ago, a hard Brexit would likely increase the cost of living for all households in Ireland by 2 to 3.1 per cent – or €892-€1,360 per household annually.
Lower-income households, which spend a greater share of household expenditure on food products, will take a disproportionate hit. Under WTO rules, meat incurs a blended average tariff of 38 per cent , processed food of 8 per cent .
"While the average EU duty rates are less than 5 per cent, the rates are uneven, with some products attracting zero duties, such as pharmaceutical products and computers and related products, others attracting high rates such as clothing and footwear of 11-12 per cent, and certain agricultural products where the rates can be significantly higher," says Glenn Reynolds, partner VAT and Customs at KPMG in Ireland.
“This could mean potentially large increases in the price of everyday items across Ireland and the UK. The UK has announced that for a temporary period post-Brexit, most goods imported into the UK [up to 87 per cent of goods] will be tariff free. However, the remainder will be subject to varying rates, including certain agricultural products, for example beef, lamb and poultry, attracting high duty rates.”
Export problems
The fall in sterling will help make it cheaper for Irish businesses to purchase goods from the UK but likewise will increase the cost of Irish products on the UK market, he points out. And ultimately, “the imposition of tariffs will make Irish businesses less competitive selling into the UK,” says Reynolds.
Right now retailers, brands and producers should seek to mitigate that risk, because “ultimately, prices going up doesn’t suit anyone – not the consumer, the brand or the retailer”, says Owen McFeely of PWC’s Retail and Consumer Practice team, who points out that food incurs the highest WTO tariffs “and fresh food the highest tariffs of all”.
The potential cost of regulatory divergence is harder to calculate, but at least the cost to the supply chain – in terms of additional haulage fees – and the need to boost manpower in terms of either in-house or outsourced customs expertise can be assessed in a back-of-an-envelope manner across a variety of scenarios.
On the plus side, the advent of “Brexit buster” ships and new routes will help those looking to avoid the UK land bridge, as will increased sourcing from outside the UK.
“But the question of who will absorb these increased costs in the meantime has not really played out yet at all,” says McFeely.
The new normal
Stockpiling should protect consumers from immediate price increases temporarily, but while things may settle down after that, into the new normal, it won’t be as good as the old one.
“Brexit is the reverse of the 1992 Internal Market Programme. Brexit is Minus 1992. Cecchini and other economists estimated that there would enormous benefits from the creation of the EU’s internal market. These price reductions and savings were counted in the hundreds of billions and trillions of euro for a much smaller EU,” says A&L Goodbody partner Vincent Power.
“Today, if the EU’s internal market is limited or restricted, then one would expect, all other things being equal, for those prices to rise. In other words, the cycling downhill in the sunshine of 1992, and the elimination of barriers, is replaced by cycling uphill in the rain of 2019.
