Many questions were raised in the wake of the EU referendum, with key figures in every industry speculating about the potential impact on their sector in the months ahead.
Since June’s Brexit decision, the UK economy has defied some analysts’ predictions and remained robust, but with the government and new Prime Minister Theresa May now aiming to push forward with the country’s exit from the EU, we will soon see the true impact of the historic decision, with trade deals being a major area of focus.
With the move away from the European Union, UK trade deals will now fall outside EU guidelines. In addition to the removal of rules and regulations around the movement of products and materials – particularly raw materials – another major potential effect is currency fluctuations that could significantly increase the cost of importing these materials to the UK.
The immediate effect of the vote was a sharp rise in import prices, which rose in July at the fastest annual pace for five years following a fall in the value of the pound. Data from the Office for National Statistics showed that the prices companies pay for metals, oil and other materials bought from abroad rose 6.5 per cent in the 12 months to July, pushing up companies’ overall raw material costs by 4.3 per cent.
This increase in import prices also foreshadowed a wider pickup in inflation, with the Bank of England forecasting that it could weigh on spending for the next year and beyond. One catalyst for the pickup is the falling pound, with sterling declining by 13 per cent against the dollar on the back of the referendum.
As it continued to fall in subsequent months, it created something of a mixed blessing for UK manufacturers and suppliers. On the one hand, the fall in the value of sterling made products more competitive in key export markets including the US and Mexico, but in contrast it has also nudged up costs for materials sourced from Europe and Japan.
As Brexit becomes a reality, costs will be a key concern for those who import or export raw materials, particularly with regard to tariffs, which have not existed for UK exports to other members of the EU since 1973, when Britain was part of what was then the European Economic Community.
In the intervening time the EU has expanded significantly to include 28 countries. For UK organisations exporting goods to the rest of the EU, there is an ongoing possibility that the UK’s departure from the union could see the remaining 27 EU members impose duties on British exports.
In a world where global trade is not only commonplace but vital to the existence of many industries, the EU functions as a customs union, with common external customs tariff rates. Britain may therefore need to strike individual deals with separate member states on reducing duties bilaterally.
The impact could also vary depending on the sector; if the rest of the EU refuses to allow UK exporters special access to its markets, UK exports may be struck by bound tariff rates that the EU has already said it will respect under its agreements with the World Trade Organisation.
These generally keep tariffs low for goods that the EU needs to import, such as raw materials, basic manufactured goods like steel exports, and minerals such as clays and gypsum – so UK exporters in the building and construction industry may fare better than many other sectors.
Another consideration from an import perspective is the possibility of businesses being at a cashflow disadvantage due to the delay between payment of customs charges on entry and entitlement to recover the VAT as input tax on the next VAT return.
Organisations based in the UK may therefore need to consider using deferment and customs warehousing arrangements to mitigate the impact, which – when it comes to quite numerous and large materials such as those used in the building sector – could present additional challenges.
Of course, many questions will remain unanswered as the actual Brexit process takes place over a number of months in 2017 and beyond, but businesses that take steps to prepare and mitigate the impact now will be the ones to benefit when the UK’s departure from the EU is complete.