MENU

Brexit commercials…we don’t know yet…do we?

LinkedIn Twitter Facebook

 

Author: Andrew McClelland, Cross-Border Consultant, IMRG

 

The world now knows that on the 23rd June 2016, over 40 million people in the UK voted in a landmark referendum on the country’s future relationship with the European Union (EU). By a margin of just over 1.2 million, UK citizens voted for the country to leave the EU. Political turmoil ensued. Some predictable; the Prime Minister resigned, sterling plunged, as did the FTSE 100, 250 and AIM markets. Some not so; leaders of the ‘leave’ campaign also missed out. However, the government has settled down with a new leadership team and new division of responsibilities around handling the exit negotiations and exploring new global trading relationships.

 

This new stability has been welcomed by the financial markets, which trade on confidence and the Bank of England has held interest rates at 0.5% for July; promising to keep an eye on economic indicators and leaving the door open for further financial stimulus should it be required in August.

 

Until the EU exit deal is finalised and a leave date agreed, there will continually be ups and downs depending on the news cycle and views of the main protagonists.

 

Whatever side of the in / out debate people sat on, trade will continue and the economies of the world will adapt as the UK seeks its new place. Businesses already hedge currency as part of their normal operations and those trading into the EU and further afield will continue to do so. No-one yet knows where the new relationship between the euro (€) and sterling (£) or the US dollar ($) and sterling will sit.

 

GBP and EUR over last 90 days

GBP and USD over last 90 days

 

Around the 18th July, sterling / euro had recovered to 1.20 while sterling / dollar was trading around 1.32; certainly a long way off sterling’s best but still representing a recovery. In the short-term, this makes products originating from the UK cheaper on the world markets; where the dollar is the predominant trading currency. However, as the majority of products sold by UK-based retailers are produced in other countries, the costs of sourcing will increase; probably introducing inflationary pressures into the UK economy. Inflation is currently running at around 0.3% and the Bank of England has a mandate to keep it under 2%. For global merchants looking to sell into the UK, inflationary pressures might produce an advantage as UK consumers look for better deals.

 

Foreign exchange pressures will also impact shipping costs, supply chain where fuel is a major element of the cost base and labour costs in producing markets. This may improve the competiveness of UK-produced product. Business models requiring complex financial arrangements, such as franchises, and on-demand type services in a global market will be significantly hit in the short-term.

 

A key question at the moment is when the UK government will press the button for exit negotiations to commence. The formal process starts when Article 50 is enacted by the government. The process can take up to two years; although extension can be granted if the EU 27 (excluding UK) all agree. The UK is likely to delay.

 

Disengaging from the EU apparatus is going to keep negotiators and civil servants busy for many years. This work load will involve a lot of prioritisation of effort. For example, the EU passporting system which allows the City of London’s financial institutions to clear trades on the euro, and many other functions, will be a priority. There are more than 3,000 EU regulations and directives that the UK is going to have to replace, adopt or remove. Repealing the European Communities Act 1973 will effectively remove the link that enables EU law to be adopted by the UK. Without this act, much of the current consumer contracts, trading, consumer protection and product safety laws will become void. There is a very good chance that much of it will be copied into UK law and revisited at a future date. Likewise, there is a higher probability that much of it will have to remain if the UK wants to trade with EU citizens. Product safety / labelling is one area (CE Mark). The other is data protection.

 

Currently, there is a new piece of regulation due to be adopted by all EU 28 countries during May 2018; the General Data Protection Regulation (GDPR). The timing of this means that UK businesses will have to comply with the new regulation, even though the UK will (probably) be exiting the EU during 2019. With the importance of this area to the economy, there is a very good chance that the regulation will be adopted by the UK, particularly with the other priorities in mind, including the desire to continue trading with EU citizens. Issues around safe harbor and privacy shield have shown that data protection is taken very seriously by the EU and any trade deal will involve GDPR.

 

Where digital marketing is a key element for driving sales in the EU, GDPR compliance will be a major factor in the success or otherwise of brand marketing activities. For example, email marketing, personalisation services and behavioural advertising all rely heavily of good quality consumer data; areas that will continue to be heavily influenced by EU rules.

 

The EU, according to the European Commission, imports over half of the global total textiles and clothing production. UK fashion retailers will already be very aware of the rules around country of origin and, while currently being beneficiaries of being able to say ‘produced in the EU’ in some circumstances, this will no longer be available. The increasingly global nature of brands means that buying and production functions could be moved to within the EU in order to benefit from more favourable terms.

 

In the worst case, where the UK and EU cannot agree trade terms, they will fall back on World Trade Organisation terms. These are globally-agreed tariffs on the imports of certain products, but can be significantly higher than those agreed between countries. For example, WTO tariffs on garments range between 9% for the EU, 15% for China and 40% for Indonesia. Free trade agreements limit these tariffs and make import / export much easier and more competitive with local competition. Shortly after the new UK government was confirmed, they announced that 12 countries had expressed interest in negotiating trade agreements; Commonwealth countries such as Australia and Canada were early announcements while the US is also on the itinerary of the new international trade minister, Liam Fox. By way of example, Australia currently exports AUD$8.6bn of goods and imports AUD $12.6bn from the UK; significantly less than the AUD$100bn between China and Australia.

 

Technically, no new trade agreements can be negotiated until the UK has left the EU; that’s not to say they can’t be ready to be signed quickly after exit following ‘informal discussions’ taking place.

 

Many businesses will have to review their headquarters arrangements. Once outside of the EU the rules around taxation will get a little more complicated. Will the UK lower corporation tax to tempt more international businesses to base themselves there? The loss of EU member status might make it harder for companies to have financially-beneficial arrangements with subsidiaries and group entities and it will certainly be harder to manage VAT or equivalent sales taxes when trading into the EU.

 

From a purely trade perspective, the UK will be much more open to the global markets than it is at present. The impact of the loss of its EU membership status is still to be seen. Freedom of movement restrictions will make it harder for international businesses to move labour to where it is needed. Britain will no-longer be an easy entry point in to the EU single market for companies currently trading outside of the EU, but most of this is still guess work.

 

In purely commercial and economic terms, many countries allow trade with each other. Yes, associated costs might be higher but it can be done. The UK has the fifth-largest economy in the world at the moment and, while it operates a trade deficit with the EU, the goal really isn’t the 500 million EU citizens, it is the main economies that are of interest – Germany, Netherlands, Nordics, Spain and France.

 

What isn’t so clear is the political situation. Lots of EU member states want the UK to have a tough time ‘exiting’ so as to quell unease at home about the European project.

 

The UK’s relationship with the EU is undergoing a transformation and only time will tell how good the future relationship will be. In the meantime, the UK is still a member of the EU for at least the next two years. There is a lot of change coming but consumer confidence will grow and with it, the UK’s economy.

 

This is still an attractive market for international merchants and UK merchants are getting adept at trading into new territories; this is by no-means the end…

 

LinkedIn Twitter Facebook

Royal Mail Sponsor

Register today for unlimited article views, and unique insights

Register Now

What can UK online retailers learn from major sales events in China?

What can UK online retailers learn from major sales events in China?

By cleverly orchestrating a string of headline-grabbing shopping holidays throughout the year, China is reinventing retail. But why are Chinese consumers embracing these shopping frenzies so readily and offers and how can overseas retailers learn from this to gain and maintain the competitive edge?
How WeChat is used for Business

How WeChat is used for Business

WeChat has been a hot topic for many marketers for a long time. However, how much do we really know about the most used social network in China? And how is WeChat used for business?
Ecommerce in Australasia

Ecommerce in Australasia

The New Zealand and Australia cross-border eCommerce markets are booming and it is looking to continue this way for the coming years. With almost 17 million savvy and highly engaged online shoppers in the region, what do you need to know about these eCommerce markets and which are the most successful retail sites there?
Ecommerce shipping to Australia

Ecommerce shipping to Australia

It’s easy for any retailer to be attracted to the impressive digital adoption Australia has taken with online retail sales of USD $9.5 bn last year. However, this success is not without its challenges as shipping into this widely fragmented country can affect your business - but how?
Online retail in the Nordics: which payment options to offer

Online retail in the Nordics: which payment options to offer

People foreign to the Nordic region might not realise that the combined markets of Denmark, Norway, Sweden and Finland are in many ways leading the world in payments innovation. And through this, it is also apparent in its consumers’ progressive payment preferences when making online purchases. However, which payment option should online retailers offer when launching in these markets?
How can online retailers earn trust in Belgium?

How can online retailers earn trust in Belgium?

Belgium’s online presence is growing year after year and with a growing healthy appetite for cross-border purchases, what should online retailers take into account if they are to enter Belgium’s eCommerce market?
Delivery preference of Dutch and Belgian online shoppers

Delivery preference of Dutch and Belgian online shoppers

Dutch and Belgian consumers are increasingly buying their goods online, but they differ in how they want those goods delivered. A savvy online retailer needs to localise its delivery options to meet these local requirements. But what are these delivery preferences?
What can UK retailers learn from the Amazon model?

What can UK retailers learn from the Amazon model?

Amazon’s reach is so pervasive that it’s overtaking Google to become the search engine of shopping. And it’s just as attractive for retailers as it is for customers, allowing brands to offer their products to the biggest audience in eCommerce, and offering attractive and easy fulfilment options. But what can UK retailers learn from the successful Amazon model?
The fundamentals of retail: Which European countries are leading the way?

The fundamentals of retail: Which European countries are leading the way?

From delivering on promise, to quickly resolving contact centre queries, to minimising the amount of returns, there are myriad aspects for retailers to get right when it comes to delivering a great customer experience. But which European countries are most successfully delivering on the fundamentals of retail?
Beyond Black Friday: Unmissable international events for 2017 eCommerce plans

Beyond Black Friday: Unmissable international events for 2017 eCommerce plans

In the US, the day after Thanksgiving has been a key focus for US shopping. Now, Black Friday is becoming the unofficial start to the Christmas shopping season in countries across the world. But there are hundreds of other events across the world to be aware of when developing an international strategy. Here are a few...

Contact Us

eCommerce Worldwide
2 Ching Court
49-53 Monmouth St
London
WC2H 9EY

Tel: 0203 696 0980
2016© eCommerce Worldwide

Keep In Touch

powered by Affino

About eCommerce Worldwide

eCommerce Worldwide provides online retailers with all the information, and resources, they need to develop cross-border strategies for entering new markets around the world
Read More