Brexit: Free Trade Deals Will Not Stop Costs Rising for Consumer Businesses and Their Customers According to Oliver Wyman
LONDON--(BUSINESS WIRE)--Jul 4, 2018--The red-tape costs from any new arrangement with the EU Customs Union will outweigh the benefits gained from negotiating free trade deals that cover imports from non-EU countries. This is according to “ Costs Up, Prices Up: Brexit’s Impact on Consumer Businesses and Their Customers, ” a report officially launched today by Oliver Wyman that debunks the myth that free trade deals are a solution to rising costs after the UK leaves the EU.
In its most comprehensive research to date, the management consultancy reveals Brexit will cause profits for consumer businesses to fall by between 1.1 and 4.2 points. Free trade deals with non-EU countries would only lessen the impact by 15–35 percent and businesses’ profit would still fall by between 0.7 and 3.4 points.
For British households, the research shows that a Brexit with free trade deals with non-EU countries will still cost Brits an additional £134–758 every year. This is 20–45 percent lower than without the deals (£245–961).
Duncan Brewer, partner and lead author of the report, Oliver Wyman, says: “No matter which trade deals are agreed, the fact that the UK is leaving the EU will create new red tape costs for imports coming into the UK from the Customs Union. Our research clearly shows that costs from this red tape are always higher than any cost reductions gained from free trade deals, leaving businesses and households worse off after Brexit.”
“No Brexit scenario can entirely remove this red tape, which is why, even if the UK implements free trade deals with non-EU countries, prices will go up all along the supply chain, and eventually hit consumers’ wallets,” Brewer added.
The report builds on the initial findings that showed Brexit could cost households an extra £961 per year. It further reveals that lower-income households will be hit the hardest by rises in food prices. This group typically spend proportionally more of their income (after housing costs) on groceries: 17 percent, compared to 9.4 percent for the highest earners. In the hard Brexit scenario we modelled, those on the lowest income will see their overall costs increase by 3 percent more than those earning the most.
The new research additionally reveals that tariffs and red tape on imports and changes to labour costs will push prices up by 2.3–7.8 percent in supermarkets, 3.0–8.0 percent in general merchandise retailers, and 0.7–6.6 percent in restaurants.
The analysis shows that a typical UK supermarket with revenues of £10 billion could expect to lose between £214.8 million and £737.1 million in profit, unless it raises prices. A typical general merchandise retailer with revenues of £1.5 billion could expect to lose between £30.5 million and £83.9 million in profit, unless it raises prices. A typical UK restaurant chain with revenues of £100 million could expect to see a drop in profit of between £600,000 and £4.8 million, unless it raises prices.
As prices go up, we expect to see consumers cut back, particularly on non-essential products and services, such as eating out. The report findings show there will be a volume decline of 1.1–3.7 percent in supermarkets, 2.2–6.1 percent in general merchandise retailers, and 1.4–12.0 percent for restaurants.
For businesses, red tape, such as paperwork, time spent at the border, and customs checks, add to the cost of importing goods. After Brexit, these red tape costs will increase for imports from the EU, making the supply chain slower and more expensive. In its analysis of these costs, the report illustrates how red tape is likely to contribute to the price of fresh produce imported into the UK from the EU increasing by 19 percent.
An agile supply chain will be key to survival, enabling businesses to quickly respond to changes in costs from tariffs and non-tariff barriers by sourcing the cheapest alternative product. The report illustrates this using wholesale prices for beef imported into the UK. Irish beef currently costs €3720 per tonne and Argentinian beef €5550 per tonne. After Brexit, should there be a free-trade deal with Argentina and increased red-tape on imports from the EU, the analysis suggests these prices will change to €3980 per tonne for Irish beef and €3590 per tonne for Argentinian beef, making the non-EU product the cheaper option.
About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across nearly 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 4,700 professionals around the world who help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.
Notes to Editors
Our research takes into account the complex and non-additive interactions of tariffs and red tape resulting from new trade agreements and labour cost changes.
The effect of changes in exchange rates have been modelled separately, due to their high magnitude: each five percent devaluation in the pound (versus USD and EUR) increases household costs by £380 per year.
We define ‘profit’ as earnings before interest, taxes, depreciation and amortization (EBITDA). Red tape, or non-tariff barriers, are anything other than a tariff that obstructs international trade. They include customs checks, providing proof of origin, and paperwork (electronic or otherwise). These generate costs for businesses because drivers will log more hours from having to stop at customs, perishable goods could expire, and more administrators are needed to provide the correct certifications.
With new free trade deals, businesses will be able to import many goods at lower costs from non-EU countries than the current EU prices. While much of the existing EU spend will move to other sources, the reduction in these prices will not sufficiently mitigate the increased red tape costs of the remaining EU imports.
To give an accurate and highly detailed assessment of how consumers and consumer businesses will be affected under each Brexit scenario, we have quantified how costs will change at each step of the value chain for each consumer industry.
Based on information from the European Free Trade Association, 28 percent of the UK’s imports from non-EU countries are covered by existing EU free trade agreements. We assume that these are distributed evenly across all import types.
All scenarios assume that businesses will shift some of their sourcing if non-EU sourcing becomes relatively cheaper than EU sourcing. For scenarios where a change in labour cost is anticipated, we have modelled the impact as an increase of 16 percent for agricultural and hospitality workers, eight percent for other unskilled workers, and as zero for skilled workers. This is based on a range of estimates of the potential labour cost increase due to reduced immigration.
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CONTACT: Oliver Wyman
Patricia Romero, +447825 193311
KEYWORD: UNITED KINGDOM EUROPE
INDUSTRY KEYWORD: PROFESSIONAL SERVICES CONSULTING FINANCE
SOURCE: Oliver Wyman
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PUB: 07/04/2018 07:23 AM/DISC: 07/04/2018 07:22 AM