Britons are due to go to the polls to vote in a referendum on 23rd June 2016 to decide whether the UK should remain a member of the EU, or exit (a so called “Brexit”). As many readers will be aware, there is no certain answer on what effect, whether positive or negative, Brexit would have on the UK economy or individual sectors of it. Below, we summarise a few key considerations when considering the effect of Brexit on the retail sector:
Effect on Sales
It is widely thought that a vote for Brexit would create a temporary downturn in trading conditions. This is due to the uncertainty a Brexit vote will have on the economy. What is disputed is the extent of this downturn and whether it will reverse. The remain camp believe a Brexit vote will have a long term chilling effect on the economy whilst the UK conducts its complex withdrawal negotiations with the EU. It is possible that a nightmare situation could ensure where negotiations have created no solution over the two years that the UK would have to exit the EU.
Conversely, the leave camp believe any downturn will be short lived as the strength of the UK economy would raise confidence and as favourable free trade terms become public knowledge. It is the leave camp’s assertion that in the long term, any short term pain of a Brexit vote will be outweighed by the long term gain.
Retailers should no doubt be cautious about the effects economic uncertainty will have on their sales.
Imports and Exports
The UK imports more from the EU then it exports. The importance of this fact is that the EU is not well placed to put up trade barriers, should Brexit occur. Retailers benefit strongly from the UK’s membership and access to the EU single market, free of custom’s duties. The loss of this access may well be the biggest risk to retailers, as the EU is the UK’s biggest market.
However, in the event of Brexit, this situation may remain relatively unchanged with the UK re-joining the EEA (like Norway), and getting access to the single market.
There would also be freedom to strike independent new trade deals with the US and other non-EU countries, which are currently subject to EU tariffs on imports and exports from the UK. The UK could for instance drop remaining tariffs on US produced goods, fostering the import and sale of US goods in the UK.
Of importance to retailers is the effect Brexit may have on staffing. It will very much depend on what sort of immigration policy the UK will adopt, post–Brexit. However, given that cheap labour and an abundance of low-skilled migration has been an issue for the leave camp, it is possible in the longer term that staffing costs and wages may increase due to a long term reduction in the low cost workforce.
The leave camp believes such costs will be countered for businesses with a liberalisation of the UK’s employment laws, such as a possible abandonment of the TUPE and Working Time Directive legislation. Although this is indeed possible, it ignores the inconvenient fact that the UK has a track record in creating its own employment protections and even going beyond the necessary ambit of existing EU legislation.
The free movement of people may also be a crucial condition of on-going access to the much sought-after single market. Higher-net worth migration is likely to remain unaffected by Brexit so senior positions in retail and the talent pool available will likely be unaffected by any reductions in low-skilled economic migration.
Red Tape and Product Regulation
Although both sides may argue on this point, we believe there is no likely great change in red tape or product regulation on the horizon, should Brexit occur. The reason being that UK is unlikely to drop its current harmonisation with EU standards, as this would close that market and is a condition of access to the single market.
However, what could occur, and this is a major possible benefit for US (or perhaps Japanese) retailers and manufacturers in particular, is the ability for the UK to accept US or other foreign product regulation and safety standards. This would mean that if a laptop was designated as safe to sell in the US, the UK could choose to accept these US product and labelling standards and the company could sell directly into the UK, without any alteration to the product or packaging. Although the product would not be able to cross into the EU from the UK, this would open up the UK as an easy market for American goods and US goods could be imported freely.
The UK cannot however compel the EU and US to align and mutually create harmonised regulations in areas such as data protection, product regulation and safety, labeling or pricing and distribution laws. These are the areas where a single transatlantic market could be created for goods, but Brexit does not bring this situation closer.
Lastly, the UK could also choose to drop EU standards and requirements for internally produced and sold products, requirements it cannot currently avoid, even for goods that never leave the UK.