Deal or no Deal

Brexit: Deal or no deal

William Tickel Blog, Brexit, Retail

If the last 12 months have been any indicator, the only certainty is that we can’t be certain of what will happen in the months and weeks leading us up to March 2019. This said, if the current situation offers us any clues, we should be prepared for the possibility of a post-Brexit-Britain without a Free-Trade deal with the European Union.

Theresa May has already committed the UK to leaving the single market and the customs union in favour of trying to strike a free trade deal without the typical constraints of EU member commitments such as free movement of labour, the supremacy of the European court of Justice etc.

The Prime Minister has also said emphatically that “No deal is better than a bad deal.” If we make the dangerous assumption of taking a politician’s words at face value, Theresa May is positioning the UK to walk away from any trade deal that would include the current EU commitments; the commitments Europeans have emphatically said are non-negotiable.

The European perspective

The problem the UK faces is that, from the perspective of European leaders, they simply cannot give the UK a trade deal that will leave us better off than before. As President of the European Commission Jean-Claude Junker reportedly said in his first meeting with the Prime Minister “Brexit cannot be a success.” This isn’t a spiteful EU politician, determined to punish the UK for leaving, but a rational actor telling the UK, that the EU will not agree to a deal that would spell its own demise.

Pro-European leaders in France and the Netherlands have barely survived the recent elections in the face of historically high, anti-European sentiment. The danger has not yet passed and any expectation that the EU will give the UK the key benefits of membership without paying the commitments, is to ask EU leaders to pour gasoline on the smouldering populist fire. It would signal to the rest of Europe that you’re be better off outside of the Union than in it. This idea, if given legitimacy, would certainly spell the end of the European project.

Given this reality, and the volume of issues that need to be resolved between now and 2019, there are several options that are possible. The first is that we will come to an interim deal that gives more time for both sides to negotiate beyond March 2019. The second is that we come to a “bad” Free-Trade Agreement that is spun by politicians as a success, and the last and most daunting option is that we exit the EU and default to WTO rules.

Prolonged uncertainty

In all cases, the effect on the UK for the foreseeable future is prolonged uncertainty, weaker job security, and a weaker pound. This is already having an effect on the retail industry as the inflationary effect of higher food and oil prices eats up people’s disposable income and reduce demand for many consumer goods.

This has already begun to worry some retailers whose success depends on consumer spending, even if they themselves feel they will grow in the coming year. If the UK were to default to WTO rules, this would only exacerbate the current effects, as over 70% of our imported food comes from the EU, and would be slapped with an average 22% import tariff, not to mention the bureaucratic nightmare that will ensue as customs checks soar from 60m per year to an estimated 350m.

The negative economic, administrative and political fallout implied by the WTO option and the unlikelihood of the “cake-and-eat it” option, seems to leave the interim trade deal option as the most likely scenario. While this seems preferable to “no deal”, it will extend uncertainty into the foreseeable future, which is not good news for many retailers and consumers.

Given these scenarios, which retailers survive and thrive in this uncertain landscape will be those that are most “Brexit-ready” and are already looking at how they can redesign and strip the fat off their supply chains as well as prioritising which products will succeed in the current economic conditions.