On 24 June, a 52% majority of UK citizens voted to "Leave" the European Union ("EU"). The outcome of the UK’s referendum on its membership of the EU creates a number of near-term challenges and, perhaps, opportunities. The UK Government faces many decisions, including deciding when and if it will serve the UK's withdrawal notice and trigger the two-year exit negotiation period under Article 50 of the Treaty on European Union.
With 47% of the UK's manufacturing exports currently being shipped to the EU and the EU representing 54% of the UK's imports 1, the potential impact of Brexit on the retail and consumer industries would be significant. In the months preceding 24 June 2016, the vast majority of UK retailers spoke out to show their support for the Remain campaign, voicing concerns about the uncertainty and risks they believed would be caused by Brexit. The UK is in uncharted water and the destination is, as yet, unknown.
Whilst the practical consequences of Brexit for the retail and consumer industries depend on the agreements to be negotiated between the UK and the EU, it is important to remember that whilst the referendum result may provide a political mandate for a Brexit, its legal status is only advisory and not binding. In addition, it provides no guidance about the form which the UK’s future relationship with the EU, and the rest of the world, should take. The formal process for a Brexit would also not start unless and until the UK delivers a notice under Article 50. This would trigger a two year transitional period for withdrawal arrangements to be agreed, at the end of which (absent an agreed extension to the process or agreed changes to the effect of Article 50) the UK would automatically leave the EU.
Below, we look at some of the immediate issues which arise following the EU Referendum result in relation to the retail and consumer goods sector:
1. Cross-border trading arrangements
Currently the UK benefits from full enjoyment of the EU's internal market, meaning that businesses are free to move goods and services freely between the UK and the EU, without any duties and quotas. The principle of free movement also facilitates access to the EU for UK workers. The UK also benefits currently from simplified customs procedures, reducing administrative burdens and complexities for UK companies trading with the EU. However, it is unclear what will happen to these arrangements if Brexit happens and what the model will look like in the future. The current expectation is that the terms of all future cross border trading arrangements between the UK and the EU will need to be renegotiated in parallel with the UK exit agreement. We will continue to monitor the process and provide up to date advice on the commercial and legal issues which arise from the negotiations in relation to the retail and consumer goods sector.
2. Digital Single Market
One of the EU's goals is the creation of a "Digital Single Market (DSM)", applying the principles of free movement of goods and services to the digital world and allowing businesses better access to online services and content. A consequence of Brexit may be that the UK will no longer have a say in the strategies being considered for achieving the DSM and that the UK could decide not to adopt the strategies to facilitate cross border commerce which are adopted by the rest of Europe. It is important to stay informed about the process so you can adjust your digital strategy if required.
3. Changes to labor markets
If implemented, Brexit is likely to have an impact on the free movement of labor from the EU into the UK and vice versa. It could become harder for retailers to recruit staff in major cities, warehouses and distribution centres, particularly as these jobs are predominantly jobs filled by migrant labour. Businesses need to be prepared and Hogan Lovells will monitor bilateral negotiations and potential changes to labor laws which may affect both employers and employees.
4. Harmonization of legislation
A vast amount of legislation relevant to the consumer and retail sectors derives from EU legislation and there is currently a considerable amount of harmonization across the EU, e.g. consumer legislation. However, following Brexit, it is possible that the UK could review these rights and changes may be seen. Although Brexit could mean that the UK no longer has to comply with New European product standards post-Brexit, the reality is that UK manufacturers supplying EU countries would need to comply with any new EU standards, post-Brexit. If Brexit goes ahead, your product strategy and product standards will have to be reviewed, especially when deciding on new products.
UK VAT law is currently derived from EU legislation which, post-Brexit, the UK may choose to no longer give effect to. Although it is likely that, in the short term, the UK will maintain a parallel VAT system, the future position that will be adopted by the UK is unknown.
6. Tariffs and pricing
It is likely that Brexit will have an impact on tariffs and prices both in the UK and in the EU. In this situation retailers will need to decide whether to adjust their pricing system and whether to pass, possibly increasing, costs on to consumers. The current expectation is that the terms of all future cross border trading arrangements, including potentially introducing tariffs between the UK and the EU, will need to be negotiated in parallel to the UK exit agreement.
7. Exchange rates
The value of the pound fell significantly in the first few days following Brexit. The immediate effect of this is that from a UK perspective, exports will become cheaper and imports more expensive. However, it is likely that most retail and consumer businesses will import some (if not all) of their goods (a large number of goods sold in the UK are manufactured abroad) and these goods may be more expensive for businesses to purchase. Consequently, this could have a knock-on effect on pricing and consumer spending. Exchange rates have to be monitored and considered even more carefully when making cross-border business decisions.
As an International law firm, with roots in both the UK and Continental Europe we have been leading an analysis of Brexit before the referendum was promised. We have built a multidisciplinary task force and have been collaborating with our clients and other experts to provide a holistic view of the risks and opportunities. We are here and ready to help you.