Britain’s leading retailers are reviewing their supply chains to Ireland and other European markets while they work out how to avoid tariffs imposed by the UK’s post-Brexit trade deal with the EU.
The Trade and Cooperation Agreement agreed with Brussels on Christmas Eve includes detailed stipulations on rules of origin that determine whether tariffs are levied on goods that are imported into the UK and then re-exported to EU markets with little or no further processing.
“Tariff free does not feel like tariff free when you read the fine print,” said Steve Rowe, the chief executive of Marks and Spencer.
More than 100 retail executives held a call with government officials on Wednesday to discuss the problem. One person on the call said there was the sound of “pennies dropping . . . everyone can now see significant issues of additional friction which is pure cost”.
William Bain, trade policy adviser at the British Retail Consortium, said that “at least 50” of the lobby group’s members were facing potential tariffs on re-exports.
Some companies, including John Lewis and TK Maxx, have suspended deliveries to customers in Northern Ireland, which has to follow EU customs rules, while others are trying to work out whether they can continue supplying their stores in the EU from the UK.
“We appreciate that the rules of origin in the [trade agreement] were designed to be facilitative on trade in goods but we need a solution which genuinely reflects the needs of UK-EU supply and distribution chains for goods,” Mr Bain added.
To qualify for zero tariff treatment, goods must be able to demonstrate that they “originate” in the EU or the UK, with approximately 50 per cent UK content for most products. But the rules are complicated; destoning dates imported from Israel does not count, while smoking salmon from Norway does.
Clothing imports from developing countries such as Cambodia, Myanmar and Bangladesh are tariff-free under the Global System of Preferences. But if they are re-exported without further processing they attract tariffs.
“We are trying to unravel all of this,” said Nigel Oddy, chief executive of New Look, which has 27 stores in the Republic of Ireland that are supplied from the UK. He said it also affected sales made via online fashion marketplaces such as Asos and Zalando and delivered to customers in the EU.
Dixons Carphone and Argos also have stores in Ireland that are supplied from the UK. A spokesman for Dixons said it was “working through the implications of the new rules”.
Retailers said that tariffs can still be avoided by using transit processes and bonded warehouses. Fashion chain Next is among those to have taken this approach. But in many cases this means unpicking logistics designed to serve the UK and Ireland as one market.
Retail executives warned that smaller businesses would struggle to pay for services such as customs warehousing. “For big businesses there will be time consuming workarounds but for a lot of others this means paying tariffs or rebasing into the EU,” warned Mr Rowe.
Another solution is to import directly into warehouses in the EU. Dixons’ substantial business in Scandinavia is run this way, and leisurewear group JD Sports said last year that it was investigating options for stocking European stores without involving UK facilities.
But supplying from separate distribution hubs means more working capital tied up in inventory, with potential implications for cash flow and debt.
Mr Bain said the BRC was “working with members on short-term options and are seeking dialogue with the government and the EU on longer-term solutions.”
The Cabinet Office said this week it was working closely with businesses “to help them to adapt to any new trading requirements.” But another retailer said ultimately a solution would require concessions from the EU.