Road to Brexit will be bumpy, though future bright

While the UK’s major multiple retailers look set to have a torrid time over the next few years, as consumers buy more products online and hard discounters Aldi and Lidl eat into their traditional customer base, former Waitrose boss and trade minister, Lord Mark Price, remains optimistic that the UK will emerge in a strong position post-Brexit, despite the “bumpy” road it is currently travelling down.

Giving the keynote presentation at food safety specialist NSF International’s conference, titled ‘Delivering customer confidence in a post-Brexit world’, in London on 15 March, Price highlighted the obstacles facing ‘bricks and mortar’ retailers, such as Tesco, Sainsbury, Asda and Morrisons. These range from rising staff costs of 5–6% a year as the national living wage starts to bite, plus soaring business rates – from which online retailers such as Amazon are immune – to increasing competition from discounters.

If all that wasn’t tough enough, the fall in the value of the pound after the Brexit vote in 2016 has pushed up food and drink manufacturers’ raw material input costs, which retailers are reluctant to pass on to hard-pressed shoppers. This is having an adverse effect on big retailer margins, said Price.

Consumer confidence in the UK has also been hit by Brexit, he added. While the nation’s gross domestic product (GDP) figures, published earlier this week, were around, 1.5%, which was better than that forecast a year ago, it was lower than that forecast several years’ ago, and one of the lowest growth rates out of the G20, he added.

More retail failures ahead
“So for all those reasons, I am pessimistic about how hard it is going to be for retailers over the course of the next two to five years,” he said. “There has to be some kind of structural change: either in rent or in the way that government taxes business, or in rateable values or, frankly, with what happens with Brexit.”

While good retailers that take the long-term view and invest for the future would thrive, Price suggested there would be more casualties ahead. “It is going to be messy. What you were seeing at the beginning of this year [with a number of retailer failures] is going to continue. And it will actually become noisier.”

However, he expressed greater optimism regarding the outcome from the Brexit negotiations currently underway between the UK and EU. While he admitted to campaigning to remain, he said: “I do believe the UK can have a positive future outside the EU.”

Price went on to explain why the government had ruled out different options in its negotiating position and proposed what he thought would be the final outcome.

The EU position was clear, he stressed. Despite the protestations of some politicians, the UK could not remain a member of the single market after it left, unless it abided by the four “freedoms”: freedom of movement of people, capital, goods and services. It would necessitate paying into the EU budget, accepting EU laws and legislation and judgments of the European Court of Justice. “Those things are not consistent with a vote to leave the EU,” he suggested.

Price, who as trade minister, visited Norway and Switzerland to explore the relationships they had with the EU, said: “The reality is it’s not optimal: you have to be a rule taker, but you don’t have a seat at the table.”

No Customs Union
He also dismissed the third option, which some people talked about, of staying in the EU Customs Union – although he accepted it was a good option during the transition period before the UK finally left the EU completely at the end of 2020.

The problem is that Non-EU countries, such as Turkey, that have this type of arrangement are disadvantaged, he warned. While Turkey has to accept lower tariffs negotiated by the EU on imports from, say Japan, since it isn’t a signatory to the trade deal with Japan, it does not get a reduction in tariffs on its exports to Japan and has to operate on World Trade Organisation (WTO) terms.

“So the danger of the UK being in any long-term Customs Union, is that we will ultimately be disadvantaged whenever the EU does any new trade deal,” Price warned. “It would mean that the UK would have to accept lower tariffs on goods coming in, but couldn’t export goods on the lower tariffs agreed by that nation.”

That was why Prime Minster Theresa May was seeking a customs agreement that had as little friction as possible, Price argued.

“I am very optimistic the UK can get a comprehensive free-trade agreement with the EU,” said Price. “Why? Because already [European Council President] Donald Tusk and the EU have set out that they want no tariffs – there is no benefit.”

Because, on day one of Brexit, regulations and tariffs within the UK will be aligned with those in the EU, “I think we will have a more comprehensive free-trade agreement with the EU than any other country has”, said Price.

He also pointed out that the EU was concerned about its food industry – which had a £10bn trade surplus in food and agricultural goods with the UK – and how this would be impacted by Brexit. This would particularly affect countries such as France, Italy and Spain, he added. “So they are very keen to make sure there is an agreement which preserves food and agricultural production in Europe and that the UK is a beneficiary of that going forward.”

Regulatory divergence
However, another speaker, Dominic Watkins, a partner with legal firm DWF, which hosted the event, suggested that regulations in the UK would eventually diverge from those in the EU. He indicated this could present problems further down the road and undermine the UK’s future trading relationship with the EU. “It is absolutely inevitable that we will end up with divergence,” said Watkins.

Brexit would present new opportunities for the UK, in the form of a new regulatory regime, which encouraged more rapid implementation of novel technologies, food products and innovative supply chain management systems, said Watkins. But at some time, he added, it would be inevitable that the UK’s regulatory approach would diverge from that of the EU, in fields such as novel foods, nutrition and health claims approvals, genetically modified organisms, health labelling of food and drink products, and others.

“That’s problematic if you want to then export to the EU,” warned Watkins. “It wouldn’t be allowed.”

The UK government was currently seeking to protect as much from the trading agreements as we have today in a post-Brexit world, Price asserted. It was working on setting out its own schedules with the WTO, “replicating current schedules as closely as it possibly can”.

“The UK will continue to trade through the WTO; it will continue to post its schedules; it may well get challenges, but it will work through those,” Price said. He added that the UK was also party to 35 trade agreements with 60 countries already through its EU membership.

“All of those countries have said they wish to continue the current relationship and they want to work with the UK to ensure that when we leave the current terms continue,” he explained. “There is no real benefit for them in doing anything else.”

He expected that in the two years between 2021 and 2022, the UK could expect to sign new free-trade agreement with other countries, most likely Australia and New Zealand initially, and possibly some trading components with the US.

In conclusion, though, Price warned of the urgent need for the UK to change; raising its productivity and efficiency to survive in very much more competitive global world. This created a dilemma, he added, since most people that had voted for Brexit were looking for greater protectionism, he suggested.

Inclusive capitalism
In this brave new world, he repeated his earlier calls for a fairer world, in which more “inclusive capitalism” was the norm. It would involve many more stakeholders, rather than focusing primarily on shareholders, and greater engagement by businesses with their workers.

In a post-Brexit world, governments would need to be more pro-business: investing in skills to help people engage with the digital age; investing in the UK’s infrastructure, in areas such like roads and communications; and investing in innovation.

“From a business perspective, efficiency is going to be key,” he argued. “We are moving into an even more global world. British businesses have got to be top of the global league table. I think that businesses will need to invest more in innovation and they are going to have to turn an eye to external markets as well as the EU.”

Lastly, Price said the contract between businesses and the people who work in them need to change “for the benefit of the individuals; for the benefit of our society; and for the benefit of companies to drive better returns”.