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It would be remiss to talk about risks facing businesses in 2020 and not mention Brexit. Brexit will impact businesses in a variety of ways but one particular area I want to focus on is rules of origin and the impact this has on British goods.
Post-Brexit the UK will aim to enter into various trade agreements with the EU and other countries. The basis of these trade agreements is that Country A will allow Country B to sell goods that originate in Country B without any tariffs or restrictions.
The definition of what makes a good originate from Country B is set out in the trade agreement, the WTO trade agreement requires at least 50% of a good’s value to be added from a country for it to meet the criteria to trade without tariffs and restrictions. It is up to the countries themselves to determine was this percentage is.
Goods that don’t meet the criteria do not qualify for the free trade agreement, they can still be sold overseas but tariffs and restrictions will apply.
Impact on businesses
The best industry to consider the effects of this would be the automotive industry. Research by the Society of Motor Manufacturers and Traders found 40% of the value added to UK cars comes from the UK. This falls short of the 50% default WTO requirement.
Cars can be exported tariff free despite this thanks to a process called cumulation. Under the current position with the EU, cumulation means any goods or value added in the EU are deemed to originate from the UK. If there was no free trade deal with the EU, cumulation would not apply and any value added in the EU would not originate from the UK. This would apply to any countries with a free trade agreement.
Honda suffered in 2017 incurring tariffs on shipping cars to Israel under rules of origin thresholds making their vehicles uncompetitive and imposing costs they could not afford to absorb.
Businesses that rely heavily on imported goods or value for their products such as textiles and machinery may be required to source more parts from the UK or add more value to goods in the UK. They could also be faced with larger costs if imports are from countries without a free trade agreement with the UK.
It will also create a huge administrative challenge for exporters to comply with. CBI research suggests there are 135,000 businesses who solely export to the EU who would be affected by this.
What can businesses do?
One solution would be to pass these costs onto the end customer, however these tariffs can range from 4-15 percent of cost and it is unlikely businesses will be able to pass all of this cost onto the end customer.
Businesses should review their supply chain for potential efficiencies to drive down costs and maintain competitiveness, particularly with regards to any administrative burden of exporting.
It is likely that an optimum solution for business would be a combination of the above. But ultimately, the outcome of any trade negotiations will determine the full extent of the impact on businesses.