Brexit Analysis Part I: Deal or No Deal?
The 29th of March 2017 could be remembered politically as a pretty historic date, depending of course on how things turn out! Today, Theresa May will trigger Article 50 and begin the messy divorce process to separate the UK from the EU politically and economically. Recent commotions in the media have focused on the possibility of the two year negotiation process ending without a new trade agreement in place. If this happens the UK/EU trading relationship would revert to tariffs on goods and services as laid out by the World Trade Organisation (WTO), where each party would be treated the same as a “most favoured nation”; even if they actually feel less amicably towards one another.
At Stowga we are obsessed with trade data as a indicator of where goods in the UK are and as a predicator of where they will be in the future — it helps us predict and design logistics solutions for our clients. We wanted to model what the potential effect of the UK reverting to WTO tariffs could be for ourselves and our clients. We mapped the tariff schedule from the WTO onto 2016 import and export data to see which sectors are at risk and which will be safe under any new tariff regime.
The headline figures would see UK importers pay an additional £21.7bn of taxes to HRMC. To put that into perspective, in 2016 the UK imported £487bn worth of goods, which means the average tariff payable comes out at 4.4%. Similarly UK exporters may have a bill of £11.1bn, payable in parts to all of the countries they transact in, with the average tariff running at 3.6%.
The figure above plots the mass of goods traded vs. the WTO tariff levied against the sector. Over the next few days you might see plots of the WTO tariff economic impact on sectors. These are useful to see how the economy will be affected as a whole and which areas will suffer most, but we wanted to look at industries we all interact with everyday.
The simplest way to interpret the plot is that if something is in the top right, there is a price hike coming that will affect everyone. Anything on the left will be largely untouched by WTO tariff schedules and the bottom right will see increases in duties, though fewer people and businesses will be affected.
The safest companies are those which trade in commodities where the WTO tariff is zero. This includes paper, books and pharmaceuticals. In 2016 pharmaceuticals accounted for £24.9bn of imports, and £24.1bn of exports. Pfizer, GlaxoSmithKline, AstraZeneca and other UK pharma companies will continue to do well after Brexit, irrespective of whether we get a trade deal. The already thinly stretched NHS will be relieved to hear the price of drugs won’t be going up through trade tariffs and a change in the regulatory landscape for drug licencing could increase the amount of choice that patients and care givers have.
Luxury goods is another sector that is safe if we revert to WTO tariffs. Art, precious metals & stones, boats and aircraft have some of the lowest rates of all sectors. Gold and high value stones account for a significant chunk of trade by value in the UK. £54.1bn was imported last year and gold is consistently the top ranking commodity imported and exported via Heathrow by value. Perhaps this is not what most people had in mind on June 23rd 2016, but the top 1% and their favorite brands such as Cartier, Rolex and Tiffancy & Co will not feel much change from trade tariffs, even in the worst case scenario.
Food and food related businesses are by far and away the most at risk in a WTO trade agreement. Sugar & confectionery, dairy, wheat, vegetables, cereals and meat all come under very heavy tariffs. If we revert to a WTO schedule, these tariffs will hit everyday consumers the hardest. Brands in this sector include Unilever, Nestle, Cadbury, Coca-Cola and Kellogg’s. Shoppers have already started to feel the effects of a devaluation of the pound since the referendum, mostly through ‘shrinkflation’, notably with confectionery brands downsizing packets in a crude attempt to cut costs and conserve consumer percention of their brands. This could get much worse, with food getting over one third more expensive or sold in even smaller packets. It is also likely to put the restauraunt business in the dangerzone; fixed wage and rent bills mean costs can only be passed on to consumers. With customers potentially already feeling the pinch and reducing their discretionary spending, an upcoming hike in business rates and lower footfall could see some great businesses shut down over the next few years.
Sugar is in the midst of a big shakeup in Europe, as quotas which have been in place since 2006 on the production and export of sugar beet are due to be lifted later this year. This is likely to mean even more price volatility for farmers as supply is expected to increase by up to 20 percent. According to WTO tariffs, sugar and confectionary could see some of the highest taxes levied of any commodity, this huge increase in potential supply could act to diminish the overall effect, but sweet stuff is still likely to cost you more than it did previously and much more than any of the proposed ‘sugar taxes’ would have. Good news for dentists and the NHS?
Clothing and apparel deserve a mention as a notable sector at risk. Apparel accounted for £79.9bn of imports in 2016, and since retail brands such as Primark, Nike, H & M and Gap will struggle to downsize their physical retail offering they will be forced to pass the estimated bill of £2.2bn on to customers. Fast fashion may be about to slow down with imported goods collecting inflated price tags as they are moved around the supply chain. Whilst the manufacture of clothes might seem like a simple process at first glance, it typically involves a number of different processes, each of which may occur in a different country. The end result is that a single dress may have been to 5 or 6 countries before it ends up in a high street store. If the UK is a step in the middle of the manufacturing chain, tariffs of over 10% could be combined multiple times to greatly inflate prices.
Taken as a basket of goods the ‘at risk’ sector look like they are going to hit Theresa May’s JAM demographic hardest. Cost-push inflation, devaluation of the pound and import duties will conspire to make the fundementals of feeding and clothing your family more expensive and life more difficult. Whilst luxuries and the sectors so powerful there are no impediments to trade (Oil and Pharma) will barely notice the WTO cliff, everyday essentials, for everyday people are going to go up. The most at risk businesses are those that trade in these everyday things. We have already seen a foreshadowing of what this could look like with retailers pulling lines from shelves or passing costs onto consumers. We expect this will become the new normal — downshifting to smaller sizes, lower quality, and less choice in an effort to preserve positive customer perceptions and avoid large price increases. Businesses dependant on discretionary spending and exposed to the hikes in food may be especially vulnerable. Restaurants on tight operating margins will need to be especially cunning to out manouver the obstacles they will likely face.
In real terms, if we assume all costs are passed onto consumers, families could be paying up to £670 extra each year.
To estimate the impact a WTO tariff could have on the UK, we took the ad valorem (by value) 2015 EU WTO tariffs as reported by the World Bank, the most recently published. The original tariffs are a mixture of a number of different units; by weight, by value, and by consignment. This meant it was necessary to convert all tariffs to the same unit to enable a valid comparison across sectors. The tariffs provided are at the Harmonised System (HS) 10 digit level. To calculate the tariffs for each sector we aggregated the original tariffs to produce an average tariff at the HS 2 level. We looked at how much WTO tariffs would have cost consumers if they had been in place in 2016, using trade data from that year. The analysis makes a certain set of assumptions. The biggest assumption is that trade volume would remain the same, even though prices are higher. In reality this is false, but the interplay between price and trade volume will be different for every single commodity, so modelling it is non-trivial. We have also applied the WTO tariffs to trade globally, which means the total figures represent the cost of trading with every country, a subset of which are already under WTO rules. As tariffs are provided at the HS 10 level, but trade data is only given at the HS 6 level, we have had to assume that the same amount of goods was traded for each HS 6 subcategorisation as there is no way for us to know what the actual figures are. HS 10 level commodities only differ from HS 6 level commodities by small differences such as being above or below a certain weight.
Joey Scully is CPO at Stowga, he runs product, strategy and data science and loves Python and coffee.
Joe Corkerton is a Data Scientist at Stowga, rows of data by day, actually rows by night, at least 5000 calories a day.
Originally published at www.stowga.com.