July 5, 2016 by Andrew Minalto - 5 Comments

BREXIT – The Effects of the Vote to Leave the EU!

brexit

I actually put off writing this post for a little while, because I don’t want to introduce any political talk to AndrewMinalto.com – we all know how quickly that can go sour!

However the UK’s vote to leave the European Union has some huge implications on us as importers and online sellers and although there are still a large amount of unanswered questions (it’s only just the beginning really) I think it’s necessary to cover Brexit now and try to assess what it means for us.

Now before I go into detail, I think it’s very important to reiterate that at the moment, it’s incredibly difficult to predict the outcome of Brexit – simply because there are currently a number of unknown factors and it really depends a lot on which of the two main possibilities play out.

And those two possibilities are:

  • Scenario A – the UK negotiates a deal to retain the free movement of goods between the UK and the EU (obviously without accepting the other EU laws).
  • Scenario B – the UK doesn’t remain a trading partner of the EU and therefore there will be customs procedures for all trade between the UK and the EU.

Now I think (well I hope) that most people will agree that Scenario A is by far the more preferable option as having to complete the full customs procedure for all exports to the EU will mean:

  • More paperwork – buying from European suppliers will basically mean same procedure as buying from China.
  • Higher shipping fees – couriers will inevitably raise their shipping prices, which means higher costs and a reduction in margin and profit!
  • Longer shipping times – more paperwork and rules means more delays and an overall longer shipping time. As we all know, shipping time is an incredibly important factor for online buyers and this means it’ll be much harder to compete with local EU sellers.

Now some of you may be thinking – “but wait a minute Andrew – surely this works both ways and it means less UK customers will be buying from EU sellers!?”

Well yes, that’s true as well and that’s one of the reason it’s so hard to say what the result of this Brexit will be. The same thing may be a negative to some sellers but a positive to others… BUT overall less trade between the UK and the EU is only going to damage the economy and thereby create a lot of negative knock-ons.

And actually that’s an important point I wanted to bring up.

We can’t just talk about things specifically but we also have to consider the overall economic affect. Even if nothing actually changes from Brexit, then the possible implications and fears will still make a big difference.

And the last week or so has been the perfect example of this. I mean for all intents and purposes, nothing has actually changed yet – it should be business as usual.

But a quick look at the stock market or better yet the exchange rates will tell you that that’s not the case.

Here is a chart showing the exchange rate for GBP to EUR over the last 10 days or so:

eur-gbp

Pre-referendum it was sitting comfortably at around 1.30-1.31 – contrast that to today when one pound will buy you just 1.19 euros.

This weakening pound means exports have become cheaper (i.e. it is cheaper for other people to buy from the UK) but imports have become much more expensive (i.e. it is more expensive for us to buy from non-UK sellers).

But let’s take a look at a real life example, so that it’s easier to understand.

Say I’m a German eBayer looking to buy a new mechanical keyboard. I head over to eBay and search for one, seeing an option from a German seller for €125 and one from a UK seller for £100 (both including shipping).

Well at the old exchange rate of 1 GBP = 1.31 EUR the UK seller worked out at €131 Euros. However fast forward to today and the same £100 is only equal to €119, meaning the UK seller is now cheaper than his German competitor.

Which is a good thing right? After all that means more sales for UK companies to the EU.

Well, no – to put it simply!

As that assumes that the cost price for the UK seller stays the same but, as I mentioned earlier, a weakening pound has the opposite effect on imports – it makes them more expensive!

Once again I’m going to look at a “real-life” example to make it clearer, but as the vast majority of us importers pay for our goods in US Dollars, let’s look at how that exchange rate has been affected by Brexit.

usd-gbp

As you can see it’s a similar story… pre-referendum one pound bought you roughly 1.47 US dollars, but today the rate is 1 GBP = 1.33 USD.

So before June 23rd, if I was importing one hundred items from China, coming to $10,000 in total, which would have worked out at £6,800 or £68 per item. Today that exact same order would cost me £7,520 or £75 per item.

That’s a 10% increase in cost, from nothing! And it would actually work out to be an even bigger difference once import duty and VAT are charged on top.

And all this economic uncertainty and negativity currently in the media will only make buyers more wary, and a lot of people will cut back on their consumer spending simply due to fear and as a precaution against a possible recession.

But going back to the weakening pound and hopefully you can now see how detrimental it is to online sellers such as me and you. Of course it is advantageous to businesses selling UK produced goods, but being realistic how much of that is left?

In my opinion it’s impossible for UK manufacturing to ever really grow to anything substantial again – simply because the world has changed and globalisation and international trade has put an end to that.

But the most important thing about the exchange rate changes are that they’re real! This isn’t theoretical talk, saying if this happens or if that happens, the value of the pound really has plummeted over the last 10 days or so and we as importers have to react.

But what can we actually do!? Well it’s the usual conundrum of increasing costs – do you raise your prices or do you reduce your margins? Unfortunately there’s no one simple answer to that question as it depends on your specific business and niche, the level of competition, the price elasticity of demand of the goods you’re selling etc. etc.

Changes on eBay

A lot of people have emailed me this week asking about how the leave vote will change eBay and my honest answer is I don’t know! eBay themselves have made a statement regarding the vote to leave, which really just illustrates how little is known at this point:

“As a global business enabling cross-border trade for SMBs worldwide, eBay has been a consistent supporter of the EU Single Market and the creation of a true EU Digital Single Market.

We believe there are advantages for both sellers and buyers to be part of large open trade blocks. But our business is a global one and our sellers are successful within and outside the European Union. British voters have decided that their interests are best represented outside of the EU and so we will continue to put the best interests of British SMBs and customers at the heart of what we do.

We will continue to work with the UK Government and at a European level to ensure we are close to any discussions/changes resulting from this vote, which may affect our customers.

Regards
The eBay-Team”

Other than the broader implications that we’ve covered, talking specifically about eBay’s rules and regulations and how they’re going to be affected is a waste of time really as it depends so much on whether or not a trade agreement is made and what exactly that agreement is for.

As even if an agreement is made, the VAT registration rules and eBay fees etc. may be different, which is why I only want to cover these things as and when we get some more definite news, otherwise it’s pure conjecture on my part.

So really there’s not much more for me to say at this point. Everything is very much up in the air and business owners are understandably worried – hence the exchange rate volatility.

But I will say this to finish off today’s post – whenever there are difficulties, the best businesses always survive and even thrive – it’s the bad ones that fail! So work on the things that you can control; get all your processes perfected, and simply work on growing your business as normal – both within the UK and abroad, and that means both EU and non-EU countries!

I think this is the topic that I’m most eager to hear your opinions and thoughts on, so please feel free to comment below and I’ll personally answer you within 24 hours, Monday to Friday.

Otherwise, until next time!

All the best,
Andrew

5 Comments
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  1. John Alldritt

    Thank you to both of you for the excellent insight.
    Maybe this is a simplistic view (I’m not at all political or a financial person), but if all UK sellers have to raise their prices, then eBay are going to make more money, aren’t they? So why would they do anything to jeopardise their UK base?
    I thought the UK was a large market for importers, are we not one of the biggest buyers of foreign cars from Europe? Not to mention other products like coffee, cheeses and so on & on?
    Can the EU really afford to turn it’s back on such a good customer and risk losing sales from it’s own companies?
    I think we should realise, as a country, we are a very good customer and we should use that fact to our favour. If the EU turn away from one of their good customers, then we should look elsewhere for our products, set our own import duties from countries outside of the EU, favourably and accordingly, to encourage 3rd world countries to sell to us.
    This would leave us in a much stronger position than any EU country, who will be tied by EU charges and regulations, will it not?

    1. Andrew Minalto

      Well, in theory you’re right John but in real life I’m afraid we’re not in the position to make the rules, at least for now.

      It will all come down to negotiations of course, how well our positions will be presented to EU.

      It’s really too early to know how it will all turn out.

      Andrew

    2. Daniel Salat

      I’m not really sure I’d like to buy cars and cheese from 3rd world countries. I’d still very much prefer the French Brie and German BMW. Who am I do judge other people’s tastes though? … Thankfully coffee doesn’t grow in the EU, we’re safe on that one John … I think that the main point that Andrew is making is the fact that already NOW, as we speak, it costs 10% more to import anything into the UK. That’s because the value of the GBP has dropped sharply after Brexit. That’s a fact and Andrew was stating the fact. Our company has put all imports on hold because the depreciation of the pound is significant and we’re not prepared to pass on the extra cost to customers. We’re really a nobody compared to big importers in the UK. You can only imagine the dilema that big companies are facing. Uncertainty for the near and distant future is the biggest factor that makes the pound loose more of its value by the day. Andrew, well done for writing an informative article, thank you for the work you do!!!

  2. Hi Andrew,

    It certainly is a huge period of uncertainty and we will not know for many years whether it was a good or bad decision to leave the EU (If it does indeed go ahead as Article 50 has not yet been invoked).

    I am in a fortunate (or perhaps unfortunate) position of being involved with several groups that deal with UK and EU customs legislation who work closely with the Government so I should be able to shed some light on some of the uncertainty. I say should, but in fact I can’t because the Government at this stage genuinely have made no plans. This has slightly shocked me as although the leave vote was unlikely, you would think there would be some work behind the scenes in advance in case so we were at least on the first step.

    Let’s however focus on the potential positives. The Union Customs Code (UCC) was introduced in May this year and involved the biggest upheaval of EU customs legislation in around two decades. Much of this had the growing world of e-Commerce in mind. There are many good things the UCC has changed, but there were also many things that the UK did not agree with. However their concerns were dismissed as they were out voted (mainly by the more Southern EU states). By leaving the EU we have a huge opportunity to make changes to suit us as a Country and protect our future.

    I note the exchange rate situation and I can completely understand the concerns of online sellers. As you point out the situation benefits exporters, but we do not have a huge export market. However, this has been in the main caused by profiteering on the financial markets due to the uncertainty we face. I am fairly confident that this is a short term problem and the rates will stabilise and start to get back to near what they were before.

    Your scenarios A and B are a big issue in my mind. I am unfortunately old enough to remember the days of completing customs entries for goods coming in from the EU and this will be a very important area as we negotiate a trade deal of some kind with the EU. (There will be some kind of trade deal I am sure).

    A final item to keep an eye on is that of Duty rates. Currently Duty rates for International Imports (Non-EU) are set by our friends in Brussels. Every EU Country has the same Duty rates (VAT rates vary but this is another more complex issue altogether). Will the UK keep the same Duty rates? Unlikely, unless again it is part of a trade agreement reached with the EU.

    This is such a complex situation that we really won’t know where we stand for at least two years (My guess is that we will remain in the EU for nearer 3-4 years). I just hope that someone within government takes control of negotiations sooner rather than later and brings some experienced non-political hands to the table to help negotiate the best deal for the UK.

    Stiff upper and all that!

    Kind regards,
    Darren.

    1. Andrew Minalto

      Thanks for your in-depth comment Darren, much appreciated! 🙂

      Andrew

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