U.K. Businesses Burn Cash as Brexit Bureaucracy Takes Its Toll

Breaking free of Brussels bureaucracy was meant to herald a bonfire of red tape for Britain. In the first 100 days of Brexit, the only thing many businesses burned was money.

Customs checks, paperwork and border delays since the U.K. completed its withdrawal from the European Union at the start of the year are sucking cash and time out of firms from big-name retailers to small family-owned businesses. Companies, which warned for years that this would happen, take no pleasure in saying “we told you so,” but the frustration is clear as they grapple with the long-term reality.

For many businesses on tight margins, every pound spent on documentation means less for wages, hiring and investment. While the impact will be far less dramatic than the short-term shock of the Covid-19 lockdowns, over time it will add up, hobbling the economy and eating into sales, earnings and incomes.

Fresh food is particularly complex, but the issues are widespread. It’s been especially dire in Northern Ireland, now separated from Great Britain by a trade border in the Irish Sea, the result of the unloved Northern Ireland Protocol. Ashley Pigott, managing director of AJ Power, a maker of diesel generators in Craigavon, says charges to bring components from Great Britain will add about 100,000 pounds ($137,000) a year to his bills.

“By the time we get through to July, we’ll start to see those costs really starting to bite,” he says.

U.K. Businesses Burn Cash as Brexit Bureaucracy Takes Its Toll

Rerouting supply chains isn’t simple, so instead AJ Power is outsourcing component assembly to another U.K. firm — an added cost, but still cheaper than the import surcharges.

Economic damage in Northern Ireland is particularly worrying, given the region’s troubled past. Violent riots this month have been linked to Brexit, but they’ve been fomented by boredom and lack of economic opportunity in one of the U.K.’s poorest regions.

“The question that really has to be asked in three or four years’ time is: What’s the manufacturing landscape in Northern Ireland going to look like in respect of its competitiveness?” Pigott said.

100 Days of Brexit: a series on how Brexit changed Britain

The story of unwanted hassle is one repeated across the U.K. One in four small exporters have halted sales to the bloc because of red tape, and a survey on Monday showed more than 40% of businesses had lower export revenue in the first quarter. In January and February, total goods exports were down 27% compared with a year earlier, and imports also declined.

Some of the drop reflects stockpiling late last year and will be temporary. There may have also been initial teething problems with the new customs rules given the U.K.-EU trade deal went down to the wire before the final divorce date of Dec. 31. But Credit Suisse says the decline in exports will probably persist and net trade will drag on economic growth in the near term. It’s warned that the trade deficit could hit 5% of output next year, a record gap that would put downward pressure on the pound.

U.K. Businesses Burn Cash as Brexit Bureaucracy Takes Its Toll

Amid a successful vaccine roll out in the U.K., Brexit has toppled down the political agenda. The B-word didn’t appear in the more than 6,000 spoken by Chancellor Rishi Sunak in his budget speech last month. With the U.K. relaxing its lockdown — non-essential retailers and some pubs and restaurants opened this week — the economy is set to grow about 5% this year. The boom in demand as normal life resumes means headline numbers will overshadow much of the fallout from trade disruption that companies are dealing with on a daily basis.

One question is how long those difficulties persist. A Bank of England measure of uncertainty has eased in recent months, suggesting while things will be bumpy for a while, it should improve in time. Companies are thankful there at least is some type of deal in place. The uncertainty index jumped in 2020 when it looked at times as if the U.K. and EU would never be able to find common ground on the most contentious issues and reach an agreement. 

For the U.K. government, freedom from the EU is a chance to strike its own, more beneficial deals. In his budget speech, Sunak spoke about encouraging free trade and the U.K. as “open to the world.” But trade deals take time, and securing one with with Washington, once touted as the crown jewel of the “Global Britain” project, is now unlikely to happen for years.

With so much at stake, a group of lawmakers and businesspeople has set up the independent Trade and Business Commission to review trade deals and figure out how the U.K. can best benefit. It will start hearings this week on Brexit’s impact and whether the effects “will be compensated for by greater trade with the rest of the world,” such as the still-distant U.S. accord.

U.K. Businesses Burn Cash as Brexit Bureaucracy Takes Its Toll

Meanwhile, companies continue to negotiate the hurdles, unclear how much is short-term and how much is the new permanent state. Some of Britain’s bigger brand names have also been tangled up.

Retailer Marks & Spencer Plc’s popular Percy Pig candies became an early symbol of Brexit in Ireland when they fell foul of technical import rules. The company has since found a workaround for those, though other issues remain. For the chain, which has owned and franchised businesses in the EU, loading one truck for the continent now takes three people and six hours to complete because of extra checks on items like fresh food, and it’s had to pull some products.

“Ministers did not understand what the new trade relations would look like,” said David Henig, a director at the European Centre for International Political Economy and an adviser to the U.K.’s new trade commission. “I don’t think we really understand what it means yet to be a third country outside the EU.”

Henig has a blunt interpretation of the U.K. government’s message to firms: “Sovereignty first, and sorry if exporters suffer.”

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If companies in the U.K. are frustrated, so too are their customers across the EU. Delays and costs mean some could swap suppliers. Anna Stellinger, deputy director of the Confederation of Swedish Enterprise, says a fifth of Swedish companies have had problems trading with the U.K. since January.

“With the higher costs, more red tape, the delays to deliveries and problems in logistics, Swedish companies say they will be looking for other companies to source from,” she said.

And other companies are looking to set up sites in the EU to make distributing and selling to the bloc easier — and cheaper. U.K. sportswear chain JD Sports Fashion Plc is opening new warehouses in the bloc to avoid duties and disruptions from customs checks, and Executive Chairman Peter Cowgill says competition for sites is tough as other businesses also seek space.

All that adds up to more losses for the U.K. that will need to be made up elsewhere.

“Brexit has certainly brought about its challenges, and I think the whole concept of free trade should be considered with very heavy inverted commas,” Cowgill said Tuesday. The issues “will alleviate as we adapt. But Brexit has been annoying, costly and time consuming.”

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