ASOS (ASC.L) has said Britain’s post-Brexit free trade agreement with the EU will add £15m ($20.5m) to its costs, highlighting the ongoing challenges businesses face navigating the new red tape and costs of Brexit.
ASOS said in a trading update on Wednesday that new “country of origin” rules mean its clothing and accessories will face tariffs of around £15m this year. Chief executive Nick Beighton said the company would absorb the increased costs, promising “no additional costs” and no “friction” for customers.
The tariff bill come despite Britain’s Christmas Eve free trade agreement with the EU, which the government hailed as tariff and quota-free. However, the agreement only exempted goods from tariffs if they were majority made in the UK.
“It’s anything where the majority of the garment is made outside of the UK or the EU where there is a risk of country of origin rules,” chief finance officer Mathew Dunn told journalists. “It depends on the exact nature of how the garment is made as to whether it will incur tariffs or it won’t.”
Country of origin tariffs are charged when items are deemed to have been imported into Britain and then re-exported to the EU. ASOS sources just 2% of goods entirely from the UK, meaning the majority of its items are likely to face tariffs.
ASOS has spent two years retooling its supply chain to deal with the changes and said its Brexit tariff bill would be even higher had it not undertaken this work. Preparation included investment in local warehouses and websites in the EU.
“Let’s say you’re a supplier in Vietnam, the way we’ve restructured the supply lines is if we want 1,000 items, 1,000 items will be split — 300 to Berlin, 300 to Barnsley and the balance to Atlanta,” Beighton said. “With the majority of our brands, that’s how we’ve restructured our supply chains.”
Even still, some items will need to be “re-balanced” between warehouses in different countries and some items will inevitably be shipped across the border as the business adjusts.
ASOS’s experiences highlights the challenges UK businesses face in achieving the government’s vision of a post-Brexit “global Britain”, at least in the short-term.
UK prime minister Boris Johnson and his allies want Britain to be come a hub of global free trade. But under the terms of the new free trade agreement with the EU, companies like ASOS are being forced to route trade around Britain — rather than through it — or face higher costs.
Over time, this may change. Beighton said ASOS was looking to increase its sourcing from the UK. He highlighted a recently launched new range that was “70%, 80% sourced from the UK.” But Britain’s relatively small manufacturing base and lack of raw materials means there is a limit to how much re-shoring can solve the problem.
“Anything we make in the UK, under rules of origin, if that’s then shipped into the EU, it’s possible that there will be a tariff bill to it,” Beighton said. “A lot of clothing obviously has a heavy cotton content and cotton tends not to be grown in the UK.”
Beighton declined to say whether he thought the trade deal was good or bad for Britain’s economy overall, saying only that ASOS was well prepared for the changes.
ASOS is not the only company dealing with these issues. Ford (F) has hiked prices on two of its Fiesta models blaming new country of origin rules, Autocar reported this week. Supermarkets have written to the government warning the free trade agreement makes trade with Northern Ireland “unworkable”. And countless small businesses are struggling to navigate the new rules. Even items not subject to country of origin rules are face complex and costly new paperwork.
Beyond goods, services have been largely left out of the agreement with the EU. This sector make up around 80% of the UK economy and 50% of all service exports go to the EU.
Already, the lack of coverage for services is hitting the City of London. Around €6bn in daily share trading activity left London on 1 January. Experts say the volumes are unlikely to return. Britain need to move fast to protect this slice of “global Britain”. Negotiations on over trade in financial services begin this week.
All of the above highlights how the EU free trade deal had introduced “grit in the mechanism of trade”, as Bank of England governor Andrew Bailey has described it.
Some of the issues have been caused by the incredibly short lead time businesses had to adapt to the free trade agreement — just seven days. But even after businesses have fully adapted, frictions will remain.
“I would expect that cost to reduce overtime,” ASOS finance chief Dunn said. “I don’t ever think it will go to zero.”
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