Crisis averted. Britain and the EU resolved their differences on Christmas Eve 2020 and agreed on a trade deal that would govern their future relationship.
Even still, both parties have yet to resolve key differences, which makes it difficult for businesses to know what they can and cannot do.
Here is an overview of the Brexit deal and what it means for the eCommerce community.
The Brexit Deal in Summary
The Brexit trade deal (the EU-UK Trade and Cooperation Agreement) was negotiated significantly faster than a standard trade deal, writes Matthias Matthijs, Senior Fellow for Europe at the Council on Foreign Relations.
The deal “respects the major red lines of both parties,” he adds. The EU keeps the freedoms of movement, goods, services, capital, and people by avoiding a hard border on Ireland, Matthijs explains, and the U.K. retains tariff- and quota-free trading with the EU.
There will be significantly more bureaucracy for importers and exporters to contend with, write Laurence Norman, Jason Douglas, and Max Colchester at The Wall Street Journal. That’s because the U.K. will now be able to negotiate its own trade agreements with other countries like the U.S. or China.
At the same time, the U.K. has promised not to do anything that would harm the EU’s ongoing labor or environmental initiatives in those trade agreements. That will make for delicate balancing acts over the next several years.On top of that, the U.K.’s deal with the EU includes details about things like fishing rights, wine sales, medicine, and data security, Guy Faulconbridge at Thomson Reuters reports.
What Does Brexit Mean for eCommerce?
Cross-border trade between the U.K. and the EU just became more complicated. For eCommerce brands whose livelihoods depend on their ability to sell across the borders, the Brexit deal will create all kinds of ripple effects, many of which are still unknown.
Here are some of the outcomes brands should anticipate at this stage.
An Initial Reduction in Cross Border Trade
Brexit makes it significantly more complicated to send products across U.K.-EU borders, regardless of which way the trade occurs, retail consultant Catherine Erdly writes at Forbes. Many EU businesses have halted trading with the U.K. as a result.
This has impacted major retailers, too, ITV’s Business and Economics Editor Joel Hills reports. For example:
- U.K. retailers Debenhams and John Lewis have closed their Irish websites.
- Other major retailers, including Tesco and Boots, are assessing whether they should do something similar.
Increased Red Tape
There’s no shortage of cross-border red tape for businesses to deal with, write Lucy Meakin, Lizzy Burden and Deirdre Hipwell at Bloomberg.
Rules around the origin of goods are a particular problem. Brands must now show where they manufactured their goods and where each component comes from, they report. Such rules don’t exist for trade within the EU. Businesses must register for VAT, too.
Each new regulation quickly adds up. In 2021, red tape and falling demand could cost U.K. exporters as much as $34 billion.
Burgeoning red tape is causing logistics problems, too.
DPD, Europe’s largest courier network, was quick to suspend road service to the U.K. and Ireland after the Brexit deal, citing paperwork issues.Returns are also an issue, says Returnado Founder and CEO Haider Abdo. “From the moment the customer initiates a return, Brexit is likely to cause disruptions to existing returns flow, plus consumers having to pay extra to import and export the purchased items back,” he explains.
This means that cross-border returns will be much more likely to get stuck in customs. That’s a nightmare for brands that have spent years perfecting their customer experiences.
For the first time, U.K.-based eCommerce brands need to import VAT and customs duties when selling to the EU. Brands must either register for VAT in every EU state they sell into or pass on costs to consumers.
Worse still, the EU charges VAT at the sale price rather than the original, and often much lower, import price.
U.K. businesses have four options when it comes to VAT, says Richard Asquith, VP of Global Indirect Tax at automated tax compliance software provider Avalara:
- The EU customer is the Importer of Record and pays the VAT.
- Brands register in each of their customers’ countries and pay the VAT themselves.
- EU customers become Importer of Record, but brands pay the VAT.
- Hold cleared goods in bulk in EU warehouses.
Brands opting for choices three or four will need to decide where in the EU to clear goods. Asquith suggests the Netherlands and Belgium, both of which have good VAT schemes and excellent transport links.
Exchange rate volatility could become a significant cause of concern for any U.S. or EU-based company selling in the U.K. The team at Rapyd recommends brands adjust prices in pound sterling to account for fluctuations rather than charging in their native currency.
Brands could still offer local payment options, but that now opens the door to new restrictions that did not exist previously.
Can the Luxury Sector Find a Way Thrive Post-Brexit?
The challenges above have hit luxury brands especially hard.
The trade of luxury goods between the U.K. and Europe has historically been a thriving business. At Harrods in London, for example, the top floor’s Salon de Parfums is home to some of the world’s most exclusive fragrance brands, like Xerjoff and Chanel and Frédéric Malle. Respectively, those brands are Italian, French and French.
Likewise, generations of tailors in Paris and Naples have cut their suits out of wool from mills in England and Scotland. What does it mean for Neapolitan tailors when worsted wool from Scabal or flannel from Fox Brothers goes up in price? Or gets held up for days in customs?
Helen Brocklebank, CEO of Walpole, which represents the U.K.’s luxury sector, tells the Financial Times that cross-border commerce has become too complicated. This has forced some companies to halt cross-border sales entirely.
Some brands have found it more cost-effective to write off inventory than to bother with cross-border sales, says Adam Mansell, CEO of the UK Fashion & Textile Association.
Other British brands are still selling to overseas customers, but with the caveat that the brand cannot take responsibility for duties or taxes applied to those orders, writes George Arnett, Data Editor at Vogue Business.
Meanwhile, brands trying to sell to U.K. customers are looking for creative workarounds. Arnett notes some brands are thinking of manufacturing some products in the U.K. to simplify supply chains there.
Expect this state of uncertainty to define cross-border luxury sales for the near-term as brands look for ways to optimize operations around the hurdles Brexit has presented.
What Are the Next Steps for eCommerce Brands?
Brexit will not impact all eCommerce brands equally. Assessing their exposure to Brexit disruption should be the first step before considering short-term goals, communicating with customers, and seeking expert advice.
Understand How Brexit Impacts Operations
Brands must first understand precisely how Brexit impacts them. Knowing the latest news and updates coming out of Europe is helpful, but a more nuanced and localized understanding is key.
In particular, brands should look at how Brexit may impact existing agreements with third-party providers.
For instance, eBay updated its terms and conditions for sellers, writes Ina Steiner, Co-Founder and Editor of eCommerceBytes. The onus is now on the seller to make sure they can export items outside of the U.K. and obtain all necessary documentation to do so.
Brexit may be the perfect time for brands to reconsider their cross-border strategy. U.K.-based businesses could focus on the domestic market for the short-term.
The brand John Lewis is adopting this strategy and scrapping international delivery, writes Sahar Nazir at Retail Gazette. Fashion eCommerce powerhouse Asos is also stopping international deliveries from its U.K. site.
Communicate With Customers
Whatever strategy they choose, brands must communicate their specific situation clearly with customers. Doing so now reduces their anxiety while everyone waits for clarity, Justine Jenkins at marketing platform Klaviyo writes.
Seek Expert Advice
As red tape and regulations mount, it is more important than ever for eCommerce brands to seek help from knowledgeable third parties. Legal expertise should be first on the list, but logistics experience should be a close second. eCommerce brands will benefit from having strong carrier agreements in place to navigate this challenging moment.