With no deal, how much will Brexit cost the UK’s shoppers?

 
Helen Cahill
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General View Of Morrisons Supermarket
Shop prices are set to rise after Brexit if the UK doesn't agree an EU trade deal (Source: Getty)

The price and make-up of a nation’s shopping basket is one of the simplest ways to understand the state of its economy. As a result, economists have been unpacking what leaving the EU will mean for the UK’s shopping bag.

So, what will “no deal” mean for food prices, and what is the “cliff edge” economists are worried about?

These terms are used variously to refer to EU migration, trade and access to the Single Market. But, put simply, when it comes to trade, we fall off the cliff edge when we leave the Customs Union.

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As a member of the Customs Union, Britain applies the same import duties on goods as all the other members of the union, and we trade freely with our allies in the bloc.

When we exit this arrangement, our tariffs will change overnight. Importers will have to start paying extra for goods coming in from the EU, which make up 70 per cent of our food imports, according to the Institute for Fiscal Studies.

If we don’t negotiate a new trade agreement by March 2019 (the “no deal” scenario), then the new tariffs will be those we have lodged with the World Trade Organisation (WTO).

The duty owed for key household food items coming from the EU would soar.

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No deal? Davis has said he is willing to walk out of talks with the EU (Source: Getty)

It is possible for the UK to eliminate tariffs on goods coming from the bloc, however, under WTO rules, it would have to extend this tariff-free access to all members of the WTO. And, if we removed all tariffs, we would have no basis on which to negotiate new free trade deals with the likes of the US and Australia.

The British Retail Consortium has warned that if Brexit secretary David Davis walks away from talks with “no deal”, the effective tariff rate on some items could rise by as much as 80 per cent. Tariffs on Italian mozzarella and Irish cheddar cheese will jump by 46 per cent and 44 per cent respectively.

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Economists have said such a dramatic increase in tariffs will push up prices for goods on supermarket shelves.

However, it is not clear how shop prices will change. Not all of the duty will be passed onto customers; food retailing remains highly competitive, so this will mitigate the effects of new trade barriers.

Further complicating predictions, the tariffs will have both direct and indirect effects.

The duty on goods which are sold straight to consumers will have a direct affect on the price of those products.

However, there will also be an indirect effect when an imported food is used to make another product; more expensive mozzarella means more expensive pizza.

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Thirty per cent of the food bought by families in the UK is imported, but price changes on EU imports will no doubt have an effect on the domestic market.

Some Brexiteers have argued British produce will thrive after Brexit as supermarkets seek out cheaper alternatives to the EU’s bread and butter.

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Retailers will be forced to pass on costs to consumers (Source: Getty)

The jury is still out on this, however, and domestic producers might want to use price rises to secure better margins.

In a recent research paper for the IFS, senior research economist Peter Levell said: “If the price of imported goods rises, then domestic producers who were competing in the same markets might take advantage of the opportunity to increase their prices too.”

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One of the most crucial trading relationships that will change after Brexit is the exchange of goods between Ireland and the UK; but Irish goods might not only become more expensive for Britons.

According to analysis by the Policy Exchange, Irish trade with the UK is valued at €1.2bn (£1.1bn) per week, and eighty per cent of Ireland’s exports move through Britain.

This raises the prospect that Irish products will not only become more expensive in Britain, but across the EU.

This underscores the complex nature of our trading networks, and how difficult it is to predict how they will change.

With slogans dominating the debate about the UK’s future, consumers may not know the real outcome of Brexit until they look at their shopping receipts in April 2019.

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