THE BLOG

The Cost Of Food After 'Brexit'

28/10/2016 12:09

With 'Marmitegate' quickly averted, supermarkets may increasingly face dilemmas where they must increase food prices to match the fall in the pound sterling or negotiate with brands to prevent a rise in prices.

Currently consumers have not been affected by price hikes in food due to the devaluation of the pound but supermarkets in particular will not be able to offset the costs for long. Unilever threatened to increase prices by 10% in response to the depreciation of the sterling, with Tesco removing products such as Marmite, Hellmann's mayonnaise and Ben & Jerry's ice cream online. Although the conflict was quickly resolved, 'Marmitegate' could be the beginning of supermarkets hiking prices in response to the fall in the pound. Before the referendum the sterling against the euro was 1.30, with the pound falling to €1.12. The sterling has fallen to a 31 year low. This has made imports more expensive, where the UK has a trade deficit, inevitably leading to higher prices of food imports.

At the moment consumers have been shielded from increases in food prices as supermarket supplies are in long-term contracts that usually last 12 or 18 months. Suppliers may look to increase prices of their products in line with the fall in the pound, and Ian Wright, the chair of the Food and Drink Federation notes that supermarkets can either absorb the costs, increase prices or remove products from their shelves. Supermarkets are likely to place the loss in profit after the drop in the pound onto customers, and food prices are likely to increase, at least in the short term after 'Brexit'.

A 'Hard Brexit', notably removing the UK from the single market, proposed by Theresa May's government could have serious economic consequences for Britain and lead to an increase in the costs of sourcing food produce. Membership to the single market means that the UK can trade without tariffs and ensure access to a larger consumer market. Leaving the single market would force the UK to pay millions of pounds for access into the single market. The ideological arguments based on preserving sovereignty and 'taking back control' pushed by Brexiters has forgone economic pragmatism where a 'Hard Brexit' could potentially lead to another recession. Free trade has long been a strong proponent of the Conservative Party, with Thatcher seeking further economic integration with the EEC with the SEA which saw the cementation of the single market. May's government argues that it can negotiate trade deals, and broaden UK trade outside of the EU and ultimately boost the UK economy.

The difficulty of negotiating trade deals cannot be understated, regardless of existing relationships trade deals post-Brexit will take many years to finalise. Canada's free trade deal removing 98% of tariffs with the EU has taken over seven years to be agreed and has still not been ratified. Forming trade deals with individual countries will take the UK years, if not decades where the UK has not needed trade negotiators since the 1970s.

Nick Clegg has warned of the damage a 'Hard Brexit' could have on the UK economy, where removing Britain from the single market could lead to high prices of food. Clegg adds that potentially tariffs could be elevated, for example on beef exports at 59 percent, chocolate at 38 percent, cheese at 40 percent and Chilean wine at 14 percent. The British Retail Consortium (BRC) noted that without an agreement with the EU by 2019, the UK would potentially have to use World Trade Organisation (WTO) rules with this leading higher tariffs on food. An agreement between the UK and the EU is of particular importance in order to prevent the imposition of tariffs that would raise food prices extortionately higher.

Consumers will bear the brunt of increases in the price of food, and a 'Hard Brexit', removing the UK from the single market could have far-reaching negative economic consequences where the UK relies on tariff-free trade. The UK government must seek to prevent the increase of food prices to protect consumers and ensure that consumers are not adversely affected by 'Brexit'.

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