Will a no-deal Brexit raise the cost of construction imports?
With the UK’s exit from the EU just two months away, the prospect of leaving without a negotiated deal is looming large. A no-deal Brexit has many potential implications for construction projects, in terms of costs, materials and workforce.
One of the concerns for architects as specifiers of products and materials has at least been addressed. The UK government has confirmed that regulatory standards over construction products would continue to function much as before in the event of a no deal or a transition period.
However, tariffs on goods imported from the EU by the UK would immediately kick in, because it is expected that the UK would begin trading using World Trade Organisation (WTO) terms – under its ‘Most Favoured Nation’ (MFN) status.
Noble Francis, economics director at the Construction Products Association (CPA) thinks that the impact of a WTO tariff regime would not, relatively speaking, be especially disruptive in its own right.
Tariffs levied on construction materials – such as wood, metals and machinery – are typically well under five per cent and would, Francis suggests, be seen by businesses as a manageable and predictable cost in terms of published tariff levies.
He sees far greater potential for disruption arising from delays at ports if goods have to be physically stopped and checked; and from new administration procedures that would have to be introduced overnight.
For example, SME product suppliers could have to pay VAT upfront at their goods’ point of entry into the UK, instead of from revenue from sales. CPA Deputy Chief Executive and Policy Director Peter Caplehorn, who sits on the RIBA Regulation and Standards Group, agrees that delivery disruption is the greater concern.
‘A lot of businesses have been building up stocks, although not everything can be stockpiled. We are not seeing panic among suppliers as such; more frustration with the Brexit process.’
‘Problems are most likely to arise from contracts drawn up when a no-deal Brexit seemed far more unlikely,’ Caplehorn points out. ‘Some suppliers could see their options for meeting those contracts’ conditions evaporating.’
Given that the UK government will be desperate to minimise disruption in the event of no deal, it has been suggested that Britain could choose to waive tariffs on imports altogether for a limited time to ease logjams.
Under WTO rules, however, the UK would have to waive tariffs for everyone it trades with, not just EU member states.
A potentially greater area of concern is the effect of a plunging pound on world currency markets and a rapid price inflation for imported products and materials. EU suppliers of products destined for large-scale UK projects are well aware of the risks to their business and already have pricing strategies in place.
Gary Clark, Associate Director at Wilkinson Eyre, says all of the main European façade sub-contractors will give a price in Euros and then leave the exchange-rate risk with the buyer. Alternatively, they may offer a price in pounds but only after hedging their own currency risk with a friendly bank. There will be a premium to pay to cover the supplier’s hedging costs.
‘What they won’t do is give a UK buyer a price in pounds and take on the currency risk themselves,’ he points out. ‘I suspect this will continue after a no-deal Brexit, or alternatively until a free trade deal is completed two years after a deal.’
Alex Whitcroft, director at bere:architects, fears that a no-deal Brexit poses a disproportionate risk to the delivery and take up of sustainable buildings, his area of professional expertise. A large amount of higher tech products sourced for high performance buildings, such as Passive House, come from EU countries.
‘The UK industry is lagging behind here,’ he points out. ‘We have already experienced cost increases due to the weakening pound against the Euro. Any additional tariffs or logistics costs will push up our costs and our headaches. At the small scale, contractors and clients can’t stockpile materials, so that dynamic doesn’t apply.’
guidance for practices on a no deal Brexit sets out the implications of a no deal scenario for the sector and the actions that practices may need to consider. RIBA is advising practices who do business or have operations in the EU to consider how these changes would affect their business model and take action if necessary, if they have not done so already.
Thanks to Noble Francis, Economics Director, Construction Products Association; Peter Caplehorn, Deputy Chief Executive and Policy Director, Construction Products Association; Gary Clark, Associate Director, Wilkinson Eyre; Alex Whitcroft, Director, bere:architects.
Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas
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Posted on 24 January 2019.