British shoemakers, like much of the country's economy, are largely unsettled by the uncertainty created by the ongoing saga of the U.K.'s planned departure from the European Union, known as Brexit.

A soap opera that witnessed a new twist on Saturday, when the British parliament voted an amendment that could postpone Brexit from the current Oct. 31 deadline to Jan. 31, 2020, an outcome that freshly elected Prime Minister Boris Johnson wants to avoid.

Yesterday, Johnson proposed that the parliament should hold another vote on the Brexit agreement that he had reached last week with European Commission, but the speaker of the House of Commons, John Bercow, rejected the request on the basis that it would be “repetitive” after Saturday's vote. The prime minister is nevertheless expected to attempt to hold a vote today, hoping to obtain a majority after some Labor Party members said they could defy their party's line and vote in favor of the deal. Bercow said that parliamentary regulations require that the agreement be thoroughly debated and turned into law. Some members of parliament indicated that they might be able to finish at least an important part of the legislative process by Thursday, but observers felt that it could take weeks instead.

As the discussion drags on, British shoemakers and importers of footwear into the U.K. are wondering about the impact that a “no deal” or “hard Brexit” scenario would have on their businesses. Making use of a government grant, the British Footwear Association (BFA) started holding a series of free seminars throughout the country on Oct. 17 to discuss the consequences of Brexit for the footwear sector, and the program will go on through Oct. 30.

Lucy Reece-Raybould, who was appointed chief executive of the BFA earlier this year, confirmed to us that a “temporary tariff” of zero percent would in fact apply for up to 12 months for about 88 percent of the products imported into the U.K. from any E.U. country in case of a no deal with the E.U., minimizing the economic impact of a “hard Brexit.” The temporary zero duty would apply to all classifications of footwear and footwear accessories, except for some kinds of uppers.

The zero duty will apply because there are currently no duties on imports from the E.U., and under the rules of the World Trade Organization, the U.K. cannot apply lower rates to imports from other countries. After this temporary arrangement, all duty rates would revert to the normal regime that applies to import from third countries, unless they are modified by the British government unilaterally with the WTO's consent or based on new bilateral trade agreements. In general, under this regime, the duties vary from 5 to 8 percent for leather shoes and 17 percent for shoes with a synthetic or textile upper.

In fact, Clarks said in its financial report for the first half of its financial year that it will gain some protection from the impact of Brexit through a commitment made by the British government to suspend import duties on footwear for a 12-month period after country's separation from the E.U.

Some British footwear executives interviewed by us at the Micam show in Milan appeared to be relatively relaxed about the tariff situation for merchandise going in as well as out of the country. Richard Utting, who is in charge of exports at Loake Shoemakers, felt that “there is a lot of drama” about the matter. Loake, which mainly produces classic leather shoes, would only be exposed to E.U. import duties of 6-8 percent. The E.U. represents about 20 percent of Loake's annual sales.

A complex political situation

In a referendum on June 23, 2016, the U.K. voted to leave the E.U. and has since lived an excruciating and inconclusive political debate that has led to the ousting of two prime ministers, undermined the kingdom's unity, put pressure on its institutions, divided the population and slowed down consumption and other aspects of the economy.

The quagmire has prompted even the staunchest advocates of remaining in the E.U. to accept any outcome as long as it puts an end to the uncertainty that is forcing British companies to grope in the dark and lose business opportunities on the Continent.

“I'm a remainer. But I now I just want it done. We are in limbo,” admitted Mark Husted, sales director of Base London. The company generates about 15 percent of its sales in the E.U.

Johnson has pledged to exit the E.U. on Oct. 31 with or without a deal. But, he does not have a majority in Parliament, which has voted that the country cannot leave without an agreement. In September, lawmakers passed legislation, known as the Benn Act, compelling the government to delay Brexit if a deal was not approved by Oct. 19, but Johnson stated that he would rather be “dead in a ditch” than postpone the deadline.

On Oct. 19, the British parliament convened in an extraordinary Saturday session to discuss a last-minute agreement that Johnson brokered with the E.U., setting the terms of the U.K.'s departure in an orderly manner. But, the lawmakers decided, by 322 votes in favor and 306 against, to delay the vote on the deal until legislation enabling its execution is ready. Parliament was concerned that the legal framework would not be ready by the end of the month and that the country would effectively have to leave on WTO terms.

Meanwhile, Johnson has sought to comply with the Benn Act without reneging on his pledge to leave the E.U. on Oct. 31. In order to do so, he sent three letters to the E.U.: an unsigned photocopy of the extension request, as well as a letter by the British ambassador to the E.U. and a personal letter explaining why his government does not want a prolongation.

Johnson claims that a delay would have a “corrosive impact” and “damage” the interests of the U.K. and the E.U. But, his move could lead to legal action because it is possibly not consistent with the spirit of the Benn Act, according to some observers.

The situation remains fluid with numerous possible political outcomes in the U.K., including a snap general election or the opposition forming a coalition government. An extension of the Brexit deadline also has to be approved by the E.U., whose members are showing signs of irritation toward the U.K. but are unlikely to push for a no-deal departure. Donald Tusk, president of the European Council, tweeted that he had received the extension request and that he will be consulting E.U. leaders “on how to react.”

The lower pound is affecting U.K. shoemakers

So far, the depreciation of the pound sterling has been the most immediate negative consequence of the persisting uncertainty – for British shoemakers as well as footwear importers, retailers and consumers. They have tried to deal with it in different ways to minimize their losses.

While global leather prices have declined sharply in the last few months, the British currency's decline has increased the cost of importing raw materials such as leather as well as footwear and components. Producers of leather shoes have partially offset the higher cost of importing leather from continental Europe thanks to their euro-denominated exports. Some observers expect the pound to rise once a decision is made and the air is cleared.

A small British company met at last month's Micam show in Milan, Cocorose London, estimates that its cost of goods has increased by 15-20 percent due to pound's drop in value. It claims that most firms had to absorb the additional expense because market conditions do not permit to pass it on to clients.

To minimize the impact of currency fluctuations, Cocorose has shifted its pricing from pounds to U.S. dollars with its distributors in Taiwan, Japan and Singapore. To reduce the geographic risk, the firm is also paying more attention to non-E.U. clients.

Meanwhile, to improve its margins, which have been squeezed by the pound's depreciation, the company has boosted its e-commerce activity, which now represents 40 percent of its revenues. The bulk is achieved through its own site. Cocorose has also started selling its shoes through Amazon.

Gareth Austin-Jones, commercial director at Cocorose, noted that the future of e-commerce with the E.U. will be largely defined by the “de minimis” rate, also known as low-value threshold, below which transactions enjoy streamlined customs procedures as well as lower duties and taxes. Very often, the purchases are duty-free.

The current de minimis rate in the U.S. is $800 a day per person. Austin-Jones pointed out that a high threshold between the U.K. and the E.U. would leave e-commerce unaffected by any decision regarding Brexit.

Brexit is prompting a reflection on the supply chain

Interestingly, Brexit has prompted some companies to rethink their supply chain and distribution options. Clarks, for example, is accelerating the start-up of a continental European warehouse in Germany, moving product there in October rather than in November as originally planned in view of a possible no-deal or “hard Brexit.”

“We have a number of options. All depends on duties (with the E.U.). Nobody can commit” because of the lack of visibility regarding the future trade relationship with the European bloc, said Mark Husted of Base London.

Besides Clarks, other companies are considering opening a warehouse in the E.U. In the case of Cocorose, its logistics operator in the U.K. has two warehouses in Benelux that could process some of its inventories.

Its management noted that the company may also consider shifting some production from China to the E.U. It stressed that China is “becoming really expensive” and is now comparable with Portugal. Moving to Iberia would also reduce the company's lead times. “The tipping point is finding a factory that can replicate the quality of Chinese manufacturing,” said Cocorose's Gareth Austin-Jones. The company already produces part of its collection in Italy.

Meanwhile, Cheaney & Sons has been working with British tax authorities to streamline customs clearance for E.U. trade. The company will be “using similar procedures” for E.U. exports/imports as those currently applied for non-EU trade. “In a nutshell, it's like opening an account with the customs authorities to cover duties and VAT (value-added tax)” for imports and exports, thus avoiding that paperwork at the border delays shipments, explained the company's managing director, Jonathan Church.

He added that the British government is being helpful in setting up the settlement procedure, which will however lead to additional costs for the company because it has to be supported with bank guarantees.

Some shoemakers are confident that large freight companies have the expertise and resources to address any shipment issues with the E.U in the case of Brexit. As previously reported, DHL has an interesting customs-free hub at Gatwick Airport near London that can help re-direct the merchandise to any point in Europe.

Still, Austin-Jones was less upbeat on this issue, noting that his company has to deliver goods duty-paid to online customers but carriers still do not know how to deal with this requirement because of a lack of sufficient information on the subject.

“I see nervousness in dealing with a British company” in the current situation, admitted Husted at Base London's stand at Micam, adding that “the level of uncertainty is killing small companies.” Clients are largely concerned about having to pay duties on imports from the U.K., generally prompting British companies to guarantee that they will cover the cost of any tariffs, at least for the spring/summer 2020 collection.

Regarding the possible disruption of trade flows, Cheaney indicated that British authorities have recommended not to have goods transiting the border during the week around Oct. 31, the current deadline for the U.K.'s departure from the E.U.

Recessionary fears

Looking at the wider global picture, the uncertainty around Brexit is adding to the uncertainty created by the duties that the U.S. introduced against products imported from China, which remains the world's largest shoe producer, and that it will rise in the future.

As already reported, many companies have accelerated the migration of their sourcing operations from China to Vietnam and other low-cost Asian countries. Others have stockpiled footwear made in China ahead of a new round of tariffs planned for Dec. 15, depending on the outcome of bilateral negotiations between the U.S. and Chinese governments. They are being held almost in parallel with the talks between the U.K. and the European Commission.

As of Sept. 1, an estimated 53 percent of all the footwear imported from China into the U.S. was hit by an extra tariff of 15 percent. The administration of President Donald Trump said on Oct. 11 that it was prepared to reduce the next round of tariff increase from 30 to 25 percent because of some positive signs that seem to be emerging from the discussions. The American Apparel & Footwear Association (AAFA) indicated that it would not make much of a difference.

Whatever the outcome of these bilateral talks, observers are afraid that this will increase the risk of a global recession. According to the OECD, the growth of the world economy is now expected to decline to only 2.9 percent this year, compared with 3.8 percent in 2017. The slowdown has already started to hit the manufacturing sector, especially in important countries like China and Germany. Apparently, it has not yet affected consumption in these two countries.

A drop in global economic growth, which is said to be likely, will affect every company. Foreign shoemakers doing business in the U.K. are also suffering from the political, economic and monetary situation in the U.K., where Brexit has evidently contributed to lower purchases of apparel and footwear, although consumers are still spending a lot of money on food, drinks and travel.

Overall traffic in physical stores fell by 1.7 percent year-on-year in the U.K. in September and was down by 1.6 percent on a three-month basis, according to a survey carried out by the British Retail Consortium (BRC) and the Springboard data company. Brexit is not the only cause: The footfall has been down by about 10 percent over the past seven years, stressing a deep change in the retailing landscape in favor of purchases over the internet.

The survey showed that the footfall dropped by 3.2 percent in September for shopping centers and by 1.8 percent in the high street but rose by 0.1 percent for retail parks. The decline can be partially attributed to heavy rain in the last week of the month.

Retailers are focusing on the crucial Christmas season and are concerned that it could be tough. A British newspaper, Mail on Sunday, interviewed the chairman of a retailer with more than 200 stores, who wished to remain anonymous and indicated that the festive season could be the worse in more than a decade.

He said that all players are struggling, especially fashion retailers. The executive was quoted as saying that “sales numbers are terrible and this whole political uncertainty has become a joke.”

On top of a weakening economy, retailers are facing crippling taxation by public authorities, known as business rates. According to research conducted by the Altus consultancy, which was cited by the Mail on Sunday, more than 12,000 stores are paying more in business rates than in rent compared with 500 in 2017.

Retailers could face an increase of £137 million (€159m-$178m) in the business rate next year, according to the BRC. The industry has asked the government to cancel the planned increase when it presents its autumn budget on Nov. 6.