CHANGE IS COMING IN EUROPE THE SAGA & IMPACT OF BREXIT

Brexit negotiations will have a significant impact on European and Trans-Atlantic trade.

Background

In March 2019, the United Kingdom will officially cease to be part of the European Union. The two-year timeline on the so-called Brexit was officially put into motion in March 2017 when British Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty, allowing for the official parting of ways between the UK and its neighbors across the English Channel.

Precisely how the Brexit is carried out is a nagging question for observers of European and international economics. The two-year timetable will offer both parties an opportunity to negotiate the terms of their separation, but it will also create hesitation and uncertainty for international investors, including those in North America for whom the UK is an an integral link in global supply chains and a critical EU entry and exit point.

Impact on Trade with Canada

Canada and the UK have a particularly special trade relationship relative to other EU member states. The UK is Canada’s largest trading partner in Europe. Bilateral trade between the two nations totaled CAD$25 billion in 2016, making up 27% of Canada’s total European trade.

As a member of the British Commonwealth, Canada shares a common heritage with the UK and many Canadian businesses have traditionally seen the strength of Britain’s economy along with its common language and similarities in culture and regulatory environment as a natural entry point for broader European trade.

While informal talks of a post-Brexit bilateral trade relationship between the two nations have already begun, a formal agreement cannot be concluded until after the UK’s official exit from the UK. In the interim, many Canadian businesses that have already established trade relationships in the UK will be watching developments closely.

Impact on Trade with the US

The United States Chamber of Commerce has identified Brexit as a critical issue for American business interests.

The US and UK are each other’s largest foreign direct investors with US companies having invested upwards of $600 billion in the UK market, generating more than two million jobs between the two markets. Two-way trade between the countries amounts to $235 billion annually.

In many cases, the investments US businesses have made in the UK have been to service not only the UK market but the broader market of the European Union’s 500 million citizens. The establishment of trade barriers between the UK and EU would create generate significant costs for American investors and would make supply chain management far more cumbersome.

Brexit Negotiations

While many observers suggest a hard Brexit – a complete political, economic and customs partition between the UK and EU – is the most likely outcome of the Brexit talks, some industry observers still believe there is a chance for a soft Brexit, that will separate the UK and EU politically but maintain their customs union.

A soft Brexit would be more advantageous for international investors as it would allow them to continue to use the UK as a base for broader EU trade without having to worry about trade barriers when moving goods across the English Channel. Unfortunately, what exactly the Brexit will look like won’t be known until late 2018 or early 2019, leaving many wondering whether it would make more sense to wait and see what the trade environment might look like before making additional investments.

Negotiations over what, precisely, Brexit will look like have been fraught with controversy and disagreement amongst UK political leaders and policymakers. While international investors can breathe a sigh of relief that the parties have agreed on a two-year transitional period post Brexit, there’s still a great deal of uncertainty about the sort of relationship the UK and EU will maintain during that period and thereafter.

The Irish Question

Perhaps one of the most vexing stumbling blocks in the negotiations is that of how Brexit will affect the border between the sovereign Republic of Ireland and the UK territory of Northern Ireland. The two entities have been peacefully coexisting since the signing of the Good Friday agreement in April 1998, but the possibility of re-establishing a “hard border” between them runs the risk of reigniting tensions – an outcome both the leadership of the UK and EU would like to avoid.

However, the Republic of Ireland is and will remain a member of the European Union while Northern Ireland will break way from the EU upon the completion of Brexit. Creating a soft border between them could negate the core purposes of Brexit – the restriction of free movement of persons between the EU and UK and the sovereignty of the UK to establish its own political, regulatory and customs regimes. However, creating a hard border could see a return of tensions.

The British government of Theresa May has suggested the most sensible compromise is to maintain a customs regime identical to that of the EU during the transitional period to avoid an abrupt and/or hard Brexit. However, Ms. May faces significant opposition from within her own government.  For example, Foreign Minister Boris Johnston suggests that the UK’s potential to sign future, bi-lateral trade deals with other countries is highly dependent on the UK making a clean break from the EU.

Opponents of Ms. May’s position believe a mirrored customs regime will require a mirrored regulatory regime, which would effectively mean a single market and an abandonment of separation from the EU. They argue Ireland’s economy depends heavily on trade with the UK and, therefore, it is in Ireland’s interests to avoid a hard border with the UK. In short, they believe Ms. May should be taking on a stronger negotiating position.

The Impact of Disparate Regulatory Regimes

Brexit will not only create trade barriers in the form of potential tariffs and/or duties on inbound shipments and reciprocal tariffs and/or duties on the other side of the English Channel, it will also create disparate regulatory regimes.

One of the key reasons Britons voted in favor of leaving the EU was to take back control of certain political and regulatory decision making. For highly regulated industries, such as Pharma, food manufacturing, chemicals, etc. that are active in both the UK and EU, that likely mean adherence to two separate regulatory regimes, which will increase costs and time to market. This applies to UK-based businesses but also international businesses in those markets.

For companies that use the UK as an access point into the EU, incongruent entry processes will require companies to reconfigure their supply chains.  They would need to ensure goods that adhere to EU regulatory policies enter the EU directly while those that meet UK regulatory requirements enter the UK directly. Regulated goods that do not meet UK regulatory requirements but do meet EU requirements may not be admissible into the UK for transit and transfer to the EU.

What Should International Businesses Be Doing to Prepare for Brexit?

Given that the details of Brexit are still very much in active discussions between the parties, it’s difficult for businesses to make definitive plans for investment, divestment or otherwise. As such, many businesses are taking a wait-and-see approach – a sensible approach given the uncertainty in the market.

However, change in how goods are processed at UK air and sea ports could come rather abruptly, resulting in costly delay and/or penalties to international shippers.

International businesses with active supply chains in the UK and/or EU should be scenario planning today and developing contingencies based on the various potential outcome scenarios of Brexit. Such scenarios should delve into risk exposure and opportunity for companies in terms of customs processes, surety bonds, audit risk, regulatory compliance, cash flow, trade lane configuration, inventory and warehousing, as well as neighboring free trade opportunities.

Contact Livingston today at 1-800-837-1063 to learn more about how Brexit might affect your international supply chain and/or how you can take advantage of market opportunities in the UK and EU today.

Supporting our customers’ needs

Livingston will continue to monitor the progress of discussions regarding the Brexit negotiations and will continue to provide updates.

If you have any immediate questions please contact 1-800-837-1063.