CHANGE IS COMING IN EUROPE THE SAGA & IMPACT OF BREXIT

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

Latest Developments

  • In the weeks leading up to the original March 29, 2019 Brexit deadline, British parliamentarians overwhelmingly rejected (on two occasions) the agreement Prime Minister Teresa May had negotiated with the EU.
  • However, they subsequently voted that Brexit should not take place without an agreement in place.
  • In response, Ms. May was forced to ask for the Brexit deadline to be extended to June 30, 2019.
  • The EU must grant the extension, but EU officials stated they would require Britain’s parliament to first vote in favor of the existing agreement, leaving the fate of the Brexit deadline in limbo.
  • On March 21, EU leaders agreed to a two-part extension plan that would allow the UK to delay Brexit until May 22, provided British lawmakers vote the following week in favor of the Brexit agreement they had already twice rejected.
  • Failure to approve the agreement  would have set an unconditional Brexit date of April 12, at which time British Prime Minister Theresa May would have been expected to provide an alternative or otherwise follow through with a hard Brexit.
  • On April 10, the EU granted a longer extension for the Brexit deadline, postponing Brexit Day to October 31, 2019 on the condition the UK participate in the EU elections on May 23, 2019, which they subsequently did.
  • Should UK lawmakers choose not to participate in the EU elections, there will be a hard Brexit on June 1, 2019.
  • Theresa May subsequently attempted to strike a deal with the opposition Labour Party in an effort to shore up the votes necessary to push her deal with the EU through the House of Commons, but was unsuccessful in persuading the Labour party.
  • On May 24, Theresa May announced she would resign her position as Prime Minister effective June 7, setting off a race for the Conservative Party and the role of Prime Minister.

Background

The United Kingdom is scheduled to officially leave the European Union on Oct. 31, 2019, ending a more than two-year period of intense negotiation initiated by Britain’s invocation of Article 50 of the Lisbon Treaty, which allows for an EU member state to leave the Union.

Precisely how the Brexit is carried out is a nagging question for observers of European and international economics. The two-year timetable offered both parties an opportunity to negotiate the terms of their separation, but it has also created hesitation and uncertainty for international investors, including those in North America for whom the UK is 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.

It’s important to note that most of the imports and exports between Canada and the United Kingdom currently qualify for the elimination of duties under the aforementioned Comprehensive and Economic Trade Agreement (CETA), a free trade deal between Canada and the European Union. However, once the UK leaves the EU – be it through a hard or soft Brexit – CETA will cease to apply for goods and services trade between Canada and the UK. In the event of a hard Brexit, the tariff regime will move to Most Favored Nation (MFN). In the event of a soft Brexit, the tariff regime may be replaced by a bilateral trade agreement. However, in July of 2019, Canadian officials made it clear that Canada would not simply carry over the terms of its free trade agreement with the EU to apply to trade with the UK, and that new terms would need to be negotiated. The announcement dispelled the notion that had often been cited by members of Britain’s ruling Conservative party that any of Britain’s existing trade agreements via the EU would be quickly and seamlessly carried over.

Impact on Trade with the U.S.

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, exactly how the UK will exit the EU is still unknown, leaving many wondering whether it would make more sense to wait and see what the trade environment might look like before making additional investments.

However, what is certain is that a hard Brexit would inevitably result in sudden and intense change to Britain’s customs regime, including the introduction of tariffs and Value Added Taxes on goods moving between the EU and UK, as well as goods entering the UK from other international origins that had previously enjoyed duty deferral under EU trade agreements. Additional documentation, including customs declarations and license controls will also be required and penalties for incorrect documentation will be applied. Regulatory regimes, currently governed by the EU, will cease to exist, leading to confusion at points of clearance and likely delays. These same changes will occur in the event of a soft Brexit, albeit through a gradual, phased-in approach.

Understanding the Stop Gap Measure

Perhaps one of the most vexing and contentious issues in the negotiations has been 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 away from the EU upon the completion of Brexit. Pro-Brexiters argue that 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 had 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 faced significant opposition from within her own government and was forced to respond to calls for a backstop. The backstop she arranged with the EU was to maintain a soft border between Ireland and Northern Ireland in the event the EU and UK were unable to establish mutually agreeable terms for trade. This was vehemently rejected by British lawmakers who believe such an arrangement would effectively bind the UK to the EU’s regulatory regimes. It would also create a separate customs regime for Ireland, which could threaten Northern Ireland’s union with the United Kingdom.

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?

Changes to 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.

Supporting our customers’ needs

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

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 mitigate disruption to it.