Trade in a no-deal Brexit

Trade in a no-deal Brexit

While the UK is bullish that the agreement on the Withdrawal Agreement – limited only to the consequences of departure and the bill – will be agreed by October, there is no similar confidence regarding the future framework for the relationship between the UK and EU.

By way of analogy that a commercial lawyer would understand, the Withdrawal Agreement is an agreement under which the UK would have an obligation to pay, while the framework for a future relationship is an “agreement to agree”. Subject to a hard deadline of less than two years. I have seen early PFI projects take that kind of time. And that was where all parties were engaged and knew what they were doing.

There are four Technical Notices which provide guidance and advice in advance of March 2019: Trading with the EU if there’s no Brexit deal, Classifying your goods in the UK Trade Tariff if there’s no Brexit deal, Exporting controlled goods if there’s no Brexit deal and VAT for businesses if there’s no Brexit deal.

The guidance recommends that businesses consider their supply chains; how they might be affected by having to apply WTO rules; and, for exporters, practicalities such as how to complete customs procedures.

In my experience, regardless of EU-wide advertisement for major large contract opportunities, our education clients tend to award contracts to local or national suppliers. For obvious reasons, there is an obvious cost advantage based on proximity. The supply of goods is usually wrapped into the supply of services, such as the supply of mechanical spare parts under a facilities management services contract.

The key point which arises is that there is a significant level of education required on life outside of the EU. This is especially true in relation to trade in goods – whether this is components or finished manufactured goods. For institutions who are typically customers, even where the customer is not itself an importer, it is worth understanding the supply chain in order to understand the impact of leaving the EU. The consequences could include:

  • Imposition of tariffs and associated paperwork
  • Exchange rate variation.
  • Increased costs and delays in managing distribution
  • Changes in tax law, particularly VAT

Some of these implications are costs, which can either be absorbed or will be passed on. Other consequences can be mitigated. This is likely to be the case where the institution has specialist equipment which may need specific spare parts: the equivalent of hoarding tins of beans in preparation.

The real danger, of course, is that mitigation is not always an option. From the other side of the negotiating table, a business based in the EU-27 might similarly be considering the options it has with respect to a UK component supplier. For large businesses, it can be difficult to mitigate the consequences if there are tight margins or production depends on a “just-in-time” manufacturing methodology. The risk for British businesses is that an EU customer might take a much simpler option.