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Preparing for Brexit

Preparing for Brexit

Preparing for Brexit

Brexit is continuing to create uncertainties, but one thing is certain: on March 29, 2019, the United Kingdom (UK) will leave the European Union. Doing business with British customers and suppliers will therefore become more difficult. There are four possible Brexit scenarios, and Brexit expert Jeroen Gobbin explains how Belgian companies can prepare for them.

How Belgian companies should prepare themselves for four different Brexit scenarios

Let us start by answering a very pressing question: Brexit is practically irrevocable. By triggering Article 50 of the Treaty of Lisbon, Theresa May started the legal countdown that ensures this. So that this all takes place in an orderly fashion, the negotiators have agreed on a withdrawal agreement of 585 pages. On Sunday, November 25, the European Council of heads of state and government approved this agreement. If it is approved by the British and European parliaments, this agreement will regulate your future path as an entrepreneur.

During the next two years, companies will notice no changes at all

The 585-page withdrawal agreement agreed upon last month by the EU and the UK describes how the two parties will separate from each other. The British will pay off some financial obligations entered into previously, and rules have been agreed upon on how to deal with the rights of Europeans now living in the UK and vice versa. The agreement also specifies how the border between the Republic of Ireland and Northern Ireland will be regulated. The agreement also provides for a two-year transition period after March 29, which can be extended and during which nothing changes. The transition period gives the two parties an opportunity to establish a trade agreement. Finally, a “backstop” has been provided for should the parties fail to reach a trade agreement before the end of the transition period, i.e. December 31, 2020.

Which scenarios should your company take into account?

Scenario 1: A long and extended transition period

Our country, as one of the most globalized countries in the world, would benefit most from a situation in which the European and British markets remain as closely interwoven as possible. Trade would remain more or less frictionless, and trucks could continue on their journey upon arriving in port without declaration forms, inspections, duties and checks. Accordingly, the most favorable scenario for your company would be a long and extended transition period, resulting in a new status quo. Such a scenario is possible, but it is certainly not a given. After all, the consequence for the British would be that they would have to continue paying into the EU, would not have any say in decisions and would still not be able to enter into any trade agreements with third countries. The EU negotiating team has also indicated that it is not all that enthusiastic about such a scenario.

Scenario 2: Backstop

An alternative scenario is that no free-trade agreement is reached, that the transition period ends and that the relationship between the UK and the EU is then based on the backstop agreed upon in the withdrawal agreement. In this scenario, Northern Ireland remains part of the European internal market, and the rest of the UK is linked to Northern Ireland and the EU via a customs union. This avoids the imposition of a hard border on the island of Ireland between the Republic of Ireland and Northern Ireland. In this scenario, trade with the UK with respect to goods would be the same as trade with a “third” foreign country. However, no import duties are levied between countries in a customs union. This type of situation already exists between the EU and Turkey. For the sake of clarity, import and export formalities as well as security checks do take place at the border, and inspections or checks on animals and foodstuffs are necessary. As a result, you must take extra delays at the border into account, which can be a real spoiler if you are part of a just-in-time supply chain. In addition, you must also make sure that your organization and your employees are able to deal effectively with these customs formalities. This therefore requires an extra investment in human capital. Finally, the backstop says almost nothing about the delivery of services. For example, if you offer security services that enable your British customers to pay a lower premium for their property insurance, it will not automatically be recognized by the British insurer. Policyholders will therefore switch to other (British) service providers.

Scenario 3: Trade agreement between the EU and the UK

The last foreseeable option is that, after the regular transition period, a free-trade agreement is reached between the UK and the EU, such as the agreement presently in place between the EU and Canada (CETA), for example. It's impossible to say what such an agreement would look like, since the negotiations for that purpose still need to begin and could continue for quite a long time. However, in general, free-trade agreements result in a less integrated form of cooperation than membership in a customs union. For example, countries can impose import duties on each other if the goods in question do not comply with the rules of origin agreed upon, and the independently concluded free-trade agreements with other countries can be an extra complicating factor if no diagonal cumulation is agreed upon i.e. recognizing the origin of each other's goods. The costs involved may therefore be higher than would be the case in a customs union. On the other hand, access to services could likely be regulated. As a result, the UK would also be able to conclude its own free-trade agreements with third countries.

Scenario 4: Withdrawal agreement simply never makes it through both parliaments

The above scenarios can become a reality only if the withdrawal agreement is approved by the European and British parliaments in December. Things will get very exciting in the near future, and it could all easily go very wrong. May seems not to have a majority behind her in Parliament for the withdrawal agreement, and the EU leaders have already made it clear that they do not wish to renew the negotiations. In other words, the possibility of a hard Brexit without a withdrawal agreement can still not be excluded. This is the worst possible scenario and would have major economic consequences. Examples of potential problems include food and medicine shortages in the UK, airplanes that are not allowed to fly because British airports and pilots are not recognized as parties to air transport agreements, and enormous traffic jams at the major border crossings in the EU and the UK. Import duties would then be based on the rules of the World Trade Organization (WTO), which of course would be higher than the zero rates that apply within a common market, a customs union, or a free-trade area.

How can you prepare?

As an entrepreneur, how can you prepare for Brexit? Regardless of the type of Brexit that we will see, it makes sense to take the following “no regrets” steps.

  1. Perhaps you have no experience in dealing with customs formalities? If so, you should quickly find a partner who can take care of that for you.
  2. Are you a supplier? If so, agree on who is responsible for what in relation to imports and exports.
  3. Are you a customer? If so, the same applies: agree on how you will receive the goods and which activities you will be responsible for in this process.
  4. Think about how financially dependent you are on British customers. If the number of British customers in your portfolio is large and poses an excessive risk, try to diversify your customer portfolio further.
  5. Consider whether you should build up strategic stocks of raw materials from the UK in order to facilitate on-time deliveries.
  6. Add conditions precedent to your terms and conditions of delivery. Define problems that may be a consequence of Brexit as a condition precedent, and check your terms and conditions of delivery for longer contracts.
  7. Consider your invoicing currency. The British pound is expected to decrease in value when Brexit takes place. It may therefore be preferable to invoice in euros, hedge the risk of major price drops via your bank or agree on an exchange rate in advance.
  8. Analyze which opportunities you have to mitigate import duties via “duty engineering” in case of a hard Brexit. In general, end products are subject to higher rates than components. It may therefore be to your benefit to have the final assembly carried out either in the EU or the UK in order to lower the applicable rates.

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