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Brexit: Now What?

The UK is in the process of selecting a new prime minister to replace Theresa May, who resigned last month after failing to get her Brexit deal through Parliament.  The favorite in the race is former foreign minister Boris Johnson, battling Jeremy Hunt, Britain’s current top diplomat.  The winner will be voted in by 160,000 members of the ruling Conservative Party and will be announced on July23.  The new prime minister will take office on July 24, when May is expected to formally tender her resignation as premier to Queen Elizabeth II.

The toughest job for the new prime minister will be to attempt to renegotiate the terms of the Brexit deal before October 31, when the UK is scheduled to leave the European Union – seven months later than originally planned.  The new PM will have very few options:  find a divorce deal that Parliament will back, leave the bloc without a deal, or delay Brexit again, if the EU and Parliament will agree to another extension.

Boris Johnson has hardened his stance on leaving the block by the end of October.  “We are getting ready to come out on 31 October,” he said, “come what may, do or die, come what may.”  He went on to say that he will scrapTheresa May’s withdrawal agreement and look for a completely new deal before then.

Jeremy Hunt, whose Brexit policy is similar to Johnson’s, is hoping to win the election based on the premise that he would be a trusted negotiator who will deliver the changes that could get through Parliament.  In an interview with BBC, Hunt said “Who is the person that we trust to send to Brussels on behalf of the British people and come back with a deal?  That has to be someone that they trust, that they’re prepared to talk to, because in the end you don’t do a deal with someone you don’t trust.”

 

Growing Fears of a No-deal Brexit

The EU has said that it will not renegotiate the withdrawal agreement.  But even if Brussels can be persuaded, the timetable to negotiate a new agreement is extremely tight as Parliament is in recess for the entire month of August and will return with only 10 days to work on a new agreement before party conference season begins.  And if there is a new agreement, if must be approved by Parliament and legally ratified by all parties, with only a few short weeks before the deadline.

Some Conservative lawmakers have threatened to resign from the party and vote against the newly elected prime minister in order to prevent a no-deal exit, a move that would topple the government.

 

How Could Brexit Impact Your Supply Chain?

As there are many different options being considered, let’s focus on the 3 mostly likely scenarios to see how they may impact your supply chain.

Bear in mind, if the UK is able to negotiate a deal with the EU, there will be a transition period through December 31, 2020 in order to negotiate a trade agreement.  This could be extended to as late as December 2022, should both sides agree.

Soft Brexit

If the UK were to follow the soft Brexit path, the relationship between the UK and the EU would remain as close as possible to their current relationship, and trade and supply chains would see minimal disruption.  There would be a minimum of customs and border controls in place.  Goods declarations would still be required, but fewer tariffs would be applied and shipments would be subject to fewer inspections.  In this scenario, air and ground transport would not be limited.  A soft Brexit scenario assumes a trade agreement is reached, most likely in the form of the Facilitated Customs Arrangement, subject to EU approval, or a trade agreement similar to the EU’s agreement with Canada.

Hard Brexit

Should the UK go down the hard Brexit path, hard limits between the UK and the EU will be put in place at the end of the transition period.  The UK would no longer be part of the single market or the customs union and would have full control over its borders, including the border between Northern Ireland and the Republic of Ireland.  The UK would need to abide by the rules of the World Trade Organization (WTO) until new trade deals can be negotiated.  This scenario would require the UK to use new technologies to automate all customs procedures, but that technology is not currently available.  Also, new road and air transportation agreements would need to be laid out, and the number of permits for freight transport will increase.

No-deal Brexit

If the UK is not able to reach an agreement with the EU, there would be no transition period, and EU law would no longer apply to the relationship between the UK and EU.  As a result, full customs and border controls would be put in place.  There will be only a limited number of goods transport permits and no aviation agreements.  Customs inspections would increase at all ports of entry, resulting in lengthy delays.

 

What Does Brexit Mean for American Businesses?

Whether you export your goods to the UK, import goods from the UK, or use the UK as a gateway into Europe, Brexit is a reality that American businesses have to face and prepare for.

As America’s top partner in services trade and foreign investment and the 7th largest trading partner for goods, any economic downturn caused by Brexit will be felt by American businesses.  A recent study by the UK’s Treasury Department predicts that a soft Brexit would result in a British economy that will be 3.9% smaller than if the UK were to remain a part of the EU, while a hard Brexit would cause the economy to be almost 10% smaller.

The day after the Brexit vote, the Dow Jones Industrial Average lost 610 points, the pound decreased by 14%, and the euro fell 2%, both of which increased the value of the U.S. dollar.  Given that the UK imports more than it exports, the falling pound has pushed up prices and has made American products more expensive for foreign importers.

Brexit would not only impact your business in terms of cost, but it would also affect other areas of your business, including administration, paperwork, and delivery times.  Here are some of the ways Brexit could impact your business:

Commercial Contracts

Existing contracts with British companies may be affected by the terms of future trade agreements, new trade barriers, tariffs, and currency fluctuations.  Disputes over contracts between a a subsidiary of an American company in the UK and a party in an EU member state may be affected as EU regulations currently impact the choice of forum, the choice of governing law, legal processes, and enforcement of judgements.

When drafting new contracts, follow the New York Convention of 1958 rather than EU regulations, especially for governing law, dispute resolution mechanisms, and arbitration clauses.

Intellectual Property Rights

Brexit’s effect on intellectual property laws are likely to be significant, most notably to EU trademarks and Community design rights.  While the draft Withdrawal Agreement states that the UK will provide for equivalent intellectual property rights as covered under EU trade regulations, even in the event of a no-deal Brexit, the full impact remains unclear.  IP enforcement rights may also be an issue as the Prime Minister’s objective is to bring an end to the European Court of Justice’s jurisdiction in the UK.

All existing EU registered trademarks and designs will automatically be “cloned” in Britain’s UKIPO’s registry at no cost to the right holder.  Pending EU applications will need to be re-filed in the UK within 9 months.  After Brexit day, new applications will need to be filed in both the EU and the UK separately.

European patents will be largely unaffected.

Business Travel

Travel for executives, sales people, and technical personnel between the UK and Europe will become more difficult.  What was once a quick trip from the UK to an EU member state would require more time for clearing customs.

Employment

For American subsidiaries in the UK that employ EU nationals, the rights of those individuals to continue to live and work in the UK after Brexit are unclear.  While the Prime Minister has said that she wants to guarantee the rights of the 3 million EU citizens who resided in Britain, she says that this is dependent upon the EU agreeing to an equivalent deal for British nationals living in the EU.  Recruitment efforts may be hindered, and efforts to relocate employees between subsidiaries in the UK and the EU may become more difficult.

Free Trade Agreements

In the event if a hard Brexit, the UK would no longer benefit from the EU’s network of more than 40 free trade agreements.  New free trade agreements would need to be put in place, but the UK is not formally allowed to begin negotiations until after the divorce date.  By extension, UK goods would no longer fall under the EU’s rules for origin requirements and would lose their rights to zero tariffs.

Tariffs

Tariffs may be imposed on finished goods, raw materials, or intermediate goods entering the UK.  Exporters to the UK are advised to join Her Majesty’s Revenue and Customs (HMRC).  The HMRC is responsible for collecting taxes and administering certain regulations.  The UK will use the Union Customs Code (UCC) for the classification of goods.

Value Added Tax (VAT)

In the event of a no-deal Brexit, UK importers would be required to pay VAT and/or customs duties for all imports to the UK.  Similarly, the EU will apply customs rules (duty and VAT) to goods received from the UK.

The British government will introduce postponed accounting for import VAT on goods brought into the UK to allow UK VAT registered businesses to account from import VAT due on their VAT return instead of paying it at the time the goods arrive in the UK.  This easement is intended to lessen the burden for UK importers to pay import VAT of 20% on many good at time of entry.  While this easement is intended to address cash flow issues arising from Brexit, postponed accounting will also apply to non-EU imports.

Logistics

No matter the kind of Brexit the UK decides upon, all transportation types will suffer consequences.  Industry experts feel that aviation and roll-on roll-off transport will be the most affected.  Shippers are advised to allow for longer delivery lead times and to be aware of any potential cost impact of trade between the UK and the EU.

Customs Clearance Delays

New customs requirements, customs checks, and the imposition of additional documentation would likely cause delays in customs clearances.

Aviation

Britain has yet to reach an aviation agreement with the European Union.  In a letter to official in Brussels, the European Regions Airlines Association (ERA) claims that a “no-deal” Brexit could have “disastrous consequences,” impacting routes, aviation safety and border security.  The ERA estimates that 1.8 million routes across Europe will be affected in the event of a no-deal Brexit.  “There’s still a lot of unknowns there,” said Robert Mann, an airline analyst in Port Washington, N.Y.  Until a deal is reached, there’s no guarantee that flights will be permitted to operate.”

Domestic Trucking

Truck drivers will need to apply for passports and international driving licenses.  If the UK leaves the single market, EU regulations on free freight transport would no longer apply.  Instead, a Conference of European Ministers of Transport (CEMT) license will be required between an EU country and a non-EU country.  To make matter worse, each EU member state has a quota which limits the number of licenses per truck type.  James Hookham, the British Freight Transport Association’s Deputy Chief Executive, firmly believes that an insufficient number of permits will be available.

Warehousing

The likelihood of major trade disruptions post Brexit has seen shippers stockpiling inventories.  This sudden influx of goods has created a dilemma in that there is simply not enough not storage capacity to hold all of the goods.  Warehouse providers are full or raising rates for temporary storage solutions, and industry experts feel the ongoing uncertainty over Brexit will only lead to more demand for short-term storage.

 

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Sources:

  • Reuters, Timeline: Key dates for Britain’s Brexit crisis and New deal or no deal – How will Britain’s next PM deliver Brexit?
  • The Guardian, Brexit: Johnson says Britain will leave EU on 31 October ‘do or die’
  • The Balance, Brexit Consequences for the U.K., the EU, and the United States
  • Mercatus Center, George Mason University, “What a “Hard Brexit” Could Mean for the US and the UK”
  • Bird & Bird, Brexit implications for US Businesses
  • Eye for Transport (EFT), The logistical consequences of a soft, hard or no-deal Brexit
  • Supply & Demand Chain Executive, Brexit, Global Trade and the Digital Transformation of the Supply Chain
  • Vault IP Limited, BREXIT & Intellectual Property
  • DBO United Kingdom, Brexit: The UK’s ‘no-deal’ plan for VAT
  • CNBC, UK and EU must ‘wake up’ to risk of grounded flights after Brexit, airline body warns
  • The New York Times, Britain and U.S. Reach Post-Brexit Aviation Agreement