Art. 50 having been triggered, the business community eagerly awaits information about the implications for UK businesses trading with the European Union. As it stands, UK-based companies can sell goods to EU customers without additional taxes and can import goods tariff-free. However, since Prime Minister Theresa May has ruled out continued membership of the single market, a new arrangement has to be reached. The UK’s proposition is a free trade deal and a new customs agreement. The government hopes for a deeply integrated trade and economic relationship with the EU with the freest possible trade in goods and services and maximum freedom for companies to trade with and operate within European markets. All this, negotiated taking into account the UK’s current special relationship with the EU.
To this end, the government rejected models already enjoyed by other countries. The Prime Minister also said that the future trade deal might include bespoke solutions for specific sectors such as the automotive and pharmaceuticals industries.
Contrary to the optimistic approach adopted by the UK’s government, the EU guidelines on the divorce process emphasise that the EU’s primary objective is to preserve the integrity of the single market, which excludes participation based on a sector-by-sector approach. The guidelines reject the cherry picking approach and any deals with individual EU countries. The EU will also insist on a level playing field in terms of competition and state aid. Importantly, the EU is unlikely to engage in parallel negotiations on the withdrawal terms and a trade deal and the latter will only commence once the terms on which the UK will leave the EU are fully agreed.
According to the Prime Minister, by the end of the two-year withdrawal period, everybody should know what the future relationship between the UK and the EU will look like. Considering the stance adopted by the EU, however, it is not by any means certain that what the UK perceives as a relationship with the EU will in fact be a fully agreed and operational trade deal and realistically, it is likely that negotiating and ratifying such trade deal will take significantly longer. One would hope, however, that once emotions on both sides settle in favour of a pragmatic approach, we may have an outline of key provisions at the least.
What does that mean for UK businesses?
In short, more uncertainty, which is likely to continue beyond the two-year withdrawal period. At this stage we can all but speculate about the final outcome of the trade deal negotiations and there are some who think that a free trade deal will have to be reached, in the interest of both parties. In the process, however, the following issues will no doubt be of concern to the negotiators and the business community alike:
Tariffs
Unless a trade deal is reached, it is likely that the cost and administrative burden on doing business with the EU will rise. While the UK’s WTO “most favoured nation” status will influence rates and prevent either side from imposing punitive measures, it is likely that the UK will still be subject to tariffs of up to 32%. There is some difference in opinion about how much this will cost UK businesses per annum; conservative estimates believe this could cost UK businesses about £7.4bn per year, but others put the cost at closer to £200bn, or 9% of the UK’s GDP.
Currency
The value of the pound dropped sharply immediately after the referendum result and could be hit again if negotiations start to go badly. While a weak pound may be good news for foreign companies looking to invest in UK businesses, and the past few months have already seen a rise in foreign investment, it also means that import prices have risen already and look set to rise further.
Regulation
At present we are subject to a wide range of EU rules, governing aspects like product specifications, labelling, and testing. However, it is possible that upon leaving the EU none of these rules will apply.
The next two years will see the UK decide on whether to keep many of the rules, incorporating them into domestic law, or replace them with alternatives. Businesses trading with EU partners will need to stay abreast of changes to laws affecting their industry and areas such as procurement law which can affect many businesses.
What can I do to prepare my business?
First, remember that you have time to prepare. The legal relationships that underpin trade with the EU will not change until at least 2019, meaning that free movement of people, goods and services will be unaffected until then.
At this stage businesses will want to keep options open where possible. While the economic picture is currently strong, the final shape of the UK’s trading position is very unclear and it is worth planning for a range of eventualities. It is also a good time to be busy. Explore as many export channels as possible and, if possible, make relationships with trading partners outside of the EU.
For further advice and consultation on how to prepare for Brexit, our International Business team is here to advise you on the best course of action for your business.
Laurence Gavin – Partner
Anna Ai – Trainee Solicitor
Published: 21 April 2017
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