The summer is over, and the UK government now has the job of deciding its objectives for the Brexit negotiations. These, like all major negotiations, will no doubt be long and difficult. They will also inevitably create major uncertainty for companies, investors and individuals as they progress.
I have personally led major negotiations in a wide variety of cultures, and also participated in them as a team member. So I have a reasonable idea of the challenges that the Brexit negotiations will create. But they are unique in their complexity, and in their political nature:
□ If one takes the chemical industry as an example, tariff negotiation is only a part of the discussion – rules and regulations around environmental, health and safety issues will probably end up being far more important
□ Political developments will create further complexity – Italy has a referendum this year, whilst elections are due next year in major EU countries including Germany and France, and the USA will have a new Administration
The UK’s new premier, Theresa May, has stated that “Brexit means Brexit”. But she is also well aware there are at least 5 major potential options for a Brexit agreement, as the authoritative Institute for Government has outlined:
□ ”Membership of the European Economic Area (EEA): the ‘Norway model’. This offers almost complete access to the Single Market in goods and services, with some restrictions on agricultural and fisheries products. In return for this access, EEA members must accept free movement of people. They make a significant contribution to the EU budget and must accept all EU laws and regulations related to the Single Market, with minimal influence over their content.
□ ”Membership of the European Free Trade Agreement (EFTA) plus bilateral deals: the ‘Swiss model’. EFTA provides access to the Single Market in all non-agricultural goods. Switzerland has added a series of bilateral agreements allowing for trade in some services, and also has a treaty accepting free movement of people. Switzerland contributes to the EU budget to cover the costs of programmes it participates in. It must adapt domestic legislation to meet EU laws in the areas of the Single Market that it participates in, and has no formal influence over those laws.
□ ”A customs union. Members of a customs union agree to trade agreed categories of goods (for example, industrial or agricultural) between themselves without applying any tariffs. If the UK were to take this path and agree a customs union with the EU, it would not face tariffs in exporting goods to the EU, but would be obliged to adopt existing and future EU rules relating to the regulation of goods. Customs unions are bespoke, with different versions covering different types of goods… An important feature of a customs union is that members apply a common external tariff to all third parties (unlike an FTA, where members can have their own tariff policy with other countries). The EU operates an advanced form of a customs union in that the common tariff is then pooled across the EU.
□ ”A bilateral free trade agreement, such as the Canadian or Singaporean models. Both these bilateral agreements, when ratified, will offer almost complete access to the Single Market in goods, but less access to the market in services, with some sectors excluded. Neither agreement requires free movement of people. Exporters must comply with EU rules and regulations when exporting to the Single Market, and will have no influence over these rules and regulations. Before the UK could sign an FTA with the EU (or with any other entity), it will probably need to have its WTO arrangements set out – potential FTA partners need to know what terms the UK is offering the rest of the world, before they can know what ‘preferential’ terms to seek for themselves.
□ ”Membership of the World Trade Organization (WTO). This would offer the most complete break with the EU. As a WTO member, Britain would be able to negotiate free trade agreements with other members, including the EU. In the period before these agreements were put in place, the UK would have to offer equal ‘most favoured nation’ status and equal tariffs to all countries wishing to trade with it. UK exports to the EU would also face the EU’s external tariff.”
PROTECTIONISM IS RISING AROUND THE WORLD
The government will now have to decide which of these options to pursue. And at the same time, it is uncomfortably aware that trade deals, as such, are becoming very unpopular in many major countries, as the above chart from Global Trade Alert confirms. Some even suggest we may be moving away from trade agreements to trade wars.
Evidence for this paradigm shift can be seen in the fact that last December’s WTO negotiations ended in failure, whilst risks are rising over ratification of the proposed TPP deal between 12 Pacific Rim countries. Pressure to abandon the proposed TTIP deal between the EU and NAFTA is also rising.
Another critical fact is that all negotiations are about compromise – if the UK wants control over immigration, for example, this will limit its negotiating options with countries that currently have relatively open access to the UK – such as China, the USA, India and others, as well as the EU.
This “fact of life” is, after all, why recent Conservative and Labour governments never implemented major cutbacks. Reducing immigration would have important “second-order effects”, as three-quarters of immigrants move to the UK for work or study. Universities, for example, often depend on fee income from foreign students for their finances, whilst the National Health Service relies on its 57,000 foreign workers. As the BBC noted before the Brexit vote:
“The UK isn’t bound to accept non-EU migrants by any international treaties, but nevertheless let 277,000 of them move over last year alone.”
Individual industries also risk finding themselves being made part of “trade-offs” to obtain benefits for another industry. The lobbying power of the financial services industry might, for example, mean that it is allowed to keep some form of passporting rights (to sell its services into the EU after Brexit). In exchange, the UK might have to accept greater restrictions on another industry.
The conclusion is clear. Anyone who thinks they know what is going to happen with Brexit, simply doesn’t understand the key issues. And anyone who thinks that Brexit has nothing to do with them or their business, may well have a surprise ahead of them.
Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit last week:
“We begin this editorial with an apology to you, our faithful readers. In March, we described the Brexit situation, then careening through its third year and nowhere close to resolution, as an “omnishambles.
“An omnishambles is a state of utter chaos, total disorder and perfect mismanagement – which brings us to our apology. If you’ve been paying any attention to British Prime Minister Boris Johnson, you know that, in declaring United Kingdom politics to have reached peak shambolic six months ago, we spoke too soon. Oh, did we ever.”
Within the UK, most people are totally confused by the mixed messaging surrounding Brexit. Was it effectively postponed again when Parliament passed a law meant to stop No Deal? Or is it all still going to go ahead – deal or no deal – on 31 October, as the prime minister insists. Nobody knows.
There has also been no debate about what kind of policies should be pursued after Brexit. Instead, the media has often focused on the influence of Johnson’s chief of staff, Dominic Cummings (pictured above, in casual dress).
Cummings led the Leave campaign under Johnson, and continues to carry out Johnson’s strategy today. And whether by accident or design, his apparent fondness for tee-shirts also seems to be proving a useful tactic for diverting media attention away from discussion of potential food shortages.
Behind all the spin, Johnson’s strategy is simply responding to the opinion polls above. He knows he has to win back Brexit Party voters if he wants to win a General Election. Understandably, therefore, he is going hard for the exit, declaring that he’d “rather die in a ditch” than leave after 31 October.
“Luckily” for him, he is up against Jeremy Corbyn – my local MP – who has completely failed to present a coherent policy on Brexit. And Johnson has exploited this position by focusing on the Opposition’s continued failure to answer the critical question – “what would any extension be for?”
It seems the Liberal Democrats will finally come off the fence under their new leader, Jo Swinson, and decide to campaign to remain in the EU. But we will have to wait to see if Labour’s Conference can force Corbyn to abandon his long-standing opposition to the EU.
If not, it is quite possible that the EU27 could refuse the extension request at next month’s Summit, if it doesn’t seem likely to lead to a second referendum or a new government.
Germany’s Chancellor Merkel has already set out her belief that Johnson wants to convert the UK to a form of Singapore-on-Thames. with a low tax, light-touch regulatory environment in direct opposition to the rules of the EU Single Market.
3 alternative and quite different scenarios therefore exist for the Brexit endgame:
- No Deal. Johnson finds a way round Parliament and the No Deal Act, and leaves without a deal on 31 October. He then campaigns on the theme of ‘The People v Parliament’ and blames Parliament for blocking his hopes of getting a deal
- 2nd referendum. The opposition parties threaten to install an interim government that would replace Johnson, and ask the Summit for an extension to allow an election and 2nd referendum.
- ‘Plan B’. Johnson understands the value of contingency planning. Given his key policy is to leave on 31 October, he is already exploring the opportunity for a deal on the basis of accepting the EU’s proposed N Ireland-only backstop option. He could then still campaign having (a) achieved a deal and (b) left as promised.
At the moment, Johnson clearly sees No Deal as his best option, as it means he doesn’t have to compromise. So it is no surprise that the Foreign Secretary has warned they will “test (the No Deal Act) to the limit”, in order to leave on 31 October without a deal.
The compromise of a Plan B would clearly lose him DUP and Brexit Party votes. But it might offer Johnson his best chance of staying in office, if the Opposition did agree to push for a new referendum. It would be humiliating, to say the least, if his term in office proved the shortest in history.
The next few weeks may therefore compel the ‘Globe and Mail’ to issue yet another apology to its readers.
New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or die, come what may”.
This means UK, EU27 and EEA companies now have less than 100 days to prepare for a UK No Deal Brexit. That’s less than 70 working days – and even less if you plan to take a holiday over the summer.
If the UK leaves without a deal, it will also leave the Single Market and the Customs Union. So everything will change overnight – 400 million Customs Declarations will likely be needed each year, plus compliance with Rules of Origin and thousands of other major/minor regulatory changes.
Of course, it is still just possible that the UK might change its mind. Or that the new UK government might persuade the EU27 to give up the so-called “Irish backstop”. This aims to avoid the need for border controls between Northern Ireland and the Republic of Ireland.
But neither outcome looks very likely today.
THE AUTO INDUSTRY IS ALREADY WARNING OF THE RISKS AHEAD
Businesses therefore now need to prepare for a No Deal Brexit on 31 October.
What does this mean? It means that companies have to assume there will be no transition period. Instead, the UK will operate under WTO rules. The UK car industry has highlighted the risks this creates in a letter to the new premier:
“We are highly integrated with Europe, and a no-deal Brexit would result in huge tariff costs and disruption that would threaten production, as well as further undermining international investors’ confidence in the UK. We need a deal with the EU that secures frictionless and tariff free trade.
“A no-deal Brexit presents an existential threat to our industry. Above all, we must ensure the sector continues to enjoy — without interruption — preferential trade with critical markets around the world, including the EU”.
The chart above highlights the potential impact on the Nissan car factory in NE England.
THE NEW UK GOVERNMENT IS NOW PREPARING A MAJOR COMMUNICATIONS CAMPAIGN
Cabinet Office minister, Michael Gove, has been put in charge of No Deal preparations. And the aim is to quickly launch a major communications campaign to help the public and businesses get ready for leaving the EU without an agreement. As Boris Johnson said last week:
“What we will do, is we will encourage people in a very positive way. From the get-go, we start saying, ‘Look, what do you need, what help do you need, what reassurances do you need?’”
This will add to the information already available by clicking on the Gov.uk website:
READY FOR BREXIT PROVIDES PLANNING AND AUDIT TOOLS, PLUS DETAILED LINKS
A No Deal Brexit will impact companies and supply chains. This is why I co-founded Ready for Brexit a year ago, with a number of highly-experienced industry colleagues. It is subscription-based, and features detailed Brexit checklists, a No Deal Brexit planning tool and a BrexSure audit tool to check your suppliers and customers are also fully prepared.
It focuses on the key areas for business, as our Brexit Directory above shows:
- Customs & Tariffs: Export/Import Registration, Labelling, Testing, VAT
- Finance: Payment Terms, Tax & VAT, Transfer Pricing
- Legal: Contracts, Free Trade Agreements, Intellectual Property
- Services & Employment: Banking, Insurance, Investment, Property
- Supply Chain: Documentation, Regulation, Transport
We can all hope that Johnson’s renegotiation with the EU27 is successful. But hope is not a strategy.
With the new government committed to the 31 October deadline, businesses really are taking an enormous risk if they don’t focus all their energies on planning for ‘No Deal’.
Thank goodness for backbench MPs and the European Union. Without their efforts, the UK would by now have left the EU without any trade deals, or ongoing relationship with it’s biggest export market. And as the Duke of Wellington said in another context, “It was a damn close-run thing”:
- In a historic vote, MPs decided by just 1 vote to force the government to ask for a longer extension
- The EU Council argued into the night on its response, but decided to give the UK “a second chance”
The problem was well expressed in a tweet by former Brexit Secretary, David Davis, on Friday morning:
His tweet completely ignored the views of all the main business organisations and trade unions, who had spent weeks trying to point out that issuing government statements and Guidance Notes was not the same as actually being prepared, as The Guardian noted:
“Frances O’Grady, the general secretary of the TUC, and Carolyn Fairbairn, the CBI’s director-general, wrote last month before the crunch EU summit in Brussels: “Our country is facing a national emergency. Decisions of recent days have caused the risk of No Deal to soar. Firms and communities across the UK are not ready for this outcome. The shock to our economy would be felt by generations to come.””
On Friday, confirming their lack of understanding of business needs – and against the advice of senior civil servants – ministers decided to completely stand down No Deal preparations. Yet as the independent Institute for Government have warned:
“Despite the delay, a No Deal exit is still very much on the table, either on 31 May or 31 October… Businesses and the public should not be left to read between the lines of individual departmental press notices.”
It is therefore critical that UK and EU27 businesses now take the opportunity of the extension to understand and prepare for the changes that will affect them if the UK does leave the EU. For all the talk of a new referendum, this is still the law of the land.
Our surveys at Ready for Brexit have consistently shown that 80% of small businesses weren’t ready for Brexit. Some had stockpiled some essential goods, but only around one fifth had actually thought through a detailed plan. As a result, many people have had sleepless nights in recent weeks as they realised the UK might well be leaving with No Deal.
Now that the UK has an extension, it is time to stop panicking and start preparing. None of us can afford to be complacent – No Deal remains the default position and businesses need to know how Brexit will affect them in key areas for their future:
- Customs, Tariffs and Regulations. No one has needed to fill out Customs Declarations for EU trade for 25 years. HMRC has warned that following Brexit, businesses may need to make 400 million Customs Declarations at an expected cost of £32.50 each. Compliance with Rules of Origin could easily cost more, if legal advice is needed. Companies need to identify how Customs and Regulatory requirements could impact their business and plan to put the correct procedures in place
- Supply Chains. Will your business be affected by interruptions in supply chains following Brexit? You need to audit your supply chain partners to identify potential weak links. It only takes one missing item to shut down a production line. And think about what may happen to your cash flow if forecast delays take place at the ports
- Sales Agreements. Do you have Material Change clauses in your commercial contracts? You need to check out key areas such as your ability to pass on the costs of tariffs, customs delays and exchange rate movements, as well as the impact of possible regulatory changes. Governing contract law also needs checking as the UK will no longer be a member of the EU
- Employment. You need to understand how the status of UK-employed EU citizens may change and check out the position of UK staff working temporarily or permanently in EU countries. Don’t forget basic areas such as whether professional qualifications obtained in the UK will still be valid in the EU after Brexit, and the possible need for international driving licences
We have all had a lucky escape in the past few days. But we can’t rely on our luck holding. Planning now for whatever may happen in the next few months may well save you months of heartache later on.
This is why, with some highly experienced colleagues, I helped set up Ready for Brexit. As I wrote here in June:
“We are particularly concerned that many small and medium-sized businesses (SMEs) – the backbone of the European economy – are failing to plan ahead for Brexit’s potential impact.”
We can all hope that politicians now step back, and work together to avoid the disaster of a No Deal at the end of May or October.
But hope is not a strategy – particularly when the future of your business may be at stake. If you need detailed help in the form of Brexit Checklists and planning tools, they are all there on the Ready for Brexit site.
“That couldn’t happen” are probably the 3 most dangerous words in the English language. They mean “I don’t want to think about something that might be painful“. So if you hear MPs saying a “No Deal Brexit can’t happen“, ignore them. They are wrong.
‘NO DEAL’ BREXIT IS THE LAW OF THE LAND
The issue is simple, yet seemingly too painful for most MPs and commentators to accept.
The EU Withdrawal Act (2018) became law on 26 June last year. It set 29 March 2019 as Brexit Day. It allowed for a Transition Agreement if a Withdrawal Agreement was agreed. Without a Withdrawal Agreement, the UK simply leaves with No Deal.
The law is the law, and the Act is primary legislation, which means it has since been incorporated in a whole range of laws and regulations as part of the UK’s exit preparations. It cannot, therefore, be overturned by statements that claim “There is no majority for No Deal”.
In fact, during the Committee stage, the House of Commons voted 320-114 in Committee Stage against staying in the Customs Union. It also voted 319-23 against a second referendum. And last week, MPs voted 432-202 against the proposed Withdrawal Agreement.
So if MPs say “No Deal can’t happen”, they are wrong. They have already voted for ‘No Deal’.
CHANGING PRIMARY LEGISLATION IS VERY HARD
Of course, MPs could still change their minds. But there are now less than 70 days till Brexit. And they would also have to agree this with the other EU 27 countries. These represent nearly 450 million people versus the UK’s 66 million.
Equally important is that the UK has been heading in this direction since negotiations started:
Since then, MPs have voted for the Withdrawal Act; against remaining in a Customs Union; against a new referendum; and against the Withdrawal Agreement. They have also voted for invoking Article 50 and for setting 29 March 2019 (by 498-114 votes) as Brexit Day.
So time is running out for them to change their minds.
THE ALTERNATIVES TO ‘NO DEAL’ ARE CURRENTLY WISHFUL THINKING
The politics of Brexit also make it unlikely that the government will change its mind, or be forced to change its mind:
- Theresa May knows very well that any move to “soften” Brexit by joining a Customs Union would split her Conservative Party down the middle. And any Tory MP who voted for a softer Brexit knows they would likely be deselected as a candidate and lose their job
- Labour leader Jeremy Corbyn voted to leave the EU in the 1975 referendum, and against the Maastricht/Lisbon Treaties. Many traditional Labour voters are also strongly pro-Leave. So any Labour MP voting against the Party line also faces the risk of deselection
It is therefore hard to see why simply extending Article 50 beyond 29 March would change anything.
And extending would enormously complicate the European elections in May. At the moment, the UK is not taking part in these, as it is leaving on 29 March. But if it isn’t leaving after all, there is little time left to prepare to vote on 23 May
Of course, the EU27 might agree an extension if the UK decided to hold a second referendum, as long as the vote was held before the new Parliament starts work on 2 July. But they would likely first want to know the question on the ballot paper.
Would the government ask if the voters approved of May’s Withdrawal Agreement? Would it instead ask if they wanted to stay in the EU? Or would it simply ask if they wanted to leave with No Deal?
Any of these questions are possible. But deciding between them could be very divisive in itself. And a referendum campaign could be even more divisive. Plus, its outcome would be very uncertain if voters worried that democracy was being undermined by a refusal to accept the first result.
“A week is a long time in politics” as former premier Harold Wilson famously noted. So it is possible that Sir Keir Starmer’s call yesterday for a new Labour approach might succeed. Equally, MPs might decide to support the Nick Boles and/or the Dame Caroline Spelman/Jack Dromey motions next week.
But this would only be the start of a quite complex process, which might well end with a General Election being called – and all the while, the clock is ticking.
So after the government’s defeat on Tuesday, UK businesses and those that trade with the UK must urgently begin to plan on the basis that a No Deal Brexit on 29 March is now UK law.
Please consider joining Ready for Brexit today (the advisory service I co-founded in June). It is effectively the one-stop shop requested by the CBI, and provides curated links to all the areas where businesses may need to prepare for Brexit.