Boris Johnson will have to disappoint someone in 2020 as the UK finally leaves the EU

Finally, after three and a half years, the UK has reached “the end of the beginning” with Brexit, in Winston Churchill’s famous phrase.

Since the referendum, its leaders have consistently refused to confront the real choices that have to be made over what type of Brexit it wants to have:

  • In June 2016, then premier David Cameron walked away from the issue by resigning immediately after the referendum
  • His successor, Theresa May, followed this by setting out her ’red lines’, as shown in the chart. But she never said what she did want, effectively leaving No Deal as the default option
  • On the Labour side, Jeremy Corbyn indulged in the same game-playing, even refusing to say which way he would vote in a new referendum

As a result, the myth grew up that there was a wonderful option called ‘WTO terms’, which would allow the UK to do exactly as it liked on standards, regulations, freedom of movement etc. Yet it would still have complete access to the EU27 market without any need for quotas or Customs barriers.

Unfortunately for all those who have indulged in such wishful thinking, 2020 is likely to provide an abrupt and painful wake-up call.  Once the UK has left the EU in January, Johnson will have to make major choices, and on a very tight timescale.

The government’s key mistake all along was to table its Article 50 notification to leave without having first decided what it wanted from the new relationship with the EU27. And by dismissing the role of “experts” and key Brussels negotiators such as Sir Ivan Rogers, it also never properly understood what might be possible from an EU27 perspective.

Now the need for choices is going to become apparent, as the Transition Agreement only runs to December 2020, and any request for an extension has to be agreed by June.  Johnson has said he will not ask for an extension, and so this narrows the choices:

  • France has said the UK can leave with a ”unique” trade deal encompassing most of the current arrangements, if the UK agrees to maintain today’s standards and regulations into the future. In effect, this would be a Norway-type deal, where the UK becomes a rule-taker, without any say in how the rules are made
  • The alternative is to leave with No Deal, as anyone with experience of trade deals knows that it is simply impossible to square all the necessary circles involved in reaching a new deal in less than 5 – 7 years. The reason is simply that trade deals create winners and losers, and the losers always complain, very loudly

One likely example of a deal-breaker is fisheries policy.

Fishing accounts for just 0.1% of the UK economy, and employs only 24k people out of a total workforce of 33m. And contrary to popular belief, not only have foreign boats been fishing in UK waters for centuries, but 70% of the fish eaten in the UK is imported (cod etc) – with 80% of fish caught by UK fishermen  exported (herring, shellfish etc).

But it was core to the Leave campaign, and Johnson is likely to find it hard to ignore – even if that means fishermen end up facing quotas, tariffs, Customs barriers and a collapse of conservation policies.

Johnson is happy to break promises, as he did over N Ireland when agreeing to the EU27’s terms for the Withdrawal Agreement. But it would be rather soon after the election to break his promise over fishing or, indeed, his promise not to extend the Transition period.

As a result, Theresa May’s legacy will finally be fulfilled, as No Deal remains the default option.  And at that point, the UK will learn very painfully that you really cannot “have your cake and eat it”, despite Johnson’s claims to the contrary.

Businesses thrilled by Brexit uncertainty: “It’s exhilarating” says small business owner

With the European Commission saying that a No Deal is now “likely“, small businesses across the UK and EU27 have begun to look forward to the opportunities that it will create, as this 1 April report from Ready for Brexit suggests.

Businesses across Europe are thrilled by the uncertainty of Brexit. “We’re absolutely loving it” said Colin Potts, whose Wolverhampton based company exports wall brackets. His wife and business partner Brenda agrees. “Because we mostly export to the EU, I’ve never had to fill in a customs declaration before – it’s something new and you know what they say, a change is as good as a rest,” she said.

In the event of a No Deal Brexit, UK/EU27 businesses will need to fill in an extra 400 million customs declarations a year, but that doesn’t faze Brenda. “Wow, 400 million! It’s exhilarating to be part of something that big”, she gushed. “As a small business owner, I have plenty of leisure time and am often bored. This is what I am looking for to fill those long empty hours.

Pete Micklethwaite, who owns a road haulage company in Doncaster is also excited. “Will there be a deal, won’t there – it’s creating a real buzz. If there’s no deal our drivers will need three separate driving licences for some of our longer jobs and looking on the bright side, you can never have too many photo IDs.

The EU nationals in Pete’s team aren’t missing out on the excitement either, he explains. “One of our longest serving drivers, Jim, who’s from Romania, asked me the other day whether if he sets off on a job on the continent he’ll be allowed back in. Some people take up gambling for that kind of thing but our lads just need to come to work, if they’ve still got jobs!

“Some of the doom merchants were saying that we needed to be ready for a so-called cliff edge on March 29, but now we’ve got at least two weeks longer than that,” mused Brenda Potts. “These naysayers have obviously never run a small business and don’t understand the grinding boredom of being able to plan ahead.

The opportunities of a No Deal Brexit aren’t passing haulier Pete by either. “A guy I know got involved with a ferry company with no ferries and still landed some big contracts. When he told me about it I had to check the date to make sure it wasn’t an April fool but it wasn’t. Now that’s entrepreneur-ship.”

 

If  you’re worried about the impact of a No Deal Brexit on your business, download the Ready for Brexit No Deal Survival Kit

Is your business Ready for Brexit?

Time is running out for the UK government to agree a Brexit deal with Europe.  As my new analysis for ICIS Chemical Business highlights, companies need to move quickly to prepare for the “No Deal” scenario

Legendary England footballer Gary Lineker best summarised the general sense of disbelief over the state of 
the Brexit negotiations when tweeting in July:

“A wealthy nation putting itself in a position where it has to stockpile food, medicine, etc., in times of peace is utter madness. What Are We Doing?”

Lineker’s concern was confirmed last month by the head of the British Chambers of Commerce who warned that “precision is what is required” regarding the Brexit process, rather than “declaratory statements”.

Yet today, with less than six months to go before the UK officially leaves the EU, businesses still do not know if the UK will simply crash out with no deal on 29 March, with no transition agreement in place. This is almost unbelievable, given that the EU is the UK’s largest trading partner, taking 44% (£274bn) of UK exports in 2017, and provides 53% (£341bn) of all UK imports, according to a July report from the House of Commons library.

One problem is that the cabinet only finally agreed on its chosen option for the new EU relationship in August. In turn, this means the civil service is only now starting to be able to advise sector groups, trade associations and other experts on the key issues involved.

A second problem is that the new Brexit department had to be created virtually overnight after the June 2016 referendum, and the average age of its staff is just 31 years. Many have no personal experience of the enormously complex issues involved.

CHEMICALS IN NO-MAN’S LAND
Chemical companies are, of course, right in the middle of this no-man’s-land. They depend on frictionless movements of raw materials and intermediates between their various EU sites, and they are heavily integrated into just-in-time supply chains with key customers such as the auto and food industries.

The UK government has recently warned of possible major disruption if there is a No Deal Brexit, and the Key UK Risks chart highlights the key economic and business risks that lie ahead.

The current gap between the UK and EU positions was emphasised in chief EU negotiator Michel Barnier’s recent evidence to the UK Parliament:

  • He confirmed that the EU did not believe key proposals in the Chequers Plan for the Irish border and other super-critical issues can either work or be agreed
  • Instead, Barnier proposed the idea of a “Canada plus plus” deal in the form of a Free Trade Agreement covering goods (but not services), plus customs cooperation, plus participation in health, research, Erasmus, aviation and internal security
  • He also emphasised that the UK’s £39bn payment was a divorce settlement covering past UK commitments, not an up-front payment for a good trade agreement

THREE MAIN SCENARIOS AHEAD

‘May achieves a withdrawal agreement’
The UK and EU will both lose from a No Deal Brexit and so in principle they could simply “fudge” the trade issue for future discussion during the transition period until December 2020. But although both sides emphasise that 80% of the withdrawal agreement is now agreed, this only highlights that the most difficult 20% still lies ahead – issues such as Ireland, immigration and EU citizen rights, and future trade relations.

‘Markets cause a panic on Tory benches’
What happens if May does stumble at this point and fails either to gain an agreement with the EU27 or to get it safely through the Cabinet, Tory party and Parliament? As the Risks chart shows, this might well lead to financial market pressure on the pound and interest rates. This would also represent more bad news for chemical companies. If even 20 Tory Eurosceptics vote against a deal, then May would have to rely on opposition party votes, and their support looks unlikely given Labour’s “six tests” for approving any deal.

‘No deal’ scenario
Exchange rate volatility could become a critical issue for companies and investors if this scenario is reached, with the pound possibly falling towards parity with the US dollar and the euro, causing interest rates to rise. Foreign investors currently own 28% of the government’s £1.9tn debt, and concern over the value of the pound could lead some to reduce their holdings of government bonds.The Brexit Directory chart from Ready for Brexit shows the scale of the risks involved.  It highlights how Brexit potentially involves almost every aspect of business – from Customs & Tariffs through Finance and Legal issues, to Services & Employment and the Supply Chain.

Of course, many major companies have already spent months and millions of euros in preparing detailed contingency plans. Some are already stockpiling key raw materials and products, and revising relevant contract clauses.

But smaller businesses do not have these resources. Surveys show that only one in seven have done any forward planning for a No Deal Brexit, and official government guidance for a No Deal has only just begun to appear. In turn, this creates a clear risk of widescale disruption, as today’s highly integrated supply chains are only as strong as their weakest link. The lack of just one raw material can stop a production line.

As Gary Lineker says, it is hard to believe this is happening. But it is, and so far “declaratory statements” rather than precise detail continue to dominate the process.

It is also easy to forget that a No Deal Brexit will not just impact the UK. US and EU-based businesses involved in a supply chain that involves a UK company face a clear risk of disruption.

This is why I have helped to launch Ready for Brexit with other industry colleagues. As the Scout motto reminds us, to ‘Be Prepared’ could be critical for business survival if a No Deal Brexit does occur.

 

Please click here to visit Ready for Brexit, and click here to download the full ICB analysis.

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