Trade talks between the EU and the UK have struggled over the past few weeks, increasing the prospect that Britain departs the bloc without a deal and that businesses face an extreme shock when the divorce takes effect.
Such a scenario would deepen the economic pain inflicted by the COVID-19 pandemic, with companies reeling from the damage of the UK lockdown and the economy heading for its deepest recession in centuries. Unemployment has surged and British Prime Minister Boris Johnson is caught between trying to revive businesses and avoiding a deadly second spike of the coronavirus.
All the while, negotiations with the EU for a comprehensive economic agreement to replace the UK’s decades-long membership in the bloc have stalled badly, with both sides unwilling to budge on fundamental issues. The standoff pushes both parties toward a no-deal Brexit that would place a serious strain on companies.
Illustration: Louise Ting
“For businesses, jobs and economic confidence in this most challenging of years, this would be a shocking outcome,” Confederation of British Industry director-general Carolyn Fairbairn said. “For many firms fighting to keep their heads above water through the crisis, the idea of preparing for a chaotic change in EU trading relations in seven months is beyond them.”
The impasse in the UK-EU trade talks comes down to a basic disagreement. In exchange for a zero-tariff, zero-quota deal, the EU wants the UK to sign up to provisions that would prevent Britain from undercutting it in areas such as environmental and labor regulations, and state aid — the so-called level playing field. Downing Street refuses, seeing the demand as inconsistent with the principle of sovereignty that was core to the Brexit vote.
If sufficient progress in the talks is not made this month, the UK has said that it would break off negotiations and tell businesses to prepare for a no-deal split. Johnson has repeatedly categorically ruled out delaying the final stage of Brexit beyond the end of this year.
Here is what that no-deal outcome would mean for businesses in Britain:
MANUFACTURING
Japanese automaker Nissan, which employs 6,000 people at a plant in the Brexit-supporting town of Sunderland, has said that its factory would not be sustainable because vehicle exports to the bloc would face a tariff of 10 percent.
“The Brexit issue does hang like a pall over the industry,” Society of Motor Manufacturers and Traders CEO Mike Hawes said. “When you’re in a high-volume, low-margin business, the 10 percent tariff removes any chance of competitiveness.”
Industrial heavyweights such as German automaker BMW, which has a plant in Oxford, and aviation giant Airbus, which employs 13,500 people in the UK and makes airplane wings in Wales, also face the prospect of border disruption snarling up their highly efficient, just-in-time production lines.
Trucks arriving at the UK-EU border without the correct paperwork would be stopped, risking lengthy lines and halting factories. Moreover, Britain has an acute shortage of customs agents to keep trade flowing.
“Airbus remains concerned by the potential for a ‘no deal’ in December this year,” spokesman Ian Middleton said. “The shape of the future EU-UK relationship remains of critical importance for Airbus and its employees.”
Another problem is an increased regulatory burden. Without a trade deal that deems UK and EU product standards equivalent, manufacturers in Britain would need to seek approval from both British and European regulatory bodies if they wish to sell their product in both markets.
They might also have to set up separate production lines if they need to produce a good that meets two regulatory standards.
RETAIL
Grocers such as Tesco, Wm Morrison Supermarkets and Sainsbury’s would face a range of price increases. About 80 percent of food imported by supermarkets in the UK comes from the EU, according to the British Retail Consortium, and much of this would become subject to tariffs.
For example, olives, mushrooms and satsumas would face a 16 percent levy, and some European wines would have a tariff of £17 (US$21.33) per half-liter.
There would also be higher costs due to new non-tariff barriers that would apply whether there is a UK-EU trade deal or not. Outside the EU’s customs union, traders in the UK would be required to file customs declarations, which cost from £16 to £56 per product line, the consortium said.
Given that retailers operate on slim margins, higher costs are likely to be passed on to consumers, it added.
“The government’s priority for the food supply chain now should be to ensure a trade deal with the EU by next year,” Sainsbury’s spokeswoman Victoria Durman said in a statement. “We have detailed plans in place to keep stores operating normally and shelves full, whatever the Brexit outcome.”
AGRICULTURE
The UK’s farming industry sends about two-thirds of its exports to the EU, which would be subject to steep tariffs under a no-deal Brexit. They would be in excess of 40 percent for cuts of beef and lamb, and 15 percent for pork, making British goods less attractive for EU buyers and flooding the UK domestic market with the surplus.
“A no-deal would be devastating,” National Sheep Association policy officer Ellie Phipps said. “We need an export market.”
Farmers would also face new, non-tariff barriers, regardless of whether a trade deal is signed. These include export health certificates, a form costing £100 that is required to export products of animal origin into the EU.
These obstacles would “cause delays which are very undesirable for perishable products,” British Meat Processors Association trade policy advisor Peter Hardwick said, adding that they would also “take away some of the key competitive advantages the UK currently enjoys in its trade with the EU.”
SERVICES
Services make up 80 percent of the UK economy — comprising a breadth of activities, including IT, law, accountancy, insurance, consulting, architecture and hairdressing — and Brexit would hurt the ability of British firms to do business in the EU, its largest export market for services.
For example, without an agreement, professional qualifications in regulated industries such as law and architecture would not be recognized, meaning that British nationals could not provide that service in an EU member state unless they had been authorized to do so.
The end of the free movement of people between the UK and EU without any further agreement would also be costly, potentially requiring companies to pay for visas for business travel. That could hurt Britain’s ability to bring in workers to plug shortages in its labor market, particularly in the National Health Service, agriculture and hospitality.
“The real trouble will come for smaller service providers,” said Anand Menon, director of the UK in a Changing Europe, a think tank that studies UK-EU relations. “If you’re a massive bank, you’ve got the resources to prepare and make contingency plans to set up a subsidiary inside the EU. If you’re a small firm, you might not have the resources to do that.”
FINANCE
Ever since the Brexit referendum in 2016, global banks such as HSBC and JPMorgan Chase have planned for the possibility of losing access to the EU’s single market. Major financial institutions have set up offices and moved staff to cities such as Frankfurt, Paris, Dublin and elsewhere in the bloc to ensure that operations are not disrupted.
Still, they are pressing for the EU and UK to allow as many trades and businesses as possible to remain in Britain. Those so-called equivalence decisions for trading desks, markets and trillions of dollars’ worth of derivatives have yet to be reached. Without them, more jobs and capital could flow to the continent.
If equivalence is not granted, “it divides the world into an increasing number of regions at a time where banks want to have liquidity and capital available to deploy where they need it around the world,” said Peter Bevan, a financial regulation partner at law firm Linklaters in London. “It brings the need for operational change, the expense of building out your European legal vehicles.”
PHARMACEUTICALS
For pharmaceutical giants such as AstraZeneca and GlaxoSmithKline, a key Brexit concern is regulation. The UK is hoping for some form of mutual recognition of testing when it comes to drugs and devices, but discussions with the EU so far have made little progress on this front.
“The most likely scenario today is that there is not full regulatory alignment,” said Hugo Fry, managing director of French drug maker Sanofi’s UK business.
The bigger issue is making sure that trade routes are uninterrupted so that companies do not have to stockpile unendingly, Fry added.
The other major concern is whether the UK would become less attractive to scientists and investors in the sector. Industry groups have been lobbying hard for Britain to remain a participant in programs like Horizon 2020, which provides funding for research and innovation.
ENERGY
The UK imports about 10 percent of its power from continental Europe. After Brexit, British electricity systems would be decoupled from the European Internal Energy Market, but that does not mean that gas and power would stop flowing.
However, trading could become less efficient and longer-term supply less certain, increasing costs for consumers. This would be especially true in times of unplanned supply interruptions or extreme weather.
NORTHERN IRELAND
Businesses trading with and within Northern Ireland would face added headaches from a no-deal Brexit. Tariffs would be payable on goods crossing from the rest of the UK to Northern Ireland, to be reclaimed later through a rebate system if the product remained in Northern Ireland and did not cross the border into the Republic of Ireland, which is in the EU.
Products of animal origin crossing from elsewhere in the UK to Northern Ireland — such as a beef lasagna or chicken pie — would require export health certificates and would be subject to health inspections at ports such as Belfast and Larne.
Goods trucks taking food to supermarkets regularly carry hundreds of product lines that would be hit by the new red tape, a potentially existential threat for some operations, Northern Ireland Retail Consortium director Aodhan Connolly said.
“It is a make-or-break issue for Northern Ireland retailers,” he said. “‘We’re looking at business models becoming unviable.”
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