Chapter 5
IN THIS CHAPTER
Setting Brexit in context by looking at UK trade around the world
Scoping out the big-picture issues for importing and exporting
Assessing the short-term changes in importing and exporting after Brexit
Preparing for longer-term changes in importing and exporting to and from the EU
Going beyond the EU for trading opportunities
Back in the oh-so-innocent days of July 2017 — at a time when the United Kingdom (UK) had barely begun formal negotiations with the European Union (EU) on a Brexit withdrawal agreement — the UK’s international trade secretary, Liam Fox, gave an interview to BBC Radio 4’s Today program. In that interview, he uttered the words, “The free trade agreement that we will have to do with the European Union should be one of the easiest in human history.”
One of the easiest in human history. Let that prediction sink in for a moment. Given that the UK–EU negotiations on the withdrawal agreement were anything but easy (and remembering that the withdrawal agreement only covers the UK’s exit from the EU, not its long-term trading relationship — see Chapter 3), Fox’s words seem a little too … optimistic.
Given that the UK Parliament didn’t even agree on what sort of Brexit it wanted, Fox’s words are bordering on delusional. (To borrow a sentiment from When Harry Met Sally … , “I’ll have what he’s having!”) As we well know, nothing about Brexit is easy.
In reality, agreeing on a trade deal is likely to be a lengthy, complicated process, and we don’t yet know the full implications of any such trade deal for British (and European) businesses. Therefore, in this chapter, I lay out where things stand for now, and look at how things may pan out in the short and long term for UK businesses that import or export.
Naturally, most of this chapter focuses on importing and exporting between the UK and the EU. But before I get to that subject, I thought it might be helpful to put UK–EU trade in context of the broader UK trading picture.
According to figures from the Office for National Statistics (ONS):
As for the split between the EU and rest of the world, according to 2017 ONS figures, UK–EU trade accounted for £619.3 billion (up 11.5 percent), while UK trade with non-EU countries totaled £639.8 billion (up 8.6 percent).
Who are the UK’s biggest trading partners? According to the ONS, the UK’s top ten trading partners during 2017 were:
A lot of European countries are on that list! However, it’s important to note that the UK has a trade surplus with the United States. That means the UK currently exports more to the U.S. than it imports, making the United States a key market for UK businesses. The UK also has a trade surplus with Ireland and Switzerland, while it has trade deficits (meaning the UK imports more than it exports) with Germany, the Netherlands, China, Spain, Belgium, and Italy. The UK has a balanced trade account with France.
On a very broad scale, what does Brexit mean for UK imports and exports?
After the UK leaves the EU, their future trading relationship will depend on what sort of trade agreement the UK strikes with the EU. (See the sidebar “How do trade agreements work?”)
That’s if the UK manages to strike a trade deal with the EU at all — given how the withdrawal negotiations have progressed, and the fact that everyone has different ideas on the UK’s ideal relationship with Europe, you probably shouldn’t take it for granted that there’ll ever be a formal free-trade agreement between the UK and the EU.
After the UK leaves the EU, the UK will begin negotiating a trade agreement with the EU — while also negotiating new trade deals with other trading partners around the world. This is necessary because the UK will no longer be covered by EU trade agreements with countries around the world, so the UK will have to renegotiate or “roll over” existing trade deals with its non-EU partners, if it wants to continue trading on preferential terms.
If the UK manages to agree on some sort of withdrawal deal with the EU (whether it’s Theresa May’s deal, as outlined in Chapter 3, or another, freshly negotiated withdrawal deal), then UK–EU trade will continue as normal for the duration of any agreed-upon transition period. The idea is that both parties will start to negotiate a longer-term trade agreement during that transition period.
If no new trade deal is negotiated during the transition period, then the UK will trade with the EU under World Trade Organization (WTO) rules until a trade deal is agreed upon. (See Chapter 4 for more on how the WTO works.)
Likewise, if the UK exits the EU without securing a withdrawal agreement, and without any form of transition period, then WTO rules would come into force right away. Many people have portrayed trading under WTO rules as a worst-case scenario, but WTO provides a baseline for trade between countries. Trading under WTO rules would work, but it wouldn’t be as advantageous as a specially negotiated free-trade deal (or EU membership).
Tariffs (see the sidebar “How do trade agreements work?”) increase the costs of importing and exporting goods. Yet, in my opinion, we’re unlikely to see very steep tariffs being applied.
The fact that the UK refused to adopt the euro puts UK businesses in a very different position from their EU counterparts, with the ability to benefit from currency swings (compared to, say, a German company trading with a French company, where both are operating within the eurozone).
UK businesses are already used to coping with exchange rate swings between the pound and the euro. If they also have to cope with new tariffs, will that send companies bust? Probably not, at least not in profitable, well-run businesses that are operating on healthy margins. (The trouble, of course, comes for businesses who are operating on very tight margins. Also, importers, who already see their costs rise when the pound is weak, may struggle more with the introduction of tariffs.)
How helpful this would be in reality remains to be seen. (Would a business realistically switch from importing goods from Italy to importing goods from, say, Zimbabwe overnight to avoid paying customs duties? Not likely.) It’s also unclear whether the UK would even be able to introduce tariffs on EU goods under WTO rules, while there is parity between EU and UK laws (parity on laws usually prevents countries from penalizing one another with tariffs, according to the WTO). And, if the UK did introduce tariffs on EU goods, would the EU respond with equal (or potentially higher) tariffs on UK goods? Probably. So many unknowns, so little time… .
I don’t mean to downplay the impact of tariffs on businesses. Instead, I think it’s important to keep the issue of tariffs in perspective.
In a word, no. British businesses won’t lose access to EU countries as a result of Brexit. Read on to find out why.
If the UK government is able to pass a withdrawal agreement, then, when the UK leaves the EU, it would enter a transition period. Under May’s withdrawal deal, this transition period would last until the end of December 2020, and could potentially be extended until 2022.
During the course of any transition period, trading terms between the UK and EU would remain the same, meaning frictionless movement of goods with no tariffs. Both sides would use this transition period to start negotiations on a formal trade agreement, ideally a free-trade agreement (see the sidebar “How do trade agreements work?”).
However, if the UK leaves the EU without approving a withdrawal agreement (known as no-deal Brexit), then there would be no transitional period, and trade between the UK and EU would be covered by WTO rules, until a new trade agreement is reached. The UK and the EU are both members of the WTO, which allows them to trade under WTO rules until a free-trade agreement is negotiated.
Some people have suggested that if the UK failed to approve a withdrawal deal, the EU would play “hardball” and impose tough tariffs to penalize the UK government. But that looks like scaremongering. (In fact, it’s the UK government that’s been threatening sanctions on EU goods.) Under WTO rules, countries are not allowed to discriminate against trading partners where their regulations are in tandem.
With the EU accounting for more than half of the UK’s international trade, there’s no doubt that Europe is a key market for British businesses.
Europe is geographically close, it’s relatively easy to transport goods to and from, and it’s culturally close to the UK in terms of the goods consumed. Therefore, access to the EU single market (see Chapter 1) is vital for UK businesses.
It’s true that tariffs may come into play (depending on what’s agreed between the UK and the EU), and that importing and exporting to and from Europe may become more complicated, especially in the unlikely event of a no-deal Brexit (see the section “Planning for Changes in UK–EU Imports and Exports”). There may be challenges, additional costs, time delays and no doubt political friction, but the UK could not be “frozen out” of EU markets — and vice versa.
Many of the biggest players in Europe have a trade surplus with the UK. Germany, Spain, Italy, Belgium, the Netherlands — all of these countries export more to the UK than they import from the UK. In other words, it’s in Europe’s interests for UK–EU trade to continue as smoothly as possible after Brexit, just as it’s in the interests of the UK.
In February 2019, German newspaper Welt am Sonntag reported that Germany would be hard hit if the UK crashed out of the EU without securing a withdrawal agreement (thereby immediately forcing the UK and EU to trade under WTO rules instead of having a softer transition period).
The paper cited a joint study by the Halle Institute for Economic Research and the Martin Luther University of Halle-Wittenberg, which found that as many as 100,000 German jobs could be threatened by a hard, no-deal Brexit. Workers in the German car industry would likely take the biggest hit.
The Republic of Ireland would also be hit hard if trade between the UK and the EU became more difficult. At the time of writing, Ireland exports around 250,000 tons of beef a year into the UK — that’s almost half of all Irish beef production.
Until we know under what sort of withdrawal terms the UK will exit the EU, and until we know how the longer-term trade negotiations shake out between the two parties, there’s little certainty for companies that import or export to and from the EU. But this section covers what we do know… .
The UK government is looking for tariff-free access to the EU single market, coupled with complete freedom to negotiate free-trade deals with other countries around the world. (As the saying goes, we want to “have our cake and eat it, too!”)
But this won’t be an easy thing to secure (turn back to Chapter 4 to read about the complexities surrounding the UK and EU’s future relationship). Anyone who implies otherwise is either deliberately telling fibs or is unaware of the massive complexities involved in negotiating trade agreements.
Let’s take the commonly quoted examples of chlorinated chicken from the United States and hormone-treated beef from Australia, both of which are outlawed under EU laws. At the time of writing, UK laws are effectively the same as EU laws when it comes to food health and safety. So, after Brexit, if the UK changed its food standards to allow the import of chlorinated chicken from the United States and hormone-treated beef from Australia, this would go against current EU regulations — potentially limiting the UK’s ability to strike a free-trade deal with the EU. In theory, it’s possible that the UK could agree on a dual system of regulation with the EU, but it seems unlikely.
Therefore, although the UK’s starting point is tariff-free trade with Europe, that may not be where we end up. If tariffs are introduced (either as a result of a no-deal Brexit and WTO rules, or as part of a future trade agreement), this will make British products more expensive to EU customers and EU imports more expensive for British businesses. Businesses will need to prepare for this eventuality and maximize their margins wherever possible.
www.gov.uk/trade-tariff
: This website is a general starting point.www.trade-tariff.service.gov.uk/trade-tariff/sections
: Here you can look up tariff rates by product category.www.gov.uk/guidance/check-temporary-rates-of-customs-duty-on-imports-after-eu-exit
: Here you can find advice on the temporary tariff regime that will apply in the event of a no-deal Brexit.Regardless of whether the UK and the EU agree on a withdrawal deal and then a trade arrangement, there may still be an increase in import and export paperwork and costs for UK and European companies.
They would also need to:
In the event of a no-deal Brexit, there have been suggestions that the potential £39 billion saved by not paying the “divorce bill” (see Chapter 3) could be used to help UK companies cope with these higher costs. However, people have also proposed lots of other uses for that money, including more funding for the National Health Service (NHS). Not paying the divorce bill isn’t a “magic bullet” to solve any and all Brexit-related costs. Besides, the EU has said it would expect the divorce bill to be paid before it enters into trade negotiations with the UK.
We know that Brexit is likely to impact customs duties (see the sidebar “How do trade agreements work?”) and import VAT.
Although the UK is a member of the EU, customs duties don’t apply on goods arriving from the EU. Likewise, import VAT is effectively suspended on goods arriving from the EU, meaning you don’t have to cough up for import VAT as soon as the goods arrive in the UK. Instead, you charge your end customer VAT and roll that VAT in with your annual VAT return.
After the UK leaves the EU, however, things get more complicated, particularly in the event of a no-deal Brexit. In the following sections, I walk you through the different scenarios.
Broadly speaking, goods being traded between the UK and the EU would be subject to the same rules as non-EU countries, which means customs and excise duties will apply immediately. Also, import VAT would technically be payable right away when the goods arrive in the UK, which would plunge many companies into a cash-flow nightmare. The government has, therefore, pledged to help businesses by implementing “postponed accounting,” which means VAT on imported goods can be accounted for in the annual tax return instead of paying it as soon as the goods arrive in the UK.
Customs warehouses can be used to delay tax liability on imports. These warehouses are authorized by HMRC to store goods and suspend customs duty and import VAT until the goods leave the warehouse. Visit www.gov.uk/government/publications/notice-3001-special-procedures-for-the-union-customs-code/annex-a
to read more about customs warehouses.
Under this scenario, in the short term at least, nothing will change. Customs duty will not be payable on goods moving between the UK and the EU for the duration of the transition period. Likewise, VAT would continue to be suspended. What happens after the end of the transition period will depend on what’s agreed upon during trade negotiations.
Ultimately, even if the UK exits the EU with a withdrawal deal and negotiates a trade agreement with the EU, the rules for customs duties and VAT on imported goods may change. One thing’s for sure: The closer the UK’s future trade relationship with the EU, the easier it’ll be to manage VAT.
The UK is a service-oriented country. One commonly quoted statistic is that services make up 80 percent of the UK’s economy. What’s more, according to a study by the Tony Blair Institute for Global Change, services have driven three-fifths of the increase in UK exports over the last 20 years. If it weren’t for Brexit-related disruption, the study claims exports of UK services would’ve outstripped goods exports within five years.
So, why has this chapter talked mainly about importing and exporting goods rather than services? It’s because services trade agreements are notoriously complicated to negotiate.
The truth is, there’s no one-size-fits-all approach for trade agreements when it comes to services; some trade agreements barely cover services at all, while others only cover certain sectors. The recent EU–Canada trade deal, for instance, doesn’t allow Canadian financial services companies to sell their services in the EU.
So, the ability of UK service companies to easily do business in the EU will depend on what the two parties agree on as part of the trade negotiations.
Critical to the smooth trading of services between the UK and EU is the notion of passporting, which allows UK firms to do business in the EU without having to gain authorization from each relevant member state. In other words, it allows UK companies to trade in the EU with much less red tape. If the UK leaves the EU in an orderly way, with a withdrawal agreement and transition period, these passporting rights will continue to apply in the short term.
As head of the Commonwealth, in theory the UK has access to all Commonwealth trading markets. The population of the Commonwealth is 2.4 billion (EU population: 512 million), and 60 percent of the Commonwealth population are 29 years of age or under — which has led many commentators to point to the Commonwealth as a great opportunity for UK exporters. In addition, in 2017, the combined value of Commonwealth economies was $10.4 trillion and this is expected to increase to $13 trillion in 2020 (not to be sneezed at when you consider that the UK economy is valued at around $2.8 trillion).
India has the largest population in the Commonwealth, at around 1.2 billion people, so this potentially represents a significant market for UK businesses. However, India is a notoriously tough cookie when it comes to negotiating trade agreements.
This points to a wider issue in negotiating trade deals. Namely, are we likely to see more countries pushing for greater access to the UK job market in return for a trade deal? And, if so, is the UK likely to bend to such demands? (After all, many people point out that negotiating as part of a bloc, which is what the UK did as a member of the EU, affords much more negotiating power than negotiating as a standalone country.) And how would such a move go down with British voters, a large number of whom voted to end free movement from Europe?
Read more about the UK’s trade negotiations with the rest of the world in Chapter 4.