When the United Kingdom (UK) officially implemented its Brexit plan and withdrew from the European Union (EU) on January 31, 2020, the UK and EU entered into an eleven-month “transition” period, the main purpose of which was to negotiate a free trade agreement (FTA) between the two parties. Since then, however, trade talks have produced little progress, and what was once considered unlikely—a “no-deal Brexit”—is now the most probable outcome.
For businesses and multinationals doing business in or with the UK, a no-deal Brexit scenario would create an avalanche of cascading complications.
During the transition period, for example, the UK has been able to trade freely under the EU’s Single Market and Customs Union rules. But if a trade deal fails to materialize, that arrangement would come to a screeching halt. Goods traveling between the UK and EU will suddenly be subject to border checks, extra charges, and tariffs. Ports could be overwhelmed and potentially blocked; airlines could be grounded; shortages of food, medicine, fuel, and other vital goods could become chronic; business supply chains could be severely disrupted; and banks and financial firms could be barred from doing business directly with EU customers.
In other words, if a post-Brexit FTA deal cannot be reached, most of the benefits of trading freely with the EU would disappear on December 31, 2020, and the consequences of going it alone would become the UK’s rocky new reality.
Potential Brexit outcomes
There are a few other possible outcomes, but each grows less likely by the day.
The Brexit transition period could be extended for another year or two—but British Prime Minister Boris Johnson has so far refused to consider an extension, even to accommodate difficulties presented by the coronavirus pandemic.
The UK and EU could also surprise the world and reach a negotiated deal. But the clock is ticking. Indeed, Prime Minister Johnson’s do-or-die deadline for a deal was actually October 15, which came and went without a deal. The British government made a clear statement that “the talks were over” when the Prime Minister warned businesses to prepare for a no-deal scenario when the EU Transition Agreement concludes by the end of this year. Unless circumstances radically change, the UK will start trading with the EU on World Trade Organization (WTO) terms beginning January 1, 2021.
With mere weeks to go before the transition deadline, the UK and EU are still leagues apart on creating a “level playing field” for trade, fishing rights, Northern Ireland, and many other aspects of a potential deal, making significant progress unlikely.
A new tariff regime: The UKGT
Of course, one of the main goals of Brexit was to give the UK a clean slate to renegotiate its trade relationships around the world unencumbered by its current obligations to the EU. Toward that end, in May the UK announced its own new tariff regime—the UK Global Tariff (UKGT)—which will apply to goods imported into the UK after January 1, 2021.
The UKGT provides a partial roadmap of sorts for future trade with the UK, whether or not an FTA can be agreed upon by the end of the year. In theory, the UKGT reduces and simplifies tariffs on thousands of goods entering the UK and removes tariffs entirely on certain raw goods and other products deemed beneficial to UK businesses.
On the other hand, if a no-deal Brexit transpires, many goods that are now traded duty-free between the UK and EU would actually be subject to higher tariffs. The new tariff regime could not only raise the cost of certain goods for UK importers but also increase the administrative costs of complying with new rules and classification codes.
Regardless of the outcome, companies must be prepared to comply with a new UK tariff regime beginning January 1, 2021. Manually updating and maintaining new classification codes and duty rates is a time-intensive and risk-inducing process. Classification software remains the simplest and most effective way to ensure accurate product classifications and avoid incorrect duty payments.
Ongoing trade compliance and supply chain concerns
None of these concerns are new. Ever since Brexit was approved in 2016, it has been the source of an alarming amount of uncertainty, particularly in the business community. Afraid of the consequences, many multinationals—e.g., Panasonic, Sony, Honda, Dyson, Barclay’s, HSBC—have already moved their European headquarters out of the UK or taken measures to limit their risk exposure.
Now, as the actual Brexit deadline approaches, thousands of companies that have been hoping for a workable FTA, or don’t have the resources to relocate, must quickly assess how a no-deal Brexit will affect them and what to do about it.
Many UK industries (e.g., in automotive, technology, retail, manufacturing, and agriculture) are deeply intertwined with the EU and have been for decades. Taken as a whole, the EU is the UK’s largest trading partner, accounting for 43% of all UK exports and 51% of all UK imports in 2019. Consequently, companies with EU-centric supply chains may have to find alternative suppliers and/or establish new trade routes through different countries. Companies on either side of the English Channel that wish to continue doing business together (or have no other choice) will have to navigate a veritable minefield of ever-changing regulations and logistical challenges.
Although the UK successfully secured its first independent FTA with Japan, companies shouldn’t assume other FTAs will be negotiated just as easily. Considering that the average trade agreement takes two to three years to negotiate, it could be years or even decades before the UK’s trade relations stabilize.
In the meantime, the impact of Brexit on global trade over the next one to three years is likely to result in:
- Higher prices for many goods and services
- Increased import/export costs
- Higher taxes (cross-border trade, transfer pricing, direct/indirect taxes)
- Border and customs disputes
- Supply chain shortages and disruptions
- Shipping delays or stoppages
- Business resource allocation issues
- Continuous business challenges of all kinds
Meeting the Brexit challenge
Given the ongoing uncertainty and fluidity of the UK’s global trade situation post-Brexit, corporate leaders are understandably concerned about their ability to manage their supply chains through what amounts to an ongoing instability crisis.
In fact, there is really only one way for trade compliance professionals to track and manage all the variables involved in the post-Brexit global trade landscape, and that’s through automated software solutions specifically designed and programmed to do most of the data-intensive heavy lifting.
This kind of technological assistance is key because it allows companies to take a proactive, forward-looking approach to trade compliance and supply chain management. Without the proper technological tools, companies can get caught in a reactive spiral that leaves them perpetually unprepared.
Companies that use Thomson Reuters ONESOURCE Global Trade software can:
- Track the origin of goods through multiple channels
- Stay up-to-date on tariff rates, sanctions, controls, and rules for 210 countries
- Run “what-if” scenarios to identify risks and quantify savings
- Accelerate import/export processes
- Automate customs declarations and other routine tasks
- Track and monitor supply chains in real time
- Calculate trade compliance costs and risks
- Maintain a dashboard of key performance indicators
- Make more informed decisions overall
Even in the best of times, managing a modern supply chain without the right technological tools is next to impossible. If a no-deal Brexit goes through, the complexities will multiply exponentially as companies are forced to adapt. Furthermore, over the next few years the UK will be negotiating new trade deals all over the world, any one of which could have a dramatic impact on industries and companies trading with and within the UK.
For companies caught in the crossfire of Brexit, the best defense is comprehensive global trade management software that can take the guesswork out of compliance and give managers the tools they need to plan for the future.
Problems arising from Brexit can’t be ignored, but they can be managed—with the right technological solutions. Visit our Brexit resource hub to learn more.