Brexit And Its Implications For UK Businesses Brexit And Its Implications For UK Businesses By Stirling Murray On 29 March 2017, the UK government invoked Article 50, which formally states its intention to withdraw from the European Union. Unless all 28 EU members (including the UK) agree to an extension of negotiations, the UK will be fully extricated within two years from an economic and political union that has taken 45 years to create. Although many parliamentary bills will be required over the next 24 months, the main component of the UK government’s legislative program will be ‘The Great Repeal Bill,” which will transcribe every single EU law and regulation into UK domestic law. By March 2019, the UK government will have introduced new laws relating to agriculture, customs, fisheries, immigration, and trade in preparation for a post-EU existence. In parallel, trade negotiations with the European Union and a whole host of other countries will ensure that British industry is optimally positioned to benefit from the new trading conditions. The outcome of the trade negotiations will effectively determine the long-term success or failure of the UK’s exit from the European Union. In anticipation of a post-Brexit world, British importers and exporters are facing two main uncertainties. These are: How will business be affected by the formal trading relationship the UK has with the European Union and the rest of the world? And, what additional business costs will be incurred as a result of the UK leaving the European Union? EU Trade Relationship Scenarios The European Union is a single customs area, which means EU member firms incur no duties, quotas, tariffs, or trading barriers when doing business with another EU member firm. The EU has also established free or preferential trade agreements with most countries in the world and EU member firms incur no (or low) trading tariffs when importing or exporting goods from these countries. As soon as the UK government invokes Article 50, there will be pressure to negotiate new trade deals with the EU and every other country in the world. There are a number of potential models the UK could implement with each country, ranging from the basic World Trade Organization model of standard tariffs, through to the free movement of goods and services. Given its importance to UK trade, the most important agreement will be with the EU. At this point in time, there is little insight into what the final model will be. A full customs union with the EU will require free movement of peoples, and this is currently an unacceptable compromise for the UK government. Therefore, a looser trade relationship is likely and this will necessarily involve higher costs through trade tariffs and/or non-tariff costs in some industries resulting from increased customs bureaucracy between the UK and EU. Depending on the final agreement between the UK and EU, British companies may face increased costs on EU-related business from three main areas: tariffs, non-tariff barriers, and quotas. TARIFFS Given that cross-border trade tariffs have steadily fallen since the Second World War, the most likely impact on business will come from the additional administrative red tape due to cross-border customs checks and regulatory standards. However, there is a possibility that should no agreement be achieved on trade, tariffs and quota charges will be significant for some industries. This is unlikely to affect the beauty industry, and the UK’s regulatory body (CTPA) are confident that EU regulatory and compliance will stay as the accepted norm. The majority of trade relationship scenarios between the UK and European Union suggests there will be some form of free movement of goods and services between the two parties. In selected industries, there will be no duties paid on UK-EU business transactions. Again this is at the early stage but it is felt that this will apply to the import of beauty products. There is a clear distinction between agricultural and non-agricultural products for the EU, and firms exporting agricultural products to the EU will be most severely affected by Brexit should no trading agreement be reached. NON-TARIFF BARRIERS Much has been made of the potential costs of Brexit arising from non-tariff barriers to entry. In the single market, all goods and services can be transferred from one EU country to another with no controls or checks. In any other trade relationship model, customs checks will take place at country borders for a large selection of goods. Companies that have intra-EU supply chains may find that the paperwork associated with cross-border transfers of materials will be much greater. Non-tariff barriers can be grouped into two broad categories: border controls and regulatory differences. BORDER CONTROLS A leaked HMRC document (reported in many news outlets at the end of March 2017) predicted that prices could increase by as much as 24% if no trade agreement is achieved within the two-year negotiation period initiated by Article 50. This would be due to heightened bureaucracy and “burdensome procedures” at country borders and ports. This concern is overblown. Most goods entering the European Union do not require customs checks at borders. For the majority of goods including beauty, it is the responsibility of EU trading standards officials to ensure the existence of the CE (Conformité Européenne) kite mark before goods can be legally sold. Therefore, it is highly unlikely there will be major delays in processing goods at ports and border crossings. Furthermore, the UK already meets CE standards requirements in all its products, and since the Great Repeal Bill will enshrine EU law and standards in domestic legislation, there is no reason to expect additional costs (at least in the short term) from border controls. REGULATORY DIFFERENCES A much bigger issue for UK business is the potential regulatory drift that may occur as the UK implements changes to its own regulations, possibly in response to new trade deals with the US, China, or India. Irrespective of any simplification in UK standards, British exporters to the EU would still be forced to adhere to EU standards, and this may result in duplicate production lines that separately satisfy both sets of standards. Firms with capital constraints may also need to choose which market to focus on if regulatory standards diverge. For example, a possible scenario could be a medical device manufacturer opting for EU production instead of the UK because of high development and regulatory approval costs. Clearly, the UK could accept EU standards as sufficient for sale, but the issue becomes even more complex when other big trading partners are included. For example, if the UK accepts both US and EU regulatory standards as acceptable for sale in the domestic market, it does not necessarily follow that the US and EU will recognize UK standards for sale in their respective markets. Any divergence in regulation will result in costs to UK businesses and these may become more severe over time if regulatory systems diverge. It is not foreseen that the import of beauty products will suffer. The Total Costs of Brexit to British Businesses The total additional costs faced by British businesses in a post-Brexit environment will be entirely dependent on the trade deal the UK government reaches with the EU. Negotiations will take place along industry lines and the objective of both parties will be to come as close to a free trading agreement as is possible. British and EU businesses make extensive use of supply chains that span all European countries. A failure to reach a trade deal will adversely affect companies in both the UK and EU and so there is no objective reason why any party would not wish to succeed in the forthcoming negotiations. For the majority of industries, a unified market is optimal and we expect this to continue after Brexit. Even if an agreement is not reached for selected industries by March 2019, there is no reason a free trade agreement will not be in place for the majority of industries. CONCLUSIONS The UK is set to enter a two-year period of negotiations with the EU on a new trading relationship that will set the scene for UK businesses for at least the next ten years. Amid the clamor to sell newspapers and increase circulation figures, the media has focused on ever more extreme predictions (both good and bad) of a post-Brexit UK and its effect on business. The reality will fortunately be more prosaic and, for most businesses, unlikely to be too different to what they experience today when doing business with the EU. The Great Repeal Bill will bring all EU legislation into UK law and the British government will maintain regulatory coherency with the EU, at least in the short term. Starting from the position of a fully integrated market with free movement of goods and services, great effort will be made to ensure this remains for as many product groups and services as possible. This is an optimal position for both the UK and EU, so we should not expect too much difference in trading conditions in the future. Negotiations will be difficult in agriculture and fisheries, and together with the free movement of peoples, these are the areas most likely to be where agreement is not reached within the two-year negotiating period. Most UK businesses do not fear a post-Brexit landscape. Unlike other trade deal negotiations, the UK and EU are starting from a position of a full customs union, which means that all of the necessary regulatory standards and laws are already in place. This is in contrast to other trade negotiations which flounder on regulatory and legal incompatibilities between countries. In sum, there is absolutely no hurdle to both parties continuing a free trade agreement in most industries post-Brexit, even without the free movement of peoples. Most British businesses including beauty will continue to trade as normal with little real change in administrative expectations. Although the early negotiating and political rhetoric indicates otherwise, there will be no economic ruin for the country and there will be no Empire 2.0. There will just be business as usual. Stop Press: The election results only add to the air of uncertainty, but had Labour won a majority the levels of doubt and business confidence would have sunk far lower than we are seeing now. It all makes for interesting times! This article first appeared in BeautyMatter. BeautyMatter Founded by industry expert Kelly Kovack, BeautyMatter exists to be an essential daily resource for beauty industry insiders, brand managers, strategists, executives, and entrepreneurs, who demand the most current beauty intelligence from around the Internet all in one place.