The UK and the EU have reached an agreement on Brexit. On October 17, EU and UK negotiators succeeded in reaching a final agreement to move forward with Brexit, solving the existing deadlock faced during the two-year long process. Nevertheless, Mr. Johnson will not have an easy ride passing such an agreement through Parliament. His Northern Irish Partners have already rejected the deal, and most of the opposition parties appear staunchly opposed in passing the agreement into Law. This has forced the UK’s Executive to request another Brexit extension, until January 31, 2020. A general election on December 12, may lead to greater clarity on the way forward.
The customs arrangement was key to reaching a deal. Under the agreed deal, Northern Ireland will continue to be part of the UK’s customs territory – meaning that it will participate and apply for future trade policy – but the customs border will apply checks between Northern Ireland and the rest of the UK, thereby protecting the Good Friday Agreement, and compelling Northern Ireland to apply EU customs rules. This unusual arrangement means that UK customs will check shipments from Northern Ireland before they enter the UK, thereby creating an artificial border within the United Kingdom. Shipments from England to Northern Ireland for example, will not pay any tariffs as long as their final destination is Northern Ireland. However, those “at risk” – a term that will be defined at a later stage – of ending up in the Republic of Ireland or the rest of the EU, will face EU tariff rates being implemented.
Whilst the risk of a no-deal Brexit is slowly effacing, the UK will continue to face challenges in order to regain competitiveness. Despite having agreed on a plan to have an orderly withdrawal from the Union, the UK still faces a huge number of challenges that need to be resolved: regulations, trade deals, standards, tariffs, etc. Recovering its regulatory autonomy comes at a price, and the country can expect a certain amount of uncertainty which will impact its business environment, as the UK enters unchartered territories.
Companies must continue to prepare for a departure from the EU. The Brexit deal does not mean that there will not be any consequences on UK companies, but instead, that they should start preparing for the new customs arrangement, especially those trading with Northern Ireland, to avoid new tariffs. It is also the moment to analyse their own value chain, to ensure that these remain competitive – as other companies sourcing from other countries might be more competitive than the EU, once the UK leaves the bloc and tariffs come into force. The fact that no one knows what the future trading arrangements between the UK and EU may be, makes any preparation very difficult. A series of contingency plans are therefore necessary.
The impact on services remains uncertain until negotiations on future trade agreements between the UK and EU are concluded. The UK is the second largest exporter of services in the world. Services represent 45% of UK exports and contribute towards 79% of its Gross Domestic Product (GDP). The EU is a market of over 500 million consumers, with a free movement of people that, once lost, will represent a significant cost for businesses. The Political Declaration that lays down the Brexit deal is vague on this area, leaving the future open to impending trade negotiations, which will be based “on recent Union Free Trade Agreements”. A Canada-EU type of agreement, which took 5 years to negotiate and 2 years to ratify, is hoped for by the UK.
The conditions for future financial services transactions remain uncertain. In financial services, an area of particular interest to the UK, the EU and the UK commit to analysing equivalence by June 2020, aiming to ensure that a new framework is in place before the expiry of the transition period, which will last until December 2020.
International Economics is experienced in analysing the impact of trade policy changes on your business. Companies need to put in place the right measures to minimise the impact that Brexit will have on everything from their supply chain, to trading partners, and arrangements with their employees. We can help your company to devise such strategies, contributing to ensuring your international competitiveness, by drawing on our recent experience providing advice to countries across East and Southern Africa on the potential impact of Brexit on their economic interests.