A no-deal Brexit would shock virus-hit U.K.
From IT to agriculture to retail, many companies may not survive divorce
Trade talks between the EU and U.K. have struggled in recent weeks, increasing the prospect that Britain departs the bloc without a deal and that businesses face an extreme shock when the divorce takes effect.
It’s a scenario that would deepen the economic pain inflicted by the coronavirus pandemic, with companies already reeling from the damage of the national lockdown and the economy heading for its deepest recession in centuries. Unemployment has surged and Prime Minister Boris Johnson is caught between trying to revive businesses while avoiding a deadly second spike of the disease.
All the while, negotiations with the EU for a comprehensive economic agreement to replace the U.K.’s decades-long membership of the bloc have stalled badly, with both sides unwilling to budge on fundamental issues. The stand off pushes both parties toward a no-deal Brexit that would create a serious strain for companies.
“For businesses, jobs and economic confidence in this most challenging of years, this would be a shocking outcome,” said Carolyn Fairbairn, director general of the Confederation of British Industry. “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 U.K.-EU trade talks comes down to a basic disagreement. In exchange for a zero-tariff, zero-quota deal, the EU wants the U.K. to sign up to provisions that would prevent Britain from undercutting it in areas like environmental and labour regulation, 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 isn’t made this month, the U.K. says it will 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 2020.
Here’s what that no-deal outcome would mean for business in Britain:
Manufacturing Japanese carmaker Nissan Motor Co., which employs 6,000 people at a plant in the Brexitsupporting town of Sunderland, has said its factory wouldn’t be sustainable because car exports to the bloc would face a tariff of 10 per cent.
Industrial heavyweights like German automaker BMW AG, which has a plant in Oxford, and aviation giant Airbus SE, which employs 13,500 people in the U.K. and makes plane wings in Wales, also face the prospect of border disruption snarling up their highly-efficient, just-intime production lines. Trucks arriving at the U.K.-EU border without the correct paperwork will be stopped, risking lengthy queues and halting factories.
Another problem is an increased regulatory burden. Without a trade deal that deems U.K. 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 may also have to set up separate production lines if they need to produce a good to two different regulatory standards.
Retail Grocers like Tesco Plc, Wm Morrison Supermarkets Plc and J Sainsbury Plc would face a range of price increases: About 80 per cent of food imported by supermarkets in the U.K. comes from the EU, according to the British Retail Consortium, and much of this would become subject to tariffs.
There would also be higher costs due to new nontariff barriers which will apply whether there is a U.K.-EU trade deal or not. Outside the EU’s customs union, traders in the U.K. will need to file customs declarations, which cost between 16 pounds ($20 U.S.) and 56 pounds ($70) per product line, according to the BRC. Given retailers operate on slim margins, higher costs are likely to be passed on to consumers, the lobby group said.
Agriculture The U.K.’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 per cent for cuts of beef and lamb, and 15 per cent for pork, making British produce less attractive for EU buyers and flooding the U.K. domestic market with the surplus.
On top of that, farmers will also face new, nontariff barriers, regardless of whether a trade deal is signed. These include export health certificates, a form costing 100 pounds ($125) that’s required to export products of animal origin into the EU.
Services Services make up 80 per cent of the U.K. economy — comprising a breadth of activities including IT, law, accountancy, insurance, consulting, architecture and hairdressing — and Brexit will 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 like law and architecture wouldn’t be recognized, meaning U.K. nationals wouldn’t be able to provide that service in an EU member state unless they had been authorized to do so.
The end of free movement of people between the U.K. and EU without any further agreement will 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 labour market, particularly in the National Health Service, agriculture and hospitality.
Finance Ever since the Brexit referendum in 2016, global banks such as HSBC Holdings Plc and JPMorgan Chase & Co. have planned for the possibility of losing access to the EU’s single market. It’s meant major financial institutions have set up offices and moved staff to cities like Frankfurt, Paris, Dublin and elsewhere in the bloc to ensure no disruption to operations.
Still, they’re pressing for the
EU and U.K. to allow as many trades and business as possible to remain in Britain. Those socalled 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.
Pharmaceuticals For pharmaceutical giants such as AstraZeneca Plc and GlaxoSmithKline Plc, a key Brexit concern is regulation. The U.K. 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 other major concern is whether the U.K. will 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 U.K. imports about 10 per cent of its power from continental Europe. After Brexit, British electricity systems will be decoupled from the European Internal Energy Market, but that doesn’t mean gas and power will stop flowing.
However, trading could become less efficient and longerterm 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 nodeal Brexit.
Tariffs would be payable on goods crossing from the rest of the U.K. to Northern Ireland, to be reclaimed later through a rebate system if the product remained in Northern Ireland and didn’t cross the border into the Republic of Ireland, which is in the EU.
Products of animal origin crossing from elsewhere in the U.K. 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 like 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, said Aodhan Connolly, director of the Northern Ireland Retail Consortium.