Negotiating future trading relationships

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.

Negotiating a free-trade agreement takes time — a lot of time. For example, the EU began trade talks with Japan in 2013. An agreement was finally approved at the end of 2018, and it came into force in February 2019. That’s pretty much normal for a big trade deal like the EU–Japan deal. So, it’s likely to be a while before UK businesses have any long-term certainty on what happens with their EU imports and exports.

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.

The impact of deal or no deal

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).

Whatever happens with the UK’s exit from the EU, trade won’t grind to a halt while new deals are being negotiated or in the unlikely event of a no-deal Brexit. But trade may be subject to more stringent customs rules and tariffs.

Stripping back the hype on tariffs

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.

I find it helpful to consider the subject of tariffs within the wider context of currency exchange rates. The currently weaker pound makes British goods cheaper for overseas customers, which is advantageous for UK companies that export. So, if, for example, the EU applied a 5 percent tariff on British cars being sold in Europe, yes, that makes British cars more expensive for European customers, but that’s offset by the weaker pound.

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).

The eurozone is the name given to EU member countries that have adopted the euro currency. Read more EU-related jargon and definitions in Chapter 1.

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.)

In response to concerns about tariffs in the event of a no-deal Brexit, in March 2019, the UK government set out its plan to temporarily slash tariffs on non-EU imports while introducing tariffs on EU imports. This was designed to encourage more non-EU trade, while giving a symbolic middle finger to the EU (something that various UK governments have enjoyed doing as often as possible for decades).

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.

Whether it’s Brexit or any other dramatic market event, the key to riding out business uncertainty or market fluctuations is making sure your business is as efficient and profitable as possible. If you have concerns about the impact of tariffs on your business, consider working with a business adviser to find ways to increase your profitability and reduce business costs.

Whatever happens, trade will continue

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.

Under either scenario (withdrawal deal with transition period or no-deal Brexit and WTO rules), trade between the UK and the EU will continue.

The importance of EU markets to UK businesses

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.

Any suggestions that UK exporters would be “cut off” from trading with European customers after Brexit is pure hysteria. British companies won’t be barred from trading with their European counterparts.

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.

The importance of the UK market to EU businesses

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.

Bottom line? Both sides will benefit from a trading relationship that’s as smooth as possible. Both sides will suffer if that’s not achieved. During future trade negotiations, it’s vital that the two parties work to agree on a mutually beneficial agreement, giving access to each other’s markets in a way that’s as seamless as possible. Turn back to Chapter 4 to read more about future negotiations between the UK and the EU.

Factoring in potential new tariffs

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.

Tariff-free trade comes at other costs, such as free movement of people, a customs union, identical (or very similar) rules and regulations, and so on. In particular, the EU is unlikely to compromise on the regulations and safety aspects associated with the single market.

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.

The following government resources will help you keep abreast of tariff developments:

• 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.

Coping with more paperwork and higher costs

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.

Work closely with your accountant to monitor your costs and cash flow extremely carefully in the aftermath of Brexit.

The impact will be significantly greater in the event of a no-deal Brexit because UK companies importing and exporting goods to and from the EU would require:

• Export declarations
• Import declarations
• Safety and security declarations
• UK import/export license
• UK economic operator registration and identification (EORI) number

They would also need to:

• Include international terms and conditions of service in contracts with EU customers
• Consider engaging a customs broker to look after software and Her Majesty’s Revenue & Customs (HMRC) authorizations (read more about value-added tax [VAT] in the next section)
• Ensure the correct classification and value of goods
• Pay VAT and import duties unless the goods are entered into “duty suspension” via an authorized customs warehouse, or postponed accounting rules come into play (again, more on that next)

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.

And what if the UK exits with a withdrawal deal (whether it’s Theresa May’s agreement or an alternative arrangement)? In the short term, importing and exporting will continue as normal for the duration of the agreed-upon transition period. But after the transition period ends, importing and exporting paperwork will depend on what sort of trade agreement the UK and EU come up with. Much of the same paperwork listed earlier may still be required. For now, it’s a case of “watch this space.” (Turn to Chapter 12 to read about more Brexit “uncertainties” to keep an eye on.)

Remember that, after Brexit, goods moving between the UK and the EU may be subject to stricter customs checks and potential customs delays. Read more about these logistical challenges in Chapter 6.

Understanding the impact on import VAT and customs duties

We know that Brexit is likely to impact customs duties (see the sidebar “How do trade agreements work?”) and import VAT.

Here’s the difference between import VAT and customs and excise duties:

• Import VAT is a tax applied by the government on goods that come into the country from other countries. Import VAT is charged at a set rate, which is currently 20 percent in the UK.
• Customs duty is another tax applied by the government on goods imported from other countries. Different rates apply to different categories of products.
• In the UK, excise duty is applied to alcoholic drinks, tobacco, and oil products (including petrol), regardless of whether the goods were produced in the UK. Different rates apply to different categories of goods.

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.