What to Consider when Planning for the Post-Brexit Period
The past weeks have seen a flurry of parliamentary activity in London, none of which has yielded any more clarity regarding the status of the UK’s membership in or relationship with the European Union. At time of writing, British lawmakers have twice voted down a proposed Brexit deal that EU officials have said is non-negotiable, and subsequently voted against leaving the EU without a deal.
Even in the likely event the EU agrees to delay the Brexit deadline, the future of Brexit remains very much in question, as Britain’s divided Parliament won’t be any more likely in the coming months to reach consensus than European officials are likely to re-open negotiations.
The innocent bystanders, of course, are the countless businesses on both sides of the English Channel, which have hitherto relied on seamless trade between the two entities, and which are increasingly reconsidering their relationships with suppliers and vendors across what has the potential to become a hard border.
Unprepared for Brexit
While the impending Brexit deadline has generated expected urgency in Britain’s parliament, the inevitability of Brexit has been known for nearly three years. Yet, as it stands today, many businesses are unprepared for the very real possibility of a hard Brexit. In fact, a recent report in the Wall Street Journal, citing a study by the Chartered Institute of Procurement & Supply (CIPS), notes only 40 percent of British businesses would be prepared to comply with a new customs compliance regime.
That’s a daunting number and serves as a call to action for those who have yet to prepare for Brexit’s rapid approach. Should a hard Brexit occur, it will serve as much more than a milestone; it will turn Britain’s customs regime on its head, sowing confusion and uncertainty that will inevitably result in disruption to supply chains, administrative headaches and unexpected costs. Industries heavily integrated with European supply chains, such as aerospace, pharma, food manufacturing and autos will face acute disruption.
Increasing Landed Costs
Perhaps the most urgent consideration for those who engage in trade will be the spike in associated landed costs. In the event of a hard Brexit, the current European customs regime will cease to apply to imports. The immediate effect will be the application of tariffs and Value-Added Taxes (VATs). Those tariffs will be based on Most Favored Nation (MFN) rates, which will vary by product and could be quite substantial. While the British government has already stated that, in the event of a hard Brexit, it plans to waive seven percent more tariffs than which currently exist, VATs will still apply as will tariffs on virtually all imports from non-EU origins. That includes countries with which the EU currently maintains free trade deals, such as the Comprehensive and Economic Trade Agreement (CETA) recently signed between the EU and Canada.
Compliance (New customs regime)
While tariffs for EU imports may be reduced for the most part, customs declarations will still be required. This is a critical development. Given that approximately half of the UK’s imports come from the EU, and the EU has several trade agreements with key trading partners, there’s been little need for customs declarations in the UK to this point. However, after Brexit, the number of customs declarations is estimated to increase almost 400 percent (from 55 million to 205 million) at a cost of approximately £6.5billion or USD $9.1 billion to businesses. In addition, there will be 180,000 British business who will be filing a customs declaration for the first time, while those who have already been filing declarations will need to adjust to a new regime of customs classification.
The importance of correctly classifying these cross border movements cannot be overstated. In a best-case scenario, such as declarations with missing information, importers will face delays at UK border crossings, which are already anticipated to be backlogged. In a worst-case scenario in which goods are misclassified, importers may face retroactive payments on top of financial penalties and – in extreme cases – lose their authorizations to import.
According to CIPS, 10 percent of UK businesses could lose EU business if there are delays at the border, and about 20 percent will see their EU buyers demand discounts for delays of more than a day.
The organization notes 38 percent of EU businesses have already changed suppliers because of Brexit and up to 60 percent of EU businesses would look to switch suppliers if border delays were to extend to two weeks or more.
Delays are almost inevitable given the more robust customs administration requirements. Today, tractor trailers pass through the UK-EU border without stopping. At the Port of Dover, the UK’s busiest and closest port to mainland Europe, some 17,000 tractor trailers pass through on a daily basis with only about two percent being stopped. After Brexit, almost all of them are likely to be stopped. Even if that stop is only for a few minutes, it’s going to result in a significant backlog of transports.
In short, importers into the UK and exporters out of the UK will need to factor in additional time in transit and set expectations with their trade partners on the other side of the English Channel.
Preparation is Key
Given the shrinking time window for preparation, businesses that haven’t done so already should be working with their trade services partners – carriers, freight forwarders, trade lawyers and consultants and customs brokers – to ensure they’re able to minimize the negative impact of Brexit on their trade activity.
The UK’s official leave from the EU may very well be imminent, or potentially months or even more than a year away, but given the consequences of inaction, getting prepared late is still better than not being prepared at all.