U.K. businesses poke holes in Brexit plan

The U.K. government’s blueprint on how it thinks Brexit should pan out was hardly going to please everyone, and in that regard it has lived up to expectations.

The white paper on “The future relationship between the United Kingdom and the European Union,” released on 12 July, attempts to retain as many of the current trade advantages the United Kingdom presently has as a European Union member, but with the right to limit free movement and to arrange its own trade deals with other countries.

Its key proposals include continuing “frictionless” access at the border between the United Kingdom and European Union by setting up a free trade area for goods, which would avoid the need for customs and regulatory checks, and establishing reciprocal agreements for EU and U.K. businesses to compete fairly in each other’s markets.

It also proposes establishing a “common rulebook” for goods (including manufactured goods and agri-food) so that U.K. and EU rules are harmonised, as well as the phased introduction of a new “facilitated customs arrangement” that would remove the need for customs checks and controls between the United Kingdom and the European Union as if they were a combined customs territory.

The proposals need to win over the European Union’s other 27 member states, the European Commission, and the U.K. Parliament. The Conservative Party, the lead political group in the government’s coalition, is bitterly divided over it.

Business groups are happy to at least see some movement, however. The U.K.’s main business lobby group, the Confederation of British Industry (CBI), broadly “welcomes” the Brexit whitepaper. Carolyn Fairbairn, CBI director-general, said: “Many of the intentions are reassuring. Seeking a free trade area for goods and a common rule book shows the Prime Minister has put pragmatism before politics and should be applauded.” But she added that “it is now the EU’s turn to put economics before ideology on these proposals.”

“Can't believe it's taken two years to get to this point. A white paper full of holes, that delivers little or nothing for working people. Rights, jobs and livelihoods are still at risk.”
Frances O’Grady, General Secretary, Trades Union Congress

The CBI backs the moves to secure frictionless trade and to maintain free-flowing data and mobility for skilled workers across the European Union, but adds that there needs to be more detail on future value-added tax (VAT) arrangements and the new customs system—and soon. The business group calls for U.K. and EU negotiators to work quickly. “With three months left to go, it is now a race against time,” says Fairbairn.

Others are less impressed. Frances O’Grady, general secretary of the Trades Union Congress (TUC), the country’s main labour body, tweeted: “Can't believe it's taken two years to get to this point. A white paper full of holes, that delivers little or nothing for working people. Rights, jobs and livelihoods are still at risk.”

Adam Marshall, director general of business group the British Chambers of Commerce (BCC), partly agrees. “This vision should not have taken two years and three weeks to emerge,” he said, though conceded that “it is nevertheless a welcome starting point for businesses.”

Like the CBI, the BCC wants concrete details to be finalised soon given that nothing has actually been agreed. “It is incumbent on the two sides to work pragmatically and productively on the nuts-and-bolts detail of the future relationship over the coming weeks,” says Marshall. “Time is short—and for businesses, it’s results that count.”

The British Retail Consortium, a trade association, is keen to retain as much of the present arrangements on free trade as possible. It is not hard to see why. Currently, when goods enter the European Union they are subject to checks and controls—there are 405 of these controls in total to ensure that products do not contain pathogens, contaminants, or residues that are a risk to human health; that they comply with rules of origin; and that the correct levels of taxation are levied. Furniture and bedding alone account for 45 of them, pharmaceutical products 44, and even strawberries are subject to 28 of these measures.

As part of the EU customs union and single market, the United Kingdom is not currently subject to any of these controls. If it leaves the EU without a deal, however, that will change. In the case of some meat imports, compliance with these measures could mean each shipment undergoing a veterinary inspection to obtain a certificate before export, followed by a submission of documentation (relating to veterinary health and origins of produce) to U.K. authorities, which will then have to be verified, before an appointment is booked for physical inspection of products on arrival. Consignments may then have to wait for several days before inspection at a U.K. border post.

What will Brexit mean for companies?

The British Chambers of Commerce has updated its Business Brexit Risk Register following publication of the white paper setting out the U.K. government’s proposals for a “soft” Brexit.
 
The register is made up of 24 issues in eight areas, including tax, people, regulation, and borders. Of these 24 issues, 22 are highlighted as “red,” and just two are deemed “amber.”
Compliance functions may find it useful as a checklist.
 
Key questions raised include:
Which regulator will be overseeing my business in the future, and what rules do I need to follow?
What dispute resolution and means of redress will be available to my business in the future?
What industrial standards will my company need to comply with?
Will my business continue to be able to hold and transfer data and personal information without interruption after the U.K. has left the EU?
Source: Business Brexit Risk Register

While not every import will be subject to this level of control, the increase in the administration for most goods will be significant. Products will also be at risk of substantial delays if border posts struggle to cope with the anticipated increase in customs declarations under a “no deal” scenario. And these additional controls will not come without a cost. Research by KPMG Netherlands released earlier this year suggests that imports of meat into the United Kingdom from the European Union could face additional costs of more than €1,000 (U.S. $1,166) per shipment. The BRC suggests that—under a “no deal” scenario—U.K. imports of food and beverage products from the European Union would face an average increase of up to 29 percent from non-tariff barriers alone.

It is the U.K.’s financial services sector, however, that is the least impressed by the white paper’s content. The government wants U.K. financial services in the future to adopt a beefed-up version of a system already used by certain non-EU countries, including the United States, Japan, and China, whereby they agree to meet certain EU rules to keep access to the bloc.

Financial services firms, however, want “mutual recognition,” whereby the United Kingdom can adopt its own standards and regulations (and get rid of all that Brussels red tape) and have them automatically recognised in the European Union. The European Commission, on the other hand, is pushing for “equivalence,” which would mean that the European Union would decide whether U.K. regulations achieve the same regulatory objectives (even if they do not follow the exact same EU laws), and if it decides that they don’t, it can withdraw its approval on very short notice.

Inga Beale, chief executive of Lloyds of London, the insurance market, has warned that the U.K.’s proposals will speed up the departure of firms from the United Kingdom to set up in subsidiaries in the European Union as an easier way to continue pan-EU business. Huw Evans, director general of the industry’s lobby group, the Association of British Insurers, said that “whatever the final outcome, the insurance industry is too important to be a rule taker.” He added that “having to comply with financial regulations we have no say over would be the worst possible scenario for our world leading insurance sector, so we will look to the government to negotiate a better outcome than this.”

Miles Celic, chief executive of TheCityUK, an organisation that champions the U.K.’s financial services sector and particularly the influence of London, said: “It’s regrettable and frustrating that mutual recognition has been dropped before even making it to the negotiating table. In hundreds of discussions across the EU, the industry has never come across an unanswerable technical or commercial barrier to this approach. The EU’s objections have always been political.”