The UK’s first week outside the EU was all about trade negotiations. And whilst you may think the current ‘transition period’ provides a respite from thinking about Brexit, now is the time to start getting ready for your future trade with the EU and the rest of the world.

Three days after the UK left the EU, the opening shots were fired in the trade negotiations which will dominate the next 11 months.  Both the European Commission  and the UK Government published their opening negotiating positions; with a detailed 33 page draft negotiating mandate from the EU and a five page statement of high level principles from the UK, accompanied by a speech from the Prime Minister Boris Johnson.

The UK Government also launched a consultation on future UK ‘most favoured nation’ external tariffs:  the import tariffs the UK will levy on goods from countries with which it does not have a specific free trade agreement with.  From 1 January 2021 this may or may not apply to EU imports, depending on whether a trade agreement is reached by then.  This proposes some rounding down of tariff rates, other ways of simplifying them, zero tariff for materials used in UK production, and zero tariffs on goods that are not produced in the UK (or very limited UK production).  

So...what did we learn?

  • “Deal or no deal” - the options for the end of December have narrowed to “Canada or WTO”:   As Boris Johnson said:  “The question for the rest of 2020 is whether the UK and the EU can agree a trading relationship on the lines of the free trade agreement the EU has with Canada”. If no trade deal is reached, we trade on ‘WTO terms’ with the EU from 1 January. 
  • EU-UK trade negotiations will not be plain sailing.  Both sides do have the same broad aims:  a zero-tariff, quota-free Free Trade Agreement along with some commitments to ease the friction for cross border services.  But flashpoints were evident this week on fisheries (whether or not EU fishermen have access to UK waters and vice versa) and on Gibraltar (the UK asserting they will negotiate on behalf of all British overseas territories; the EU asserting that any provisions on Gibraltar will be subject to a Spanish veto).  Boris Johnson’s speech touched on these but focused on one specific area of conflict: the EU desire for hard commitments to a ‘level playing field’. The EU is wary of agreeing to market access without safeguards to ensure that UK business don’t have competitive advantages like lower regulation, lower tax and state subsidies. In turn, the UK’s negotiating statement was very clear in rejecting ‘regulatory alignment’ and stating that areas such as state aid should not be covered by an EU-UK treaty.
  • The outcome is in the balance:  these differences may sink the talks unless both sides compromise. There is some leeway to land an agreement that gives both sides a fig leaf for their principles (notably if they can agree to some commitments on level playing field that avoid the UK adopting EU rules – probably based on maintaining existing standards as a regulatory ‘floor’ but not committing to mirror future regulatory changes).  I think the odds on a trade agreement may be about 60% right now, and 40% likely to fail; but this week I have heard varying odds both ways.
  • ‘Friction free’ trade ends on 31 December: UK Ministers have been at pains to point out to business that the future UK-EU trade will not be friction free – there will be additional costs and hurdles.  A Free Trade Agreement may provide for a minimum set of barriers to trade in industrial goods, but there will still be some.  For products like agri-foods, negotiating trade access may prove harder.  And any trade agreement will mean increased barriers to trade in services; and probably the best hope for services will be that agreements are reached on mutual recognition of qualifications, the flow of data, and business travel.  Financial services may see separate side deals; some this year to ensure financial stability and support critical markets, but ‘equivalence’ agreements in other areas may take longer. 
  • We know more than we may think about the changes that will take place on 31 December, regardless of the trade negotiations.  The most important point for business was made by the Prime Minister this week: “In either event [i.e a EU-UK trade agreement or none] the UK will be leaving the single market and the customs union at the end of this year and stakeholders should prepare for that reality.”  

What does this mean for business?

  • Start getting ready for trading with Europe on 1 January 2021: our work with clients has shown that there are more similarities than differences between a Canada style trade deal and trading on WTO terms, come December. There are many steps you can take now to prepare for December, based on the fact that the UK will leave the customs union and single market. Regardless of whether there is a UK-EU trade deal, changes will include:
    • New customs processes for EU-UK trade
    • New VAT arrangements
    • Regulatory requirements – e.g. labelling country of origin and extra requirements for food 
    • Border control post veterinary checks on animals and animal products
    • We can also expect safety and security declarations at borders 
    • Bilateral withholding tax arrangements kick in between the UK and each separate EU country
    •  In addition, we can expect some disruption and delay at ports, affecting supply chains – as traders face teething problems or are unprepared for these changes.
  • If you trade in goods, get started on customs preparation now: for trade with Europe you will in future need to have processes in place for customs valuations, classifications and rules of origin. Your business model may also benefit from applying various customs reliefs, simplified processes and trusted trader schemes – all of which have a lead time. If you provide duty paid deliveries to customers in the EU, you’ll need to review how best to achieve this when we leave the customs union and EU VAT area. More on this in our customs guide.
  • Reduce costs and review forecasting: trading with Europe will be more costly from 1 January 2021, with a variety of aggregate cost drivers associated with new processes, regulations and trade friction. This means it is important to continue to optimise cash flow, reduce your cost base and engage your supply chain.   It is also worth reviewing potential tariff costs.  The biggest difference between an EU-UK trade agreement and no trade agreement may be on tariffs (with tariffs definitely applying of no agreement is reached) and the UK Government consultation on import tariffs indicates that there may be more tariffs than under the previously published ‘no deal tariff schedule’; assessing potential exposure and mitigation remains important. 
  • Look at opportunities: if you currently trade solely with the EU, the fact that you need to put customs processes in place means that you will have the systems needed for exporting elsewhere too.  Does this make other markets more viable?  With some tariff changes inevitable in January next year, do other countries become more competitive for sourcing? And are there changes you would like to see to UK import tariffs that would benefit your business – if so, send your views to the government consultation before 5 March.

There will be major changes in EU-UK trading from 1 January 2021 and we know already what many of these will be. You can act now to mitigate compliance cost and continuity risks.  And such significant change – or disruption – in markets also creates opportunities, which your competitors may already be exploring.

For further insights and guidance visit - https://www.grantthornton.co.uk/brexit/