The decision to leave the EU will have significant implications for UK businesses doing business with the European Union. As it stands, UK-based companies can sell goods to EU customers without additional taxes and can import goods tariff-free. However, since the Prime Minister has ruled out continued membership of the single market, a new arrangement has to be reached.
There are currently two options:
- A renegotiated free trade deal. While not uncommon (Canada enjoys such a deal), and would serve to eliminate tariffs and other trade barriers, negotiating this could be difficult. The EU has traditionally been slow to agree terms for such deals and, given the political tensions arising from Brexit, may be unwilling to offer the UK favourable terms.
- WTO (World Trade Organisation) Terms. Both the UK and the EU (which acts a single entity) are members of the WTO. In the absence of a renegotiated trade deal, both will have to apply the same tariffs and trade barriers as they apply to imports from other WTO member states.
What does that mean for UK businesses?
Unless a trade deal is reached, it’s likely that the cost and administrative burden on doing business with the EU will rise. While the UK’s “most favoured nation” status will set rates and prevent either side from imposing punitive measures, we will still be subject to WTO tariffs up to 32%. There is some difference in opinion about how much this will cost UK businesses per annum; conservative estimates believe this could cost UK businesses about £7.4bn per year, but others put the cost at closer to £200bn, or 9% of our GDP.
The value of the pound dropped sharply immediately after the referendum result and could be hit again if negotiations start to go badly. While a weak pound may be good news for foreign companies looking to invest in UK businesses, and the past few months have already seen a rise in foreign investment, we are seeing it also means that import prices have risen already and look set to rise further.
At present we are subject to a wide range of EU rules, governing aspects like product specifications, labelling, testing and requirements. However, it is possible that upon leaving the EU none of these rules will apply.
The next two years will see the UK decide on whether to keep many of the rules, incorporating them into domestic law, or replace them with alternatives.. Businesses trading with EU partners will need to stay abreast of changes to laws affecting their industry and areas such as procurement law which can affect many businesses.
What can I do to prepare my business?
First, remember that you have time to prepare. The legal relationships that underpin trade with the EU won’t change until at least 2019, meaning that free movement of people, goods and services will be unaffected until then.
At this stage it’s important you keep your options as open as possible. While the economic picture is currently strong, the final shape of the UK’s trading options is still very unclear and it’s worth planning for a range of eventualities. It’s also a good time to be busy. Explore as many export channels as possible and, if possible, make relationships with trading partners outside of the EU.
For further advice and consultation on how to prepare for Brexit, our International Business team is here to advise you on the best course of action for your business.