Businesses need to understand the impact of a no-deal scenario on trade. You should think about tariffs and currency fluctuations, trading under the World Trade Organisation (WTO), the relevance of incoterms, and compliance with new customs procedures.
You should also carry out an audit of your supply chain and look for vulnerabilities and consider pricing.
You should take time to future-proof existing supply chain contracts – considering the ability to change suppliers, flexibility around pricing, and managing ongoing trade relationships.
Finally you should think about your routes to market (i.e. distribution and agency agreements) and the impact of competition law on them.
Our lawyers have provided answers to some common questions about how a no-deal Brexit could impact trade. If you’d like to speak to an expert, get in touch with us on 0370 1500 100.
What happens to our trade with the EU if we come to the end of the implementation (transition) period without a long-term trade deal with the EU and the rest of the world?
If no trade deal is reached with the EU, then from 31 December 2020 the UK will trade with the EU on “WTO terms”.
Currently, through its membership of the EU, the UK benefits from free trade agreements with over 50 other countries globally. Whether the UK can benefit from these agreements following the end of the implementation period will depend on the terms of each agreement. The UK will be able to agree new free trade agreements, but such negotiations generally take years. So without a trade deal with the EU, from 31 December 2020 the UK is likely to trade with much of the rest of the world on “WTO terms”.
What is the World Trade Organisation (WTO), and what does trading on WTO terms mean?
The WTO lays down the rules of trade between member nations. Its aim is to reduce tariffs (and other barriers), and eliminate discriminatory treatment in international trade.
The three main agreements cover trade in:
- goods (General Agreement on Tariffs and Trade (GATT))
- services (General Agreement on Trade in Services (GATS))
- intellectual property (Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)).
The UK is a member of the WTO in its own right, but the UK currently shares the EU’s schedule as an EU Member State.
The two key concepts behind the WTO’s agreements are:
- most favoured nation (MFN) treatment – if a WTO member grants another member favourable market (i.e. reduced tariffs), then it must grant the same favourable treatment to all other members unless the favourable treatment comes from a customs union (e.g. the EU) or a free trade agreement; and
- national treatment – WTO members must treat foreign products, services and service supplies no less favourably than domestic equivalents.
For goods, these two principles are included as general commitments by each country. For services, the commitments are far more specific with market access conditions (and, in particular, exemptions from these general commitments) being set out in schedules of specific commitments that are divided by sector and mode of supply.
The UK has submitted drafts of its commitment to the WTO, which are pending certification.
Practically, if there’s a no-deal scenario, what implications will trading on “WTO terms” have?
Goods:
If no deal is agreed by the end of the implementation period, the UK will trade with the EU on WTO terms as a third country, with WTO tariffs and customs procedures being automatically applied.
Each WTO member has a list of tariffs and quotas that they impose on all trading partners.
This means that from 31 December 2020:
- tariffs will be charged on imports of goods into the UK from the EU
- tariffs will be charged on imports of goods into the EU from the UK
- tariffs charged on imports into the UK from countries outside the EU are likely to change
- tariffs charged on imports of goods into other countries from the UK are likely to change.
This will not only have a cost impact (in terms of paying these tariffs), but the creation of the new regime to deal with imports and exports to and from the EU may affect the smooth trade in goods across the channel.
Services:
If you provide a service, you will need to follow terms set out in the legislation of the receiving country (for example, on immigration, incorporation of an organisation or mutual recognition of qualifications), and any sector specific commitments in the receiving country’s services schedules.
It’s likely that trading under WTO rules will present new barriers to trading services, including the additional costs in doing so. For EU countries and third countries with existing free trade agreements with the EU, the position is likely to be very different.
What is the UK Government’s proposed UK Global Tariff (UKGT), and what are the implications?
The EU Common External tariff continues to apply to goods imported into the UK until the introduction of the UKGT after 31 December 2020.
The UKGT applies to any goods imported into the UK from countries that the UK does not have a free trade agreement with. The Government website offers an online service to check whether the UKGT applies to goods being imported from 31 December 2020 (see link).
What should we be doing during the implementation/ transition period to understand the impact on our supply chains if there is a no-deal scenario?
No-deal creates two threats to supply chains:
- a long-term cost implication from increased tariffs (both in terms of paying them, and also complying with them)
- 2) a short-term threat of disruption as the impact of a less free-flowing border between the UK and the EU slows the transit of goods, potentially affecting direct supplies to consumers, but also supplies of components to manufacturers.
You should therefore audit your supply chain for vulnerabilities:
- Identify where you receive supplies from the EU, and consider whether an alternative supply route is available
- Check the legal basis upon which you are receiving supplies – do you have an up-to-date contract in place with your suppliers, and does it appropriately apportion the risk of a no-deal scenario?
- Identify how tied-in you are to EU suppliers, and whether there are replacement suppliers available
- Identify the likely increase in tariff costs on your supply chain, and establish which party is legally obliged to bear those increased costs
- If the supply is of services, will the regulatory treatment of the provision of those services change?
- Establish any likely regulatory changes to the products being supplied, and identify which party bears the risk and cost of regulatory change
- Where there is risk of disruption, do you have sufficient stock in the UK to minimise the impact on your business?
What should we be doing during the implementation/ transition period to understand the impact on our customer contracts if there is a no-deal scenario?
The impact of a no-deal scenario will equally be felt on your customer relationships.
The issues identified in relation to your supply chain will equally apply to your customer relationships but you will be considering them from the opposite perspective.
What contracts should we review?
You should review any contracts with key suppliers and customers where there are operational and financial implications on your business (e.g. supply of goods and services, support and maintenance contracts, outsourcing, and other long-term financing arrangements).
What key terms in our existing supply chain contracts should we review to protect against uncertainty?
- Flexibility regarding pricing mechanisms – can prices be changed to reflect changes to tariffs, regulatory/ legal change, or simply the underlying cost of supply?
- Pricing - if pricing is fixed, are there assumptions, exceptions or thresholds that will open up the price to change or re-negotiation?
- Force majeure – can the supplier be excused from performing if goods are delayed at the border or if it cannot, itself, receive supplies on time?
- Term/ termination/ break clauses – are there any rights to terminate for convenience?
- Hardship clauses – can a party terminate the contract if it is deemed not commercially viable?
- Future reorganisations - is there flexibility to transfer the contract to an affiliate, or any flexibility around customer geographies/= or volumes of supply?
- Restrictions on staffing changes – are there requirements for key people that may be difficult to meet if free movement of people is restricted?
- Delivery – which party bears the cost of tariffs, and the risk of delivery delays?
- Territory - what is the territorial scope of the contract?Does it assume the whole of the EU and, if so, does that include or exclude the UK?
- Governing law and enforcement - what is the governing law of the contract, and how can it be enforced?
How can we future-proof any key trading relationships?
Once you’ve identified any risks and opportunities from your contract review you’ll need to assess how the contract can be changed to deal with them. Possibilities include:
- a full contract amendment – this could be a lengthy process
- a short-form amendment just picking up the key commercial issues
- a letter of intent, or memorandum of understanding, setting out the intentions of each party (but be clear if this is intended to have legal effect or not)
- if you trade on standard terms, can they be amended before the end of the implementation period?
Do we need to prepare for any changes in competition law?
Immediately after the end of the implementation period, there should be little difference in competition law, apart from the fact that the UK competition authorities will only be concerned about breaches of UK competition law.
The block exemptions that are important for structuring commercial arrangements will remain as “retained exemptions”. As a result, it’s unlikely that there will be short-term divergences in competition law.
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