Brexit: what does the cliff-edge look like? Part one

30 November 2017

The UK will be leaving the European Union on 29 March 2019. As it stands, the terms of its departure are far from settled, and some are even advocating a ‘no deal’ scenario which would see the UK walk away from any trade agreements, along with the Single Market and the Customs Union entirely. Most – including the Government – hope it will not come to that, but what would ‘no deal’ look like in practice?

The UK is a member of the WTO but at present it is the EU that exercises its membership of the WTO on behalf of all member states. Each WTO member agrees tariffs on all types of goods and some services with all the other members but it is a requirement that all members apply their tariffs to all trading partners equally, subject to any free trade agreements and/or customs unions.

If the UK leaves the EU without an agreement, the UK will revert to being an independent member of WTO. It will have to establish its own schedule of tariffs. Its tariffs will then apply to all of those countries (including our former partners in the EU) except in those cases where UK has set up a free trade agreement.

Work undertaken by Civitas in October 2016 estimated an average tariff on goods exported from the UK to the EU of 4.5% resulting in additional costs (assuming all other circumstances remain equal) of £5.2bn. The equivalent figure levied on the EU would be over £12bn, largely reflecting the trade deficit between the two economies.

Whilst this may appear an attractive windfall to the UK government, clearly in this situation behaviours would change and there would be a significant impact on already strained UK-EU relations. In addition, many other areas also need to be considered.

Border controls

It is important to stress the difference between a free-trade agreement (which is tariff free) and a customs union (which is both tariff-free and paperwork-free).

Some politicians are urging that we leave both the Single Market and the Customs Union. Others have expressed a wish for ‘frictionless’ trade. This cannot be achieved without being in the Customs Union, which the UK Government has ruled out, as membership would preclude the establishment of trade deals with other countries.

At present the customs procedures, regulating the movement of goods, have been largely eliminated for trade between EU member states. UK traders who send their goods to the EU complete at most a single form, an ‘Intrastat declaration’ for VAT, and the goods move across borders unchecked and without hindrance. This is due to the EU Customs Union and the European Single Market.

No deal would mean additional paperwork for all businesses that export to the EU. It is estimated that 180,000 businesses (mostly SMEs) in the UK currently export to the EU but not to other parts of the world. These businesses will have to learn quickly how to fulfil the new documentation obligations imposed on them. But over 30 government departments and public bodies, and more than 100 local authority organisations will also need to be prepared. In fact a very large, disparate group of organisations will somehow have to work together.

Aviation

You don’t have to own an airline to be affected by this. Think of business travel, tourism and hundreds of thousands of jobs in the aviation industry.

The airline industry is, for technical and safety reasons, highly regulated. Currently the UK is a member of the European Common Aviation Area (ECAA), which includes all the EU states and several aspirational members. Any airline whose operating company is based in a member state is free to operate anywhere within the ECAA, without any restriction as to frequency or capacity. Without an agreement the UK will leave the ECAA in March 2019 and its airlines will no longer be permitted to land at ECAA airports. Moreover, due to an arrangement between ECAA and the US those airlines will no longer have the right to land at US airports. EasyJet and British Airways will be the worst affected. However, the former has already started to re-register its aircraft in Austria which will ensure its rights to fly anywhere in the world – except the UK! Note that US and other ECAA carriers would also lose their rights to fly to the UK.

The obstacles that face the UK are firstly that the terms of membership of ECAA demand a ‘framework of close economic cooperation’ with the EU, and secondly that it falls under the jurisdiction of the European Court of Justice. Mrs May has pledged that:  “The authority of EU law in Britain will end.”  Politically she is in a tight spot and may not be allowed to retain vestiges of ECJ oversight.

There are alternatives to the ECAA – a bilateral open skies agreement could be reached with the EU such as that of Switzerland, which is not part of the ECAA, but enjoys virtually the same status. In order to obtain that status, it had to enter into other agreements concerning economic integration – politically difficult for the UK.

Click here to read part two of this blog which discusses the impact of ‘no deal’ on the nuclear, pharmaceutical, chemical, agricultural and motor industries, as well as looking at the effect it could have on Northern Ireland.

How we can help

UHY is already working with local companies to help them to prepare for these changes. We have close relationships with our colleagues in UHY International, both in the EU and further afield. Our network covers 98 countries meaning we have people available to support you wherever you choose to do business. Please feel free to contact me or fill out our contact form to see how we can help you.