4 December 2017
Click here to read part one of this blog which looks at the possible effect of ‘no deal’ on border controls and aviation.
The nuclear, pharmaceuticals and chemical industries (among others)
The UK’s membership of Euratom pre-dates its membership of the EU and its predecessors. Nevertheless, there is a declared aim to leave the organisation as it is overseen by the European Court of Justice (ECJ).
Euratom promotes, supports and regulates the nuclear industry across Europe, safeguards the transportation of nuclear materials, oversees the safe disposal of nuclear waste, and carries out nuclear research. It enables the free movement of nuclear workers and nuclear materials between member states. Of great significance to many; it regulates the import of radioactive isotopes used in medicine. The UK cannot produce these isotopes and they cannot legally be exported by any European country to a country that is not a member. In her letter to the EU invoking Article 50 Mrs May made specific reference to the fact that leaving the EU meant also leaving Euratom. There does not appear to be an easy or politically acceptable way back.
There are a number of other European agencies that regulate UK business activities in the UK in a way that would be immediately missed in the event of an unplanned Brexit. The most important are the European Medicines Agency, the European Aviation Safety Agency, the European Chemicals Agency, the European Food Safety Agency, and the European (Financial Services) Supervisory Agencies. The Government has anticipated the need to negotiate new relationships with these but the stumbling-block will again be the UK’s determination to release itself from the jurisdiction of the ECJ.
72% percent of Britain’s agricultural exports go to the EU, and some sectors are almost entirely dependent on trade with the rest of Europe. Of £300 million UK lamb exports last year, £290 million came from sales to Europe, while 78% of wheat and barley exports went to the EU.
On the other hand, the value of EU food and drink exports are much less than the imports from the EU – over a quarter of the food and drink we consume comes from the EU.
As mentioned above, WTO tariffs would apply if the UK failed to negotiate any sort of deal with the EU by the time it leaves the union. Agricultural tariffs vary from product to product and can be up to 40%.
There is a further problem. The WTO imposes quotas on agricultural products, and the EU’s quota on many of these products will need to be divided between the EU and the UK. Any negotiations will involve all 27 members whose quota share will be affected so delays are likely and so are trade disputes over affected products.
Of course the much-criticised Common Agricultural Policy will cease to apply in the UK and many farmers see this as an advantage. However, at least in the short term the UK Government will have to continue to pay subsidies to allow producers time to adjust – and due to the new tariff regime we will see changes in the mix of crops and livestock produced by our farmers as some products become uneconomical to export whilst others become more expensive to import.
Along with pharmaceuticals, the motor industry is one of the UK’s productivity stars. It depends heavily on foreign inward investment and a complex trans-Europe supply chain. Just-in-time manufacturing allows it to hold minimum stock of parts at its factories, relying instead on the rapid transport of items and paperwork-free border crossings. (The UK has spent the last 30 years inducing such businesses to set up here as the ‘gateway to Europe’). Under WTO rules car tariffs are 10% and components 5%. A WTO arrangement would clearly close down the UK car industry as we know it, so if we see any special arrangements at all we can expect them in this sector. Nevertheless, even if a free trade agreement is established with the EU especially for the motor industry, the UK will still remain outside the Customs Union, causing delays in supplies due to the paperwork.
If we are to enquire as to what ‘no deal’ means for the island of Ireland the most problematic scenario is surely the reinstatement of a hard border. Nevertheless a border between the EU and a non-member inevitably involves tariffs and customs checks. Even if an agreement is reached, free trade in goods will be restricted to goods originating in the UK or the EU. This is how trade with the EFTA countries works and can only be avoided if the UK were to remain in the Customs Union. Therefore, as at all frontiers between the UK and EU countries – including Ireland – originating goods have to be distinguished from non-originating goods, and non-originating goods are subject to whatever external tariffs are applied by the UK and EU respectively. To see how this might work in practice we can look at the border between Norway and Sweden where the European Free Trade Area comes into contact with the EU.
Norway is in the Single Market but outside the Customs Union and so is, in fact, in a more favourable situation than the UK will be. It operates automatic number-plate recognition on all of its road crossings to Sweden, and designates some of them as ‘green lanes’ which are closed to dutiable goods. Commercial vehicles are also obliged to stop at customs posts to make a declaration. There are spot checks, X-Ray facilities and warehouses for contraband at the border. Delays often occur due to spot-checks and anti-smuggling operations.
That is where the similarity ceases. There are only 80 crossings between Sweden and Norway, far fewer than in Ireland. The country is sparsely populated. A typical arrangement in Ireland could be a farmer who keeps a dairy herd on one side of the border but whose milking-shed is on the other, or simply a farming business in the Republic whose customer base is in the North. It is difficult to see how WTO rules can be applied, or indeed how illegal immigration into the UK can be prevented, without some type of border posts, which will unavoidably put the brakes on cross-border trade and be a focal-point for political dissent.
A no deal may seem attractive given the apparent windfall in tariffs. However, in this eventuality behaviours would change (the numbers would change) and many other areas of day to day life would be affected. There would clearly be enormous challenges faced by the UK in unpicking half a century of shared development with continental Europe. This blog only deals with a few of those issues.
Regardless, business owners will continue to seek out the opportunities that come after any change (even one as massive as leaving the EU).
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 99 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.