© Savvapanf Photo | shutterstock.com

27.11.2018

BREXIT: HOPE FOR THE BEST, PREPARE FOR THE WORST

The EU member states have adopted a draft agreement on the modalities of Great Britain's withdrawal from the EU. But since the deal might be vetoed by the British parliament, companies should still prepare for a possible hard Brexit.

By Holger Kunze

© Alexandros_Michailidis | shutterstock.com

In less than five months' time, the fifth biggest export market of the European mechanical engineering industry will leave the European Union - but nobody knows in what way. On the one hand, negotiations between the EU and the UK have progressed. On 25 November, the remaining EU states expressed their support for a draft agreement on the details of the UK's withdrawal. In case the British Parliament supports the deal, United Kingdom will leave the EU on March 29 in an orderly fashion and with a subsequent transition period of three years.

On the other hand, however, the British government is still divided over the question whether the agreement would serve the UK's interests. As a consequence, it is highly uncertain if the proposed Brexit deal will ultimately pass the British Parliament. The EU has already made clear that the draft agreement will be the final offer and sees no room for further negotiations. In the worst case, if no deal is reached, Great Britain will leave without an agreement in what is being called a hard or cliff-edge Brexit.

A hard Brexit in particular will have consequences for the daily business of companies, since the rules of the Single Market and the Customs Union would no longer apply to the UK. However, despite the fact that the British withdrawal from the EU does not follow the rules of economic logic, there are steps that companies can already take to prepare for a no-deal outcome - even if the hope is that this scenario does not become a reality.

1.    Check your value chains

Great Britain is not only a huge export market, but suppliers from UK are also part of many value chains for continental manufacturers. After Brexit, there may be delays or shortages of components coming from the UK. Companies are therefore advised to check what parts of their production might be affected by Brexit, and whether it would be advisable to plan with a larger stock for the coming months, for example. Companies should also note that not only direct suppliers from the UK might encounter problems, but also European ones that rely on British parts.

Companies should consider potential Brexit-related risks when negotiating new contracts with business partners. For example, increased costs due to tariffs or delays in the delivery of goods caused by border controls may be reflected in adjustment clauses or termination clauses respectively. Parties may also want to reconsider the allocation of liability for Brexit-induced damages. With respect to current agreements which do not yet reflect the possible consequences of Brexit, parties should meet in time to develop mutual contract terms, as it is uncertain whether adequate adjustments may be ordered by a Court.

2.    Do not forget the rules of origin

The European Union has concluded free trade agreements with a large number of countries, guaranteeing advantages for European exporters. To be covered by an EU free trade agreement, goods need to be produced mainly in the EU, usually to around 60 per cent of the total added value. However, following Brexit, goods materials with UK origin would no longer constitute goods of EU origin under the various free trade agreements of the EU.

This might affect companies with products including value added in the UK. The automotive industry has already warned that EU free trade agreements might no longer apply for some models, for example if engine production is based in Great Britain. Consequently, manufacturers of all industries should check to what degree their products include value added in the UK, and whether the rules of origin may pose a problem for their exports to third countries under European trade agreements.

3.    Prepare for delays

If the UK drops out of the Customs Union, the immediate problem for exporters would not necessarily be customs itself, but the need for checks at the border. Research commissioned by the BBC concluded that it will take an average to of about two minutes for each vehicle to be processed at the port of Dover. This does not initially sound dramatic, however the effect would be, with researchers predicting this measure to add about 10 miles to the queues at peak times for every additional minute's worth of checks. To further underline the possibility of this becoming a reality, there are already plans by the British government to turn motorways into potential lorry parks in worst case.

Companies that export to the UK (or import components, see figure 1) should also prepare for a scenario in which a hard Brexit causes chaos at the borders, especially in the first weeks. The biggest delays are expected at the Channel Tunnel and the port of Dover, where 1.6 million and 2.6 million lorries respectively pass each year. Consequently, logistic processes should be reviewed and checked for the availability of alternative routes.

Further information

VDMA European Office   |   VDMAimpulse 03-2018: "British industry looks for solidarity"   |   VDMAimpulse 02-2018: "Trade after Brexit: A matter of cake and cherries"

© VDMA
Contact
Holger Kunze, VDMA European Office.