The global trading system is in disarray. Global economic growth is slowing, half the G20 are now operating under openly protectionist agendas, and tensions between China and the United States remain high – despite faint promise of a truce earlier this year. But over in the UK, all of this is overshadowed by the continuing dispute over Brexit. The nation is bitterly divided, and we are fast approaching what could constitute a national crisis.
The confusion on behalf of international onlookers is understandable and they are not the only ones in disbelief. The decision defies all logic: why would a first division trading nation commit such an act of self-harm – voluntarily downgrading itself from the premiership of global trade to operating outside of a larger trading bloc on less preferential terms? But what had seemed like a slim possibility may well become a reality. As the 31st October approaches, we must suspend our disbelief and prepare ourselves for the worst possible result: a “no-deal Brexit”.
We are now in no doubt that a no-deal will trigger disruption internationally, though UK firms will naturally be worst affected. For the businesses that survive, additional costs will be cascaded down to the consumer – the poorest and most marginalised communities being the most vulnerable. But no-one will be immune.
The uncertainty surrounding the terms under which the UK will leave the EU has been hugely problematic for business continuity for the past few years; not to mention that many people hadn’t believed a hard Brexit would even be considered a possibility. Indeed, recent studies have shown that 70% of the UK’s 5.7 million small and medium-sized enterprises (SMEs) remain unprepared for a no-deal – many having been unable to afford such large-scale contingency planning given the multiple possible outcomes.
Political grievances aside, with less than two months to go, practical initiatives need to be established to minimise business interruption, whatever the outcome. For some services industries, Brexit has already happened; in many cases, companies have established a European presence to ensure that our new global status has as little impact on business operations as possible. The concern now predominantly lies around goods traders – particularly SMEs – and anyone with supply chains that cross UK/EU borders. Tariffs are predicted to reach up to 40% on some goods, with businesses in the food, drink, automobile and manufacturing sectors all set to suffer the most – particularly those with smaller margins. To mitigate the disruptive effects of crashing out of the EU, these companies should all be aware of the practical steps that need to be taken prior to the 31st October.
For any business that imports or exports across UK-EU borders, this involves dealing with the increased administrative burden (around tax, customs duties, declarations, tariffs, and quotas) which could swamp businesses that are unprepared or under-resourced – watertight contingency plans need to be established to ride out the storm. Importantly, businesses must ensure they have registered with HMRC to apply for an Economic Operator Registration and Identification (EORI) number, which anyone importing or exporting commercial goods from outside the EU needs to have. Businesses will be responsible for filling out the correct documentation to import/export from/to the UK, and this needs to be completed prior to loading at point of origin, as there will be no such capabilities in the ports.
Another reality that many may not yet have fully grasped, is that free movement of labour might cease altogether from the 31st October, regardless of how “orderly” or “disorderly” our departure from the EU is. Companies should be cognisant of this and make arrangements accordingly – by ensuring all of their workforces are in possession of a passport with 6 months validity, for example.
Though this seems like a UK-centric issue, the disruption will not purely be confined to UK businesses. Global supply chains will be impacted, costs for companies exporting to the UK will rise, and investment may be deferred – as we have already seen since the referendum. Companies trading with the UK are already re-evaluating and remapping their supply chains – all of which carries a cost both at home and abroad. Indeed, any companies trading with the UK (or with operations in the UK) should ensure they are fully informed of their UK counterparties’ plans and/or seek out local government representatives to get the latest information around trading requirements with the UK post-Brexit.
Businesses are understandably frustrated by the seeming lack of acknowledgment within the government of the economic distress that a no-deal would cause and the deficit of support provided to protect them in this eventuality. But it is time to accept the facts – businesses need to be preparing for the worst and hoping for the best.
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This article was part of TFG’s third issue of Trade Finance Talks: Trade Wars & Tradetech, launched at Sibos 2019. This free issue gets into the detail of trade wars, trade flows and geopolitics, as well as looking at how digitisation and fintech is bridging the trade finance gap. You can read the full edition for free here.