For US companies, Brexit means both uncertainty and opportunity
After several years of politicking and, at times, fraught negotiations, the United Kingdom (UK) and the European Union (EU) formally concluded the Brexit process on December 31, 2020. The ramifications of what follows are as complex as the exit process itself: the UK actually left the EU on January 31, 2020, but under the UK-EU withdrawal agreement it entered into a “transition period” in which most EU law continued to apply in the UK; as a result, many things remained as if the UK were still an EU member state.
With the conclusion of the future relationship agreements, which have applied since the end of the transition period on December 31, 2020, the UK and EU began to forge a new, evolving partnership that will also have implications for their global partners. In addition, the terms of the withdrawal agreement will have continued relevance for many years to come.
For US companies, the complexity of these new agreements means that organizations of all sizes must re-evaluate every detail of their UK/EU business arrangements — from supply chains, logistics, and manufacturing to inventory, taxes, customs declarations, and distribution. Understanding the new rules and complying with them will be imperative to avoid any unpleasant surprises.
Several months post transition, gaining clarity on the ever-evolving changes in these areas continues to be a challenge. A number of new customs regulations and procedures have been introduced, for example, but specific guidance on how companies should modify their own processes and procedures to manage these changes has been in short supply.
Furthermore, navigating the complexity of the changes is proving to be a costly endeavor. As stated in the article Global Trade Technology Can Help Solve Brexit Supply Chains, “For UK importers, the new tariff regime may increase the cost of certain goods as well as the administrative cost of complying with new rules and classification codes.”
Aggravations and opportunities
Among the most contentious issues are new “rules of origin” determinations that require businesses to track and prove country of origin for all goods and products, including raw materials; many cumbersome changes to Value Added Tax (VAT) calculations; complications in the certification processes for food, animals, medicine, and professional services; ongoing disputes about how to manage customs with Northern Ireland; and a whole host of issues hidden deep in the details of the withdrawal agreement and future relationship agreements that businesses and consumers are only now discovering.
For US companies, however, Brexit represents a mixed bag of aggravations and opportunities. Yes, the UK’s split from the EU means that companies must re-evaluate their supply chains and compliance obligations, but there are certain aspects of Brexit that may give some US businesses a distinct advantage — at least for a while.
For example, US financial firms may be able to benefit from the fact that London-based banks no longer have free access to the EU market and must now establish a physical presence in each individual EU country in order to do business there. Many US banks and finance firms already have the required “passporting rights” to operate in the UK and EU, as well as the necessary physical offices, so they may be in a good position to peel off new clients and business from UK firms that are still scrambling to establish their own physical presence.
US manufacturers may also have an opportunity to lure business from EU-based companies that no longer wish to source goods or materials from the UK, or companies that are open to a more beneficial trade arrangement given new UK/EU border restrictions.
Separate and no longer equal
Still, the most immediate impact of Brexit for US companies has been the need to treat the UK and EU as separate trading entities. For US companies that export goods to the UK for resale inside their borders, not much has changed. But, for US companies that have historically used the UK as a distribution gateway to the EU market, that arrangement is now fraught with complications — not the least of which is that goods originating in the US and entering the EU through the UK are no longer duty free.
Companies that continue exporting through the UK can expect to encounter customs delays and incur additional costs for taxes, fees, documentation, and additional personnel to manage it all. In addition, distributors to the EU also need to establish a physical presence in countries to which they are exporting. This may be neither practical nor desirable for many US companies, particularly small to mid-size companies that built their business models based on the assumption of free access to EU markets.
Likewise, US supply chains that previously went through the EU to the UK may be subject to different VAT requirements, or — because of logistical difficulties and extra costs — may no longer be feasible. In such cases, US companies have little choice but to create separate trading relationships with the UK and EU and to adjust their supply chains accordingly.
Certifications and FTZs
At the very minimum, this means that US manufacturers exporting to Europe and the UK must obtain separate regulatory compliance certifications from the EU (a CE mark) and UK (a UKCA mark). For goods traveling from the EU to the UK, the EU’s CE mark will be accepted in the UK until the end of 2021, after which a UKCA mark ensuring that the goods meet UK regulations will be required.
When that happens, the UK and EU will officially have different import/export regulations, and US companies will need to do whatever is necessary to ensure they are in compliance with both.
For companies that want to have a presence in the UK but would prefer not to pay high tariffs, at least one viable alternative is emerging: in March, the UK government agreed to establish eight free-trade zones (FTZs) or “freeports,” which will lower tariffs and customs obligations for qualifying companies. But the zones, located near major ports, are not yet operational and with trade a major agenda item of the G7 in recent weeks, it’s possible that further changes are coming.
The EU has its own FTZ system under the EU’s Union Customs Code, but companies that use them should be prepared to adapt or upgrade their computer systems to meet the EU’s more technologically sophisticated compliance requirements.
Still a wish: Free trade with the US
One of the much-asserted benefits of Brexit is that it gives the UK the power to negotiate more favorable trade arrangements with countries outside the EU, unencumbered by EU rules. And, of course, one of the free-trade deals the UK had hoped to secure sooner rather than later was one with the US.
Unfortunately, though the UK is busily negotiating or re-negotiating free-trade deals with numerous countries, a deal with the US is not likely to materialize anytime soon. White House representatives have said it may be two or three years before the Biden administration is ready to discuss a trade deal with the UK.
In the meantime, both the US and UK agreed in March to a four-month suspension of tariffs in their ongoing Airbus-Boeing trade dispute that has been going on for 17 years. This may or may not count as progress, depending on how one looks at it, but at least it signals a willingness on both sides to de-escalate tensions in a dispute that could impede trade talks if and when the US is ready to negotiate.
Responding to Brexit
As noted in the report, Brexit Accelerates the Pace of Change, the post-Brexit landscape is still very much evolving, so plenty of changes can be expected in the coming months as companies and governments grapple with any challenges that may arise. In the meantime, US companies exporting to the UK and EU need to continue monitoring their supply chains and inventory levels. They also need to stay current on evolving regulations in multiple areas, including data privacy, cross-border trade, and relevant tax policies, as well as new free-trade agreements in other parts of the world.
For some companies, this level of vigilance may also mean significantly upgrading corporate ERP, tax, and trade-management systems to ensure compliance in what has become an ever-changing and increasingly uncertain environment for global trade. Furthermore, Brexit affects every company differently, so how a company responds depends on its own unique operational structure and business challenges.
Companies the world over have been speculating about the impact of Brexit for nearly five years. Now that most of Brexit’s mysteries have been revealed, it is up to individual businesses to find ways to make this new reality work for — rather than against — them.