Brexit, Stage Left

Here are eight ways Brexit might affect your European supply chain.

When it comes to the U.K.’s monumental decision to leave the European Union, the only thing that is certain is complete uncertainty about how this separation will impact individuals and businesses for years to come. 

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The only thing that is certain is complete uncertainty.

New U.K. Prime Minister Theresa May recently indicated that the British government would invoke Article 50 of the EU’s Lisbon Treaty by the end of March 2017, which formally kicks off the two-year exit negotiations process.

This means the U.K. and its trading partners will be waiting for quite some time before trade policies can begin to change.

To better understand the strategic implications of the post-Brexit supply chain for American companies, UPS’s Mark Boyles talked to Penny Naas, vice president of public affairs and sustainability at UPS, based in Brussels, and Richard Currie, director of public affairs at UPS in London.

[Also on Longitudes: Bracing for the Next Brexit]

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What are the short- and long-term implications of Brexit on companies whose supply chains involve the U.K. and EU?

Naas: In the current environment, there are still more unknowns than there are knowns about what’s going to happen.

Companies and governments are in a kind of limbo-land with a lot of speculation on the medium-term and long-term picture. Over the next five to eight years, I anticipate quite a bit of dynamic change regarding supply chains.

Currie: I think there’s been an assumption that the U.K. will remain within the single market. But one of the lead factors in the “Leave” campaign was controlling migration and immigration.

So, if there are going to be curbs placed on the free movement of people, then within the deal that the U.K. manages to negotiate with the rest of the EU, it may prove impossible to still have access to the single market.

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If people can’t move freely, then goods can’t move freely?

Currie: That’s correct. And it’s been made very clear that, if they want to put curbs on people, then the free movement of goods within a single market is no longer open to them.

Naas: The EU was founded on four freedoms of movement: goods, services, people and capital.

And if you block one of those four, you lose the other three.

If you’re going to restrict the free movement of people, then the EU says your goods, capital and services will have to go through the same hurdles as anybody else coming into the EU’s Single Market.

I’d add a fifth, which is data. As soon as the U.K. leaves the EU, there will need to be agreements with regards to the movement of data.

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What are some of the key issues to be worked out in new trade agreements between the U.K.-EU and the U.K.-U.S.?

Naas: When the U.K. is negotiating its departure from the EU, it will have to negotiate at least three legislative packages.

First will be the package to leave the EU itself. 

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American companies may not be able to use the U.K. as a home base.

Second, it will be negotiating free trade agreements with other countries – the EU and other countries.

Right now, its free trade agreements come as part of its membership in the EU — it will have to re-establish or rejoin these existing agreements, or else face different trading conditions than it currently enjoys.

And third, it will have to rewrite many of its laws, since many are based on European law.

Currie: Border clearance is going to be an important issue.

We probably won’t be able to move things from the U.K. into the EU as easily as we do today to the 27 member states.

There could be customs barriers between the U.K. and the EU, and it will go both ways, which would add cost and time to the process.

Even if the U.K. somehow stays in the European tariff agreement, the value added tax (VAT), the European equivalent of sales tax, will still require a formal clearance when goods cross the border.

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What do you anticipate will become the most likely impact of Brexit negotiations and changes on American companies doing business in the EU?

Naas: The entry procedures into the U.K. are not going to change for a U.S. company in the short run, as currently the EU does not have a free trade agreement with the U.S.

However, as the U.K.-European relationship changes, American companies may not be able to use the U.K. as a home base for what they do on the rest of the continent as efficiently as today.

The many U.S. companies that have warehousing facilities in the U.K. and ship to the rest of Europe could see the introduction of customs procedures between the U.K. and EU.

Also, there will be corporate and VAT tax implications post-Brexit.

The U.K. obviously is a preferred location because of language and familiarity with the legal system.

There is a lot of commentary going on about the fact that most U.K. contracts are based on current EU law, although the U.K. has already started discussion to work through this issue.

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What will be the long-term impact of Brexit on world trade policies, and could this curtail global expansion plans for American firms?

Naas: There are some who have said that Brexit is a sign that there’s a decline in support for globalization – and a decline in support for trade policy in general.

Some believe that this discontent with global trade and globalization is being picked up and echoed in U.S. elections.

I actually see the Brexit debate being more about sovereignty. 

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The EU may move in a way that’s more restrictive about the use, control and storage of personal data.

The campaigners who led the move to leave the EU were actually pressing for a more aggressive trade strategy for the U.K. when it was unencumbered by the EU. So as a result, I hope Brexit revitalizes support for the global growth trade policy agenda.

Currie: I don’t think that Brexit is based upon putting up a drawbridge and creating a barrier between the U.K. and the rest of the world.

It’s quite the opposite.

The U.K. wants to trade.

There are some EU member states that are skeptical and distrusting of trade deals and international trade in general. The U.K. is not one of them.

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American companies conducting business in Europe know that EU data privacy laws are much more stringent than they are in this country. How might Brexit impact those rules?

Naas: EU data policies may change, and companies collecting customer data in Europe may need to change their approach to storing it.

For example, the EU could decide that consumer data needs to remain on the continent.

Companies storing data on servers located in the U.K. might want to consider alternatives because cross-border data flows are also very likely to be impacted.

Overall, the EU may move in a way that’s more restrictive about the use, control and storage of personal data, as the U.K. has historically pushed for a balance between personal protection and the use of data for commercial means.

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Could there be any possible benefits from Brexit for mid-sized U.S. companies taking part in the global supply chain? 

Naas: You could see the U.K. become a more business-friendly environment for small and medium-size U.S. companies.

Another benefit is that the EU Single Market, which has not always been admired, has suddenly become sexy again.

People are rediscovering how great it is, with 500 million consumers.

[Also on Longitudes: Africa’s Post-Brexit Opportunity]

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Some experts predict that smaller and mid-sized companies will be the first to feel a negative impact from Brexit, since big business may consider them high-risk. Does this sound realistic to you?  

Naas: For U.S. small and mid-sized companies that do business with Europe, not much is going to change in the short run.

It’s going to be more of problem for these firms as the negotiations start and changes start to fall into place.

But there is a possibility that the biggest loser out of all of this is the U.K. consumer.

That has not played itself out in the data yet — consumer spending is still high at the moment, in part because of what’s been done to bolster the currency.

Also, for people like me who live in Brussels, it’s a great time to go to London and spend money because it’s cheaper now that the pound has declined in value after the Brexit vote.

London saw a huge tourism boom this summer. goldbrown2


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Richard Currie is Director of Public Affairs at UPS. He deals with all public affairs issues in the U.K., Ireland, Nordics, Turkey, Middle East and Africa. He was previously (2006-2008) Director of EU Affairs in Brussels.

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Penny Naas Vice President, International Public Affairs at UPS.

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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.