The two UK exit from the EU scenarios are a no deal exit and a free-trade agreement at the end of 2020. In either scenario are likely to have a direct impacts on traders and on their supply chain. Although there may be a lot of uncertainty about UK exit from the EU in one sense the two outcomes are predictable to a significant extent because templates already exist for the types of relationship that they would imply for the EU and UK and the effect that they would have on trade.
It is critical in scenario planning, that traders consider these possibilities and their impact as it may affect them, main suppliers and their customers. Both a no deal exit or a long-term EU UK trade agreement, would involve a very significant disruption and change in the terms of trade between Ireland/the EU and the United Kingdom (and to a much lesser extent Great Britain)..
In the case of a no deal exit, the risk is about both customs tariff costs and customs process cost/barriers to trade. In the case of a exit with a deal, it is likely that there will be zero or almost zero tariffs on almost all goods in their sector but that the biggest risk of cost in this scenario will be in the area of new customs regulatory processes and barriers to trade.
Changes Terms of Trade
Either a no deal exit or an exit with a deal changes the terms of trade between Ireland (and the rest of the EU) and Great Britain. The processes describe in relation to customs and regulatory controls will affect businesses and affect many of the businesses with whom they deal either as immediate or ultimate customers or an immediate or ultimate supplier. It might do so either in a way they can manage, perhaps with contraction, or it might threaten their whole business model and their long-term sustainability as suppliers or customers. Larger to medium-size businesses are likely to be in a better position to adapt to the required changes than smaller size businesses.
A no deal exit produces severe and widespread risks. Not alone is there customs and tariff costs on top of compliance costs, there is also across the economy regulatory disruption in areas such as compliance standards for the goods themselves and also across numerous basic areas of the business infrastructure.
This would include wide freedoms to provide services (e.g. reverse transport services which will disrupt transport industry) data movements, intellectual property, the enforceability of court judgments and numerous other parts of the basic commercial infrastructure, any of which by itself, might have a very disruptive effect on any given business in circumstances
A significant issue in terms of the impact of UK exit from the EU on suppliers, logistics providers or customers has been and remains perceived uncertainty about outcomes. This uncertainty has lessened considerably since the December 2019 election in the UK. That uncertainty made it difficult for other businesses to plan with the result that information traders might get from suppliers and customers has been hedged around the range of outcomes and uncertainty about those range of outcomes, that formerly applied.
In many cases, suppliers logistics providers and customers have not made any definite plans or arrangements and can give little certain indication as to what they propose to do because of the uncertainty as between the main outcomes.
It is understandable that businesses do not necessarily want to spend significant money and commit significant resources to particular possibilities which are uncertain. However the two possible outcomes of UK exit from the EU are broadly similar and it is virtually certain that one or other will occur at the end of 2020.
Deal or No Deal
This is the possibility of a no deal exit at the end of 2020. They is the possibility an EU UK agreement, with additional costs and multiple knock-on effects , very profound, but significantly less than a no deal exit. Traders need to consider the risk of a no deal exit and an exit with and EU UK Agreement. There will be a cliff edge of uncertainty towards the end of 2020 during which the alternatives will remain uncertain. The difference in the scenarios will differ from sector to sector. In many cases,there may be little difference in outcomes..
There may be threats of the possibility of a no deal exit right up to the moment there is a trade agreement. This is the nature of negotiations. The threats of a no deal exit by either UK or the EU might be posturing or bluff or regardless of whether they are so or not, may come true by accident or design with the result that there is a no deal exit even in the medium term. This is the so-called cliff edge.
Therefore, in planning around logistics, traders need to be ever conscious of the risk of a no deal exit and the an exit with a deal. The first is a catastrophic event and the latter is a very significant, but potentially less catastrophic event, at least is some cases. Both constitute a sudden ripping up of the fundamental terms of trade and carry the prospect that a trader’s business model may no longer work.
No Deal Exit Risks and Mitigation
It is widely expected that a no deal exit or even an exit with an EU UK agreement,, could lead to severe logistical and supply chaos around all movements of goods which in any way go through or to and from the UK. Even continental EU logistics is likely to be affected by the knock-on effect for example of goods vehicles being detained longer in the UK than has been the case to date.
The EU and the UK have published dozens of notes in 2018 and 2019 on how they would deal with issues in the event of a no deal exit. These are likely to be republished in similar terms for exit at the end of 2020. Broadly speaking, because the UK would be free to adapt its laws as it wishes and it has tended to be more flexible
The UK has, for example, indicated it will waive all entry declarations and allow businesses who don’t use professional freight forwarders or customs agents to undertake a very simplified form of customs import declarations by an entry in their books for a period. Equally, in relation to regulation, the UK has indicated that the whole of the UK would accept EU certification for a temporary period may be 6 to 9 months.
A problem with mitigation steps that might be taken, such as those mentioned above is that the EU moves much more slowly. It would take time to change its laws and it may be less willing to accommodate the UK in any event. Therefore although UK might take steps such as providing ultra-simplified import procedures for GB importers in the event of a no deal exit, there would still be export requirements on the EU side in both of these cases which would still lead to significant friction for EU to UK trade.
Customs Controls and Costs
In broad terms, every movement of goods to and from the EU and UK will require an importer and exporter of record. This may pose challenges to some businesses who supply directly to customers who are not in a position to undertake import formalities.
The introduction of customs controls leads to definite immediate costs in simply undertaking the procedures and also the risk of much more significant costs in dealing with revenue authority queries arising from the steep learning curve for both industry and new revenue personnel. This may be exacerbated by revenue inventions primarily aimed otherwise but affecting traders and causing bottlenecks. It may induce ultimately, longer-term changes in distribution, logistics, and routes.
We have set out in other sections the issues which should be raised or at least considered in relation to suppliers and customers logistics providers and prospectively customs software providers in the context of taking on board customs and regulatory costs and procedures.
The issue of origin is important. Even under an EU UK trade agreement, the zero rates of duty that might be available will only be available, provided that the goods are of UK origin for Irish imports and EU origin for UK imports.
Origin does not mean that the goods have been lawfully imported into a country. They must have been manufactured or substantially transformed in that country. Therefore, for example, it is possible that the UK importer might import goods in China paying customs duties on them. They would be subject to further customs duties as if they are third-country goods even if imported directly from the UK, even where the UK EU trade agreement provided zero duties. This is because they are not of UK origin. The result is a double customs duty charge.
In the event of a no deal exit and customs controls, then a whole other range of customs management possibilities may assist. They may suspend duties or simplify processes. The Customs code (both EU and new UK) has several reliefs which can be used to manage and postpone customs duties.
To mention one of several, there is customs warehousing by traders or by their supplier by which goods may be brought goods to a customs warehouse in Ireland so as to postpone customs duties for traders until removed from the warehouse. Equally reliefs for goods entered the jurisdiction on a temporary basis relief are available.
If a no deal exit took place whereby customs tariffs had to be paid or incurred there is significant scope for logistical analysis of how customs duties as a whole could be managed and minimised by using various reliefs and the customs code.
In some cases, even with customs duties, third countries with which the trade agreements might have lower rates of duties which may tip the balance in favour of supplies from that country. As the case generally with customs costs, purchasing from within the EU from an alternative supplier would avoid both the customs tariff costs as well as the customs procedures costs.
We have set out separately the main risks in relation to regulatory compliance. The EU’s formal position is that it will not accept UK certified goods after UK exit from the EU. The particular regulatory position depends on the precise sector. Existing goods are likely to be accepted where they have been certified prior to departure from the EU.
This is likely to be no recognition of certification of UK certifiers in the EU post-UK exit. UK manufacturers would need to adjust to obtaining certification by EU accredited bodies and this may take time. Many certifiers have arranged the certification. Traders using UK certified goods should seek confirmation of the position from the manufacture or supplier.
The UK has indicated that will accept EU certified goods at least for a period of 6 to 9 months after UK exit from the EU. After this, the EU certify goods must be certified by UK recognised certifiers.
This is the general position and there are differences in particular sectors where immediate changes can kick in including in particular requirements to have authorised representatives in the other state i.e. in the UK by EU suppliers for UK regulatory purposes and equally EU representatives in the UK in the case of EU suppliers.
Payment / Currency
Currency issues will obviously also arise. Traders need to consider the terms of payment. It is in no way possible to predict future currency rates. It is commonly assumed that a sudden unexpected UK exit from the EU might lead to a fall in the value of sterling.
This may have implications in terms of their pricing when traders give credit and terms of payments which straddle UK exit from the EU, whereby traders might end up with a much lower value in euro than traders anticipated.