UK, Europe chemicals face more Brexit uncertainty, chaos

Source: ECN

2018/12/07

The UK chemical industry and its trading partners face more uncertainty about the eventual format of Brexit as the government suffered a series of defeats in parliament ahead of a crucial vote to approve the deal on offer.

After three votes against the government on 4 December, UK Prime Minister Theresa May’s deal, approved last weekend by the EU, now looks more likely to be thrown out by members of parliament in a vote on Tuesday 11 December.

If it is rejected, the entire Brexit process could be thrown into disarray. With the likelihood of a disorderly “no deal” Brexit now increasing, the industry could be left in a regulatory vacuum without time to recreate or find a replacement for the Reach regulation which governs trade in chemicals across the EU.

It would also face immediate tariffs of up to 6.5% on petrochemicals under World Trade Organization rules. Huge delays would also be likely at ports around the UK.

Following the parliamentary defeat JP Morgan analyst Malcolm Barr doubled his estimation of a “no deal” Brexit from 10% to 20%. He also doubled the chance of Brexit being cancelled altogether from 20% to 40%.

On Wednesday the government was forced to publish legal advice from the country’s attorney general, Geoffrey Cox. He advised that the UK could be trapped “indefinitely” in a temporary “backstop” arrangement which keeps Britain and Northern Ireland in a customs union with the EU. The advice will not increase the popularity of May’s deal ahead of the vote because during the “backstop” period the UK must follow EU rules to ensure a level playing field on trade.

Under May’s deal the UK will leave the EU on 29 March 2019 with an extendable transition period until December 2020.

The UK has to follow EU rules and remain part of a single market until then, allowing frictionless trade in chemicals and other goods and services. But it has no say in EU decision-making during the transition. If no trade agreement is in place by the end of the transition period, a temporary arrangement will keep the UK in an EU-wide customs union until a deal is struck, allowing frictionless trade to continue. To end this, the UK and EU must jointly agree.

If the government is defeated in next week’s vote, MPs have several options.

They can vote to hold a second referendum on Brexit or suggest changes to the Brexit deal.

Options include the “Norway model” during a transitional period while it strikes a trade deal with Europe. Norway is a member of the European Free Trade Association (EFTA) and European Economic Area (EEA).

It would then retain full access to the EU’s Single Market but would not have to abide by the EU Common Fisheries Policy, Common Agricultural Policy or European Court of Justice. However, it would be required to allow free movement of goods, services, people and capital.

Controlling immigration was a key reason for the pro-Brexit vote so the Norway model may not be a popular choice for the UK. It could also call for a free trade deal similar to that negotiated between Canada and the UK. ■

Click here to view an ICIS Brexit trade flow infographic