Chemicals face more Brexit uncertainty after UK election

Author: Will Beacham

2019/12/12

BARCELONA (ICIS)--Whatever the result of Thursday's UK election, the country's chemical sector and its trading partners can expect months and possibly years more uncertainty over the country’s withdrawal from the EU.

  • Last pre-election poll suggests Conservative majority of 28 seats
  • Boris Johnson plans to pull out of EU by 31 January
  • 11 month 'business as usual' transition until 31 December 2020
  • Will try to negotiate a free trade deal
  • If he fails could exit on WTO terms (maximum 6.5%, average 4.5% tariffs)
  • Labour control of parliament - customs union, second referendum
  • Liberals - cancel Brexit

The election result, on Friday morning, is unlikely to bring much more clarity - at least in the short term - to the format of Brexit.

The last pre-election poll, published on Wednesday by YouGov, gives the ruling Conservative Party a potential lead of 28 seats. This is a weaker majority than in previous polls, suggesting voters were switching sides in the closing days of the election campaign.

If the Conservatives do win a working majority, Prime Minister Boris Johnson has promised to take Britain out of the EU by 31 January, 2020.

Under the withdrawal agreement it is “business as usual” during the transition period which ends on 31 December, 2020. The UK remains in the EU customs union, following the rules of the single market (including any new ones) until then. UK chemicals will continue to trade under the existing zero tariff customs regime.

Johnson will use the 11-month transition period to negotiate a free trade deal with the EU27. He has ruled out extending this, even though the withdrawal agreement allows for up to two additional years.

Trade deals usually take a minimum of 5-7 years to negotiate so it seems unlikely he will succeed in 11 months. If he fails, Johnson will then have the stark choice to either change his mind and extend the transition period – which many of his supporters will dislike – or exit the EU anyway.

WTO RULES FROM JANUARY 2021
In this scenario the UK will default to World Trade Organisation rules from 1 January 2021. This means average chemicals tariffs of 4.5% up to a maximum of 6.5%. These tariffs will apply to trade with the EU27 and the rest of the world, except where the UK has negotiated bilateral free trade deals.

The UK government has, so far, managed to roll over 19 EU free trade agreements, worth just over 8% of total UK trade. It has great ambitions to strike deals with the US, Japan and other major trading countries. For trading partners without an FTA, full customs checks and procedures will fall into place.

SUPER CANADA PLUS TRADE DEAL
The political declaration for the post-Brexit UK-EU relationship commits to creating a free trade zone with zero tariffs and non-tariff barriers to trade. Controls over immigration and the right to pursue independent trade policy are important to the UK, while the EU wants to protect its single market and customs union.

On a positive note for chemicals, cooperation over chemicals regulation, and avoidance of un-necessary barriers to trade are explicit. It picks out the European Chemicals Agency as a target for UK/EU cooperation.

Johnson is aiming for something like the new EU-Canada free trade deal, but with added extras. This free trade agreement came into effect in September 2017 and will be implemented over the course of seven years.

It eliminates tariffs between the EU and Canada on chemicals (previously up to 6.5% under WTO rules) and most other goods (some agricultural and food products are not covered).

If the UK agreed a similar deal with the EU it would still be free to negotiate separate trade deals with other countries. However customs checks would be necessary to ensure goods meet regulatory requirements. Johnson wants to include services, which are not covered by the Canada deal, and closer regulatory alignment, hence “Super Canada Plus”.

OTHER BREXIT SCENARIOS – LABOUR, LIBERAL, HUNG PARLIAMENT
If the opposition Labour party wins enough to control parliament, they have pledged to negotiate a deal based around a customs union and close regulatory alignment within three months. A second Brexit referendum within six months. The choice will be to leave with the customs union deal or to stay in the EU.

A UK- EU 27 customs union would allow for tariff-free trade between the EU27 and the UK. There would also be a common approach to customs agreements with third countries. But the UK would not be free to negotiate its own bilateral trade agreements.

A customs union is different to a single market which includes much deeper economic integration. The EU single market includes four freedoms of movement of goods, people, services and capital.

The Liberal Democrats have campaigned to revoke Article 50 and cancel Brexit without a second referendum.  This seems to have backfired as the polls suggest they have lost a lot of support since introducing the policy.

A hung parliament – with no party in overall control – would probably result in more of the disagreements and inertia that plagued the last parliament. There would be pressure to agree on a second referendum to resolve the Brexit question.

IMPACT ON CHEMICALS
The UK and EU27 chemical sectors are strongly linked in terms of supply chains. Large volumes of building-block chemicals cross the channel. The UK also relies on imports of hundreds of chemicals in tariff and customs-free trade within the EU28 bloc.

The chemical sector faces severe disruption if we exit onto WTO terms. There would be added delays, costs and paperwork. Some companies may choose to cease trading with the UK or to cut supply of smaller volume products.

Companies and trade groups here are crying out for certainty, and Brexit has already had a negative impact on investment. Tying up working capital in holding extra stocks ahead of each false Brexit deadline has made life difficult, especially for SMEs.

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Graph by Miguel Rodriguez-Fernandez. Source: ICIS Supply & Demand database
Front page picture source: ANDY RAIN/EPA-EFE/Shutterstock

Focus article by Will Beacham