INSIGHT: New legislation makes no deal Brexit more likely, industry must prepare

Author: Will Beacham


BARCELONA (ICIS)--As the UK publishes new legislation which seeks to renege on important parts of the Brexit withdrawal agreement, the country's chemical sector and its trading partners need to ramp up preparations for the rising prospect of a no deal exit from the EU on 31 December, 2020.

  • No deal means WTO tariffs average 4.5%, maximum 6.5%
  • Lose access to EU free trade agreements (FTAs)
  • UK has rolled over 20 FTAs = less than 10% of total UK trade
  • Customs declarations set to rise from 55m to 300m/year
  • Rules of Origin could remap supply chains

On Wednesday the  Internal Market Bill was published which will allow the UK government to make unilateral changes to parts of the Brexit withdrawal agreement on customs controls in Northern Ireland. Ministers admit the bill breaks international law. It was published just as the latest round of EU27-UK Brexit negotiations got underway this week in London.

Then on Thursday Brussels threatened legal action unless the UK withdraws the new legislation.

The renewed Brexit turmoil hit sterling which plummeted this week to its lowest level since March 2020.

Even before the new legislation was published, there was pessimism that the Brexit talks would succeed as previous rounds had floundered over disputes on EU access to British fishing waters and rules over state subsidies to industry, environmental protection and worker rights.

The EU had wanted to finalise a free trade deal at a Council of Ministers meeting scheduled for October 2020. This now looks increasingly unlikely as recriminations fly from both sides.

The UK complains that the EU side wants to agree difficult areas such as state aid and regulatory alignment before it finds areas of common ground. The EU accuses the UK of trying to “cherry pick” the most attractive aspects of a deal, such as single market access.

With no deal in place, the UK will exit onto World Trade Organisation (WTO) tariffs which apply to trade between any countries which do not have trade deals in place.

Average WTO chemicals tariffs from Europe would be up to a maximum of 6.5%, and an average of 4.5%. UK exporters will face the same tariff regime to other countries trading on WTO terms.

In May 2020 the UK published new  "no deal” tariffs  which lowered rates for many imported chemicals to 4%

The tariffs will apply to the EU and all other countries without a free trade deal in place. This follows the WTOs ‘most favoured nation’ principal.

If the UK leaves the single market it also loses access to all the FTAs agreed by the EU. These will have to be re-negotiated, with the government hoping to roll over as many as possible.

As of August, 2020, 20 FTAs had been rolled over equalling less than 10% of total UK trade.

The government has great ambitions to strike deals with the US, Japan and other major trading countries but these often take years to conclude. The UK's Financial Times reported on Friday that the UK is close to striking a deal with Japan.

Possibly even more damaging than tariffs to chemicals trade under a no deal exit are the raft of customs checks and procedures that would fall into place.

With or without a free trade deal in place, the UK chemicals sector and its trading partners will face new requirements for customs procedures, plus onerous rules of origin regulations.

The British Chamber of Commerce estimates customs declarations will rise from 55m to 300m/year, based on official forecasts.

This inevitably means delays at borders, and threatens supply chains based on “just in time delivery”

Industries downstream of chemicals such as automotive face severe disruption. Thousands of components sourced from EU suppliers will now be subject to customs procedures and possibly tariffs too. For UK-made vehicles, 59% of their components come from outside the UK. Vehicle exports to the EU could face 10% tariffs under a no deal scenario.

If the UK strikes a free trade deal with the EU, this will grant UK-produced goods tariff-free access to the EU27. But what constitutes a UK-made product is defined by Rules of Origin.

Products typically must have 50% or more of their value created in the country of origin.

With so many feedstocks and components sourced from the EU27 and elsewhere, these rules could prevent UK chemical producers and their supply chains from exporting to the EU27 once the transition period ends.

It works the other way too: EU27 manufacturers with a high percentage of non-EU components could be prevented from exporting elsewhere if they cannot conform to the Rules of Origin.

Rules of origin could potentially be more disruptive than tariffs.

They could re-map supply chains with UK manufacturers having to source much more domestically to stay above the 50% UK value added rule.

The UK government is introducing a regulatory system – known as UK Reach - which should mirror the existing EU Reach framework, at least initially.
Companies producing and selling or importing chemicals into the UK learned in September that they must register basic details by 30 April 2021. Then there is a schedule of 2, 4 or 6 years to complete registrations depending on tonnages to complete the registration.

Chemical producers and distributors must prepare now. Prepare internally for UK Reach, the ramp up in customs declarations and check how Rules of Origin apply to your production. Stockpiling may also be advisable as companies did when a no deal exit was previously threatened.

Also check on post-Brexit plans with suppliers and customers. Do suppliers have any plans to stop producing or selling products in the UK market? Are customers planning any changes to their requirements?

For some companies the UK market is not significant so they may stop supplying the UK market because of the costs involved.

Because of financial stress caused by the pandemic, many companies will be examining their geographical coverage and asking if it is worthwhile continuing to supply the UK when it is outside the EU.

Since the Brexit vote in June 2016, UK chemicals production has already been hurt compared with the rest of the EU. UK business has been badly affected by uncertainty over what form Brexit will eventually take, with negative sentiment affecting investment and growth.

This chart uses data from the American Chemistry Council and shows chemical production as an index with 2012 as 100. Prior to the Brexit vote UK chemicals had been doing a lot better than Europe. After the vote it falls below Europe for the next couple of years and then fluctuates above and below. It is currently below Europe in its recovery from the pandemic.

The graph also highlights how UK and Europe chemicals have fallen behind the rest of the world in production growth.

The UK and EU27 chemical sectors are incredibly strongly linked in terms of supply chains. As the chart shows, large volumes of building-block chemicals cross the English Channel, including almost 800,000 tonnes of ethylene exported to the EU27 from the UK in 2019. The UK also relies on imports of hundreds of chemicals in tariff and customs-free trade within the EU28 bloc.

Insight by Will Beacham

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