'No deal' Brexit calamity

18 October 2017 15:06 Source:ICIS Chemical Business

The UK government’s Brexit negotiations are – by most accounts – stumbling before they have reached the first hurdle. The EU has made it clear that there can be no progress towards negotiating post-Brexit deals on trade or anything else until three aspects have been agreed: Firstly the financial divorce settlement (how much the UK must pay to meet its previous obligations); secondly the rights of EU citizens living in the UK and vice versa; and third – a solution to the border between Northern Ireland and the Republic to the south which remains in the EU.

Despite several rounds of negotiations none of these have yet been agreed and there is a bad-tempered impasse between the two sides. After the latest talks failed to make any progress this week, it emerged that the UK government is now preparing for the possibility of a “no deal” Brexit, and has allotted £250m to help government departments prepare. No deal would see the country crashing out of Europe in March 2019. In this scenario, free trade with EU countries would end and World Trade Organisation (WTO) standard tariffs would apply.

Speaking in the House of Commons UK Prime Minister, Theresa May declared: “while it is profoundly in all our interests for the negotiations to succeed, it is also our responsibility as a government to prepare for every eventuality, so that is exactly what we are doing”.

For the chemical industry a no deal exit would be the worst-case scenario. Tariff barriers would be put up which could severely hamper trade with the EU. In polymers alone, for example, a 6.5% levy would apply on product leaving and entering the country under WTO rules.

UK chemical exports would become less competitive to EU customers whilst production costs for companies relying on EU-sourced chemicals would rise.

The UK chemical industry sends 60% of its exports to rest of the EU and receives 70% of its imports. The country’s trade association, the Chemical Industries Association has called repeatedly for tariff-free access to the single market to be maintained.

REGULATORY NIGHTMARE

With no transitional deal or other arrangements in place, chemicals trade with the EU could be frozen as UK companies’ Reach registrations would no longer be valid, regulatory lawyers have warned. This is because the registrations are for EU-based companies.

The UK government has made it clear that it does not plan for the country to adopt EU regulations in the way members of the European Economic Area such as Norway have done. This means a bespoke UK Reach or equivalent will need to be created, along with something to do the job of the European Chemicals Agency (ECHA) and all the complex IT systems it has set up to administer EU Reach over the past decade.

But this will take time so the UK really does need to negotiate transitional arrangements to allow for a continued role for ECHA, at least in the short term. The agreement could also include some system for mutual recognition for Reach registrations. This would only work if UK Reach is very similar to EU Reach. None of this is likely to happen under a ‘no deal’ Brexit.

The CIA and UK’s Chemical Business Association have also warned of major supply chain disruption if no transitional deal can be agreed.

Customs checks will inevitably delay trade and the UK government has already drawn up plans to create huge truck parks on routes heading towards UK ports so that inspections can be carried out and paperwork checked.

Then there is the impact on the broader economy. WTO tariffs average 2-3% on many industrial goods and rise to 10% on autos and even higher on agricultural goods. Thousands of jobs rely on frictionless trade between the EU and UK.

Whilst we can live in hope that the current deadlock will come to an end, UK chemical companies and their European trading partners would be wise to prepare for the disruption of a “no deal” Brexit worst-case scenario. This could include building substantial cash reserves as a buffer as well as examining the potential impact of WTO trade tariffs and a new regulatory framework.

 

By Will Beacham