Brexit exit begins

01 February 2018 15:48 Source:ICIS Chemical Business

Uncertainty surrounding the outcome of Brexit negotiations is forcing UK chemical companies to set up subsidiaries in other European jurisdictions to handle regulatory requirements, the CEO at the country’s Chemical Business Association (CBA) says.

Peter Newport said that the lack of clarity about the format of Brexit and its impact on chemical supply chains and regulation is making his members take action now to ensure they can continue doing business with the important European market.

“Businesses are already moving: our members are advising us that they are already pressing the button. One CBA member has been in face-to-face discussions with government departments, telling them that in late 2017 he established a new company in Europe,” said Newport.

This company is swapping its REACH registrations – the EU’s main chemicals regulation – into a new European subsidiary and will seek to develop new markets in that country, he added.

Moreover, he said the EU country the company is moving operations to has lower corporation taxes than the UK, adding that the business may declare profits and pay tax in the new location, denying the UK government tax revenue, he added.

Newport revealed that larger pan-European companies either have or plan to switch REACH registrations to EU subsidiaries to protect them and may move parts of their businesses away from the UK.

The news comes as a leaked UK government report published by UK news site BuzzFeed on 30 January named the chemical sector as the worst affected by Brexit in whichever form it eventually takes. “We’ve been telling the government that chemicals will be a key sector impacted by Brexit and that chemicals impacts other ‘darling’ sectors such as automotive and pharmaceuticals that the government sets as priorities,” said Newport.

He pointed out that some substances can be shipped across the channel several times as intermediates, so tariffs and customs delays will hurt not only chemicals but the UK and EU economy. “There is a growing realisation amongst the EU27 [the EU minus the UK] and the UK government that supply chains are complex. After 40 years many are closely integrated and unravelling them is not going to be simple,” the CBA CEO said.

The CBA wants the UK to remain part of the EU’s REACH system and to pay fees to the European Chemicals Agency (ECHA) – which administers REACH - if necessary.

Without a transitional deal, ECHA has pointed out that after Brexit the UK will become a third country so UK REACH registrations will not be valid in the EU. At the same time, EU27 chemical companies will also suffer because some substances registered under REACH have data owned by UK companies.

“Until late 2017, the UK government was a bit like a black hole – a lot of information was being put in but nothing was coming back out. Now there are signs of what the government would like to see and reassurance they have heard what we’ve been saying,” said Newport.

The BuzzFeed report quotes a loss of between 2% and 8% to UK GDP growth over the next 15 years. This would depend on whether the country crashes out of the EU under World Trade Organisation (WTO) rules or enjoys continued single-market access through membership of the European Economic Area (EEA).

REPORT CONFIRMS FEARS - CIA

The leaked report confirms the concerns of the UK’s Chemical Industries Association, according to its CEO. “This report reaffirms everything we’ve been worrying about in terms of tariff implications, and non-tariff barrier implications, in the event of regulatory inconsistency and divergence. Also the extent to which there is a block on people and skills,” said Steve Elliott.

He said he has yet to receive an answer to a letter he wrote before at the end of 2017 to Michael Gove, the UK’s Secretary of State for Environment, Food and Rural Affairs.

In the letter, Elliott pointed out that the chemicals industry wants regulatory consistency with REACH. With 60% of the UK’s chemical exports heading to the rest of the EU, and 70% of its imports heading the other way, there are fears that blocking access to that market via regulatory divergence could be damaging.

REACH is also seen as a gold standard in regulation and is being emulated by other countries. South Korea, for example, has implemented K-Reach. Divergence by UK chemicals could threaten easy access to other markets.

“On regulatory divergence, our message holds that for something like REACH it’s a question of market access and standards setting. Sticking as close to, if not within REACH, enables that access to our most important market,” said Elliott.

Minimising disruption to supply chains across the EU27 from Brexit is a key objective on both sides of the English Channel, said Elliott. Over the next few weeks, Elliott said he also expects to see more established formal working groups between industry and government.

By Will Beacham