www.structuredfreight.com | April 2017 | CEO COLUMN | 6-7
The United Kingdom entered into the Treaty of Rome in January 1973 and has participated in the creation of common laws and regulations for all members of the EU for the last 44 years. The UK was also involved in the creation of the 1992 Treaty of Maastricht, which led to the European Union and a new common currency, the euro.
Most discussion about the impact of Brexit in the media has focused on the loss of free movement and free trade. But what is not often discussed is the fact that the UK has, for 44 years, allowed the EU to negotiate all international treaties. As a result, there is no one within the UK with experience in negotiating the new international treaties that will be necessary for an independent nation, or of drafting new rules of international trade. This leaves the UK in a precarious position. UK lawmakers are inexperienced with international trade, as are UK businesspeople. Many people have yet to realize how international trade will be different once the UK is an independent nation.
Let’s consider the scenario where the UK is able to negotiate a free trade agreement with the EU. This would provide welcome stability as we will be able to continue to trade with our neighbouring countries without barriers. Furthermore, the government will only need to work on drafting new trade deals with countries outside of the EU. However, even with a free trade agreement with Europe, now that the EU is a foreign nation, trading will be more complicated. Businesses will now need to deal with more complicated VAT calculations, customs declarations, and bureaucratic delay from foreign customs agents, among other issues. These were issues that did not exist when trading with the 28 countries of Europe from within the EU but will appear overnight once we have left. And the scenario above is the best possible outcome. Considering that the EU does not want to encourage other member states to leave, it is doubtful this scenario will come to pass.
The more likely scenario is that the UK will not get a special trade agreement with the EU, and will have to abide by the rules of the World Trade Organisation. In addition to everything mentioned in the previous paragraph, UK businesses will also need to pay import taxes from any imports from the EU, and their customers in Europe will need to pay import taxes as well. This could lead to price increases of up to 20%.
For example, imagine a UK manufacturer that import parts from suppliers in Europe. They will need to pay an import tax on these parts. If the product they create is sold to customers in Europe, those customers will also need to pay an import tax. The cost of this product to the European customer has just increased and the profit to the UK manufacturer has decreased.
Now imagine this UK product sold to the European customer is transformed into a new product, and is sold to a customer in the UK. The new UK customer has to pay import taxes on this as well. As products are moved back and forth across international borders, the cost continues to increase due solely to trade taxes. And because the UK has traded freely with Europe for the last 44 years, many UK businesses have their suppliers in Europe, and there may not be appropriate substitutes in the UK.
The businesses most at risk are the small businesses. The cost of labour and infrastructure in the UK is already higher than most places in Europe. The added cost of trade taxes will make the UK increasingly less competitive. It is imperative that small businesses begin planning today for how they will handle international trade. They will need to employ customs agents and companies dedicated to international transport to advise them on how to adapt for the coming separation.
There are solutions available and we will discuss them in our next issue. Until then, if you have any questions, either about Brexit in general or how it will affect your business specifically, you can send an email to [email protected].
Carlos Saiz-Perez
CEO & Business Operations Director