What Brexit Means for Global Services

Mar 29, 2019

What Brexit Means for Global Services

The Brexit train started to leave the station over two years ago, but the deadline to actually leave is fast approaching. In fact, the deadline has come and gone, and an extension has been granted by the European Union (EU) to the United Kingdom (UK) so they have the time they need to make a deal. The terms of that deal are going to have significant ramifications for people and businesses around the world in terms of trade, travel and even citizenship. Though the terms of the deal are not yet known, and while it's possible there won't be a fully negotiated agreement, it's important to anticipate some of the consequences of this and what they mean for your global trade initiatives.

What is Brexit?

The term Brexit is a combination of "Britain" and "Exit", and refers to the UK's intended departure from the EU and the resulting major changes to the trade bloc, border security and immigration policies. A 2016 referendum in the UK resulted in a slight majority of voters opting to leave the EU with a timeline of several years to negotiate new trade, border, and immigration agreements.

As part of the European Union, the UK was able to take advantage of free trade and open borders that allowed for easy, visa-free travel, and shared security responsibilities. This exit is expected to have a major effect on world economies as the EU is also Britain's chief source of foreign investment and their largest export partner.

Currently, it's difficult to predict exactly how Brexit will take effect, but there are two major possibilities: a no-deal "hard Brexit" without newly negotiated agreements, or the anticipated Brexit that still results in a separate UK but with new trade, security, and border agreements in place. First, here's what a No Deal Brexit could look like.

No Deal Brexit

A No Deal Brexit is what will happen if the deadline for leaving the EU occurs and the British Parliament has not agreed to the terms negotiated by British Prime Minister Theresa May and the EU. So far, the British Parliament has voted against two different options, forcing the Prime Minister to seek an extension to the Brexit deadline. If there's no agreement or new extension by this new date, a No Deal Brexit will occur and could mean a number of uncertain things.

Immediate Consequences

Initial negotiations agreed upon a 21-month transition period to allow the various effects of Brexit to take place slowly. This was meant to ease the burden of transitioning out of 47 years of established economic relations, which will bring significant changes to the way that trade is handled.

It's estimated that customs officers will receive an uptick in declarations to around 200 million per year, up from the average 55 million yearly declarations while part of the EU. The amount of licensed traders in the UK will likely double to more than 350,000 people per year. What this means is almost certain delays and backups for any inventory entering or leaving the UK, while most expect only a 1-2 day delay for pass through shipments.

Trade Patterns Will Shift

There's a lot of uncertainty about Brexit, but without established trade agreements ahead of time, it's fairly certain that current trade routes won't be as viable as they once were. For example, goods destined for the EU that currently pass through the UK might have to be rerouted to avoid that extra border crossing.

With the majority of OEMs in Europe based out of the UK, it remains to be seen exactly what strategy they'll adopt to deal with potentially higher taxes and delays. However, some suppliers have already started moving inventory from the EU to the UK and, likewise, from the UK to the EU to avoid taxation on those items after a hard Brexit.

Supply Chain Change

Currently, commercial drivers are allowed to pass through the EU without needing a separate license or credentials for each different country in the bloc. If the UK leaves without any further agreements, it's possible that lorry drivers won't be able to complete their routes as scheduled any longer without first receiving permission to drive from each country that they must pass through. While these changes do have solutions, it's necessary to anticipate the potential delays and additional time and paperwork necessary to continue business as usual.

With the majority of OEMs in Europe based out of the UK, it remains to be seen exactly what strategy they'll adopt to deal with potentially higher taxes and delays. However, some suppliers have already started moving inventory from the EU to the UK and, likewise, from the UK to the EU to avoid taxation on those items after a hard Brexit.

Brexit with a Deal

Even though the deal has not been approved by the British Parliament, negotiators on both sides have sought to come to agreement on a number of key issues. If there is to be a deal passed on Brexit, it will most likely have provisions for the following major items.

Exactly how much money the UK must pay to end the partnership. The latest negotiations have arrived at a figure just short of £40 billion GBP ($52 billion USD). What the border between Ireland and Northern Ireland should look like. As the only land crossing into the UK, this currently free and open border is a big point of contention for both sides of the debate. Individual trade agreements with each country in the EU, or at least a plan to establish them over time if one cannot be established with the entire EU. This presents one of the greatest unknowns for businesses that operate within both the EU and UK.

How to Prepare for Brexit

Preparing for a very uncertain event can be a hard task. However, when billions of dollars are at stake and business models are being threatened, it's well worth exploring many contingencies and preparing for a number of eventualities. With two major options in mind, think ahead and strategize how each might affect business operations and start to plan accordingly.

Exactly how much money the UK must pay to end the partnership. The latest negotiations have arrived at a figure just short of £40 billion GBP ($52 billion USD). What the border between Ireland and Northern Ireland should look like. As the only land crossing into the UK, this currently free and open border is a big point of contention for both sides of the debate.

The first step is to rework budgets to include the additional duties and taxes that might result from Brexit. Because it's impossible to tell exactly what new tariffs might cost, it's important to add plenty of room within the newly projected numbers for unexpected figures. These budgeting forecasts can also help plan potential future trade routes.

Even if the budgetary projections are spot on, there's still likely to be significant delays at border crossings. These delays can stack up, signifying that clients won't receive their merchandise within the same timeframe as before, which means your cash flow may be significantly altered. Start accounting for a longer cash flow cycle and determine any financing needs long before they're required.

It won't just be delays at the border that slow down the process, either. Expect that a share of the burden will fall directly on your company, and that burden must be treated like any other trade compliance department. There will probably be new rules on what must accompany shipments, so expect to dedicate more time and resources to paperwork and other government compliance requirements.

It's not only the trade department that must adjust to Brexit. In fact, the entire ERP system will potentially require reworking. This will likely include changes to how taxes are paid and to whom, where shipments originate and the supply chain they pass through, plus smaller details like how invoices are sent for shipments.

Ultimately, to manage the uncertainty of Brexit, the best way forward for a company is flexibility and planning. While there's no one who knows exactly what the future holds for the UK and the rest of Europe, there are experts who understand the nuances of international trade. These experts can help figure out exactly what steps to take so a business is prepared for any outcome, and even ready to take advantage of a new set of trade laws and regulations.





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