Europe's complicated geopolitical "divorce" may affect cross-border commerce

Since the United Kingdom (UK) joined the European Union (EU) 44 years ago, the UK and the EU had been working to progressively integrate their legal, economic and financial systems. Then last year, UK voters opted to "Brexit" from Europe. And in March 2017, the UK formally triggered the Article 50 process to begin negotiations for Brexit—thus launching one of the most complicated divorces in world history.

The news has been full of confusing, sometimes speculative discussions of how Brexit could affect cross-border businesses.

To help make sense through the noise, here is a brief summary of what is happening with Brexit and the impact it could have on Taiwanese businesses.

Brexit in a nutshell

The UK is now scheduled to leave the EU by March 2019. There are two likely ways for it to do this.

The first exit option is that the UK would stop being an official EU member, but would agree on transitional arrangements and a future relationship with the EU, with the aim of minimal disruption to the current UK-EU integration.

While that would be tough to achieve, it would be possible for the UK and EU to negotiate a deal over the next 18 months or so. This would involve compromising on a difficult set of issues, including the legal and financial consequences and the details of what the future relationship between the UK and the EU would look like. Given the unprecedented complexity of this deal, there is a significant chance that the EU and UK will not be able to agree on all relevant details by March 2019.

In addition, political considerations are likely to play a significant role here and could prevent a deal even if the technical negotiations were bearing fruit. For political reasons, the UK government has ruled out accepting free movement of people and the legal jurisdiction of the European Court of Justice post-Brexit, which makes a compromise more difficult. At the same time, EU leaders will not wish to let the UK just "walk away" from the EU while retaining all economic benefits of membership.

The second exit option would involve severing the UK's trading relationship with the EU through a "hard" exit. In this case, the UK would trade with the EU—and the rest of the world—on the basis of the rules of the World Trade Organization (WTO). The UK has said that it intends to maintain the WTO commitments that it currently offers as an EU member.

WTO rules currently provide the basis for key trading relationships around the world, including between the EU and the United States. After a hard Brexit, the WTO framework would cover most (though not all) aspects of trade between the UK and the EU and other WTO member countries, like Taiwan. The UK would then need to build on WTO rules through new free trade agreements and address some tricky WTO issues as a consequence of its exit from the EU.

What Brexit means for Taiwan

For Taiwanese businesses, no matter what type of scenario results from the current Brexit negotiations, the UK's departure from the EU will not change any aspect of Taiwan's trade directly into the remaining EU member countries.

Similarly, Taiwan's cross-border trade directly into the UK may remain unchanged for a while. At least in the beginning, the UK is likely to keep similar external tariffs and schedules in place.

The main area of complication for Taiwanese businesses to watch closely is cross-border trade indirectly into the UK via Europe.

This indirect trade route into the UK likely will become more complicated post-Brexit, even if there is a UK-EU deal. And if no deal results, there is the potential for a more significant disruption of trade, especially as new systems are put in place. For example, if your company or an entity you invest in currently ships goods to the UK after delivering, manufacturing or adding value to those goods in an EU country, then this may be a good time to review alternative options.

As the Brexit proceedings begin to unfold, think carefully about your supply chain indirectly into the UK. Beyond that, they are unlikely to create immediate concerns for Taiwanese business.