In her long-awaited speech on 17 January 2017, Prime Minister Theresa May laid out the role of the United Kingdom and Ireland after exiting the European Union1. Two questions must be raised: Which points of the future legal framework for trade and economy have become clearer? Which kind of action do companies need to take now?
Which points have become clearer ?
Clearer than before, the Prime Minister has illustrated her point of view that the control on immigration and the four fundamental freedoms of the European Union cannot be reconciled2. Yet she made two practical concessions for a transition period: (1) Applicable European Law will continue to apply to the United Kingdom until the then competent parliaments change or replace it3. First of all this is a practical concession and is to be justified with the fact that it is basically impossible to review and possibly amend the applicable law within two years. (2) There shall be a transition period for the hard exit which should be as short as possible4. This concession to the industry is also based on practical considerations.
Regarding the other important points for industry and trade, the speech contained nothing new, but contradictions, wishful thinking, contemptuous remarks and threats. This can certainly be explained with the fact that the Prime Minister directed the speech to „her“ domestic audience; towards the European „Partners“ the tone and content are more than inapt and rather offensive.
Which kind of action do companies need to take now ?
Companies that produce either themselves or through third parties in the United Kingdom need continue expecting the worst case scenario, and therefore reconsider their entire manufacturing and distribution chain. The effort of those companies that carry out production steps in different countries will increase significantly: for instance, costs for fenders that are produced in Czechia using British glass fibre materials, that are then shipped to Great Britain to be equipped with German electronic sensors, and that are then shipped to Germany for paintwork before they are fixed to motor vehicles in Great Britain to be then sold there as well as in other European countries, will as a matter of principle, increase.
The best case scenario would be that the European Union and the United Kingdom agree on a free trade zone that provides for a zero-duty quota for most products. Other expenses such as for handling and for respecting different rules, will however increase as new rules of origin have to be considered and shipping conditions change to those of trade with a third country (meaning usually additional regulatory obstacles and expenses for customs documents, taxes and import turnover tax). As Great Britain does not want to follow any existing model, the exact future arrangement thereof cannot be predicted.
Furthermore the general and product specific legal framework will change as Great Britain will over time amend currently applicable European Law and it will not apply future adopted European Union Law. Internally the question of the competence for legislation will be raised as the complicated constitutional relations between the parliaments of Westminster, Edinburgh, Cardiff and Belfast have not yet been settled5.
Regarding the above mentioned example, the regulatory compliance costs will increase (considering different British product specific rules, especially regarding rules of origin, documents of import and export); costs for import turnover taxes as well as, in the worst case, customs duties must be added. Should the companies work with special customs procedures that usually imply high regulatory burdens and involve financial risk, duties could be refunded on exports.
Accordingly, manufacturing and distribution chains must be reviewed in their minute details and Great Britain must be treated as any non-EU-country when evaluating the consequences of Brexit and possible need for action. The moment for this review has now come as the statement of the British government has increased the risk for a hard exit of the United Kingdom and, for obvious reasons, changes in the manufacturing and distribution chain should be carried out within the time slot of the hard exit (March 2017 plus 2 years).
Another deindustrialisation should be the consequence for Great Britain because the conditions of production and trade risk not only to be compromised by exchange rate fluctuations but also by other obstacles regarding efficient production and distribution chains. The Prime Minister’s announcement or threat to decrease corporate tax should not compensate for the additional obstacles and costs – at least not for production locations in eastern-European countries with low tax rates. Great Britain can neither „replace“ the trade and service flows with EU Member States through a revival of the Commonwealth or trade with other countries. And there is still no clarity of the future legal framework for the banking and financial sector; rather it is to be expected that the negotiating positions harden on both sides. Within the next two years financial service providers must therefore increase their efforts to secure their product specific licences through subsidiaries in the 27 Member States.
As a result all companies should soonest review their commercial relations involving the United Kingdom and treat the United Kingdom as any other non-EU-country when evaluating the Brexit consequences and the possible need for Action.
On 24 January 2017, the Supreme Court of the United Kingdom ruled that the government cannot sidestep Westminster when beginning the formal process of withdrawing from the European Union, and that the government will not have to seek approval from the regional legislatures in Scotland, Wales and Northern Ireland. See https://www.supremecourt.uk/cases/docs/uksc-2016-0196-press-summary.pdf and https://www.supremecourt.uk/news/article-50-brexit-appeal.html.