On the heels of the June 2016 referendum, in which UK voters opted to leave the European Union, little consensus has emerged about what Brexit will mean for U.S. companies that conduct commerce in Europe. The only thing that people can agree upon is that things will change, and uncertainty over how will persist for some time.
Though negotiations between the UK and the EU won’t begin until the British government invokes Article 50 of the EU’s Lisbon Treaty, a close examination of EU and UK trade policies and practices suggests that some outcomes are more likely than others.
To that end, we’ve asked Penny Naas, Vice President of Public Affairs and Sustainability at UPS, in Brussels, Belgium, and Richard Currie, Director, Public Affairs at UPS in London, England, to help assess the strategic implications of post-Brexit supply chain for American companies and others engaged in European commerce.
In this discussion, both Naas and Currie examine how trade issues to be negotiated between the UK and EU—and the US and UK—could lead to significant changes in how companies manage:
• Border controls, including customs and taxes for cross-border commerce;
• Logistics and supply chain decisions, such as where to locate distribution centers;
• Contract laws and applicable jurisdictions;
• Cross-border movement of data and privacy issues; and
• Cross-border movement of workers and goods.
1- What are the short- and long-term implications of Brexit on companies whose supply chains involve the UK and EU?
Naas: In the current environment, there are still more unknowns than there are knowns about what’s going to happen. UK citizens voted in late June to depart the European Union (EU), but the UK government has not yet triggered the beginning of the process of negotiating the UK’s exit from the EU.
So, as a result, companies and governments are in a kind of limbo-land, where there’s a lot of speculation, but not a lot of certainty, with regard to the medium-term and long-term picture. The major implications would be a more complex operating environment. And in particular, over the next 5-8 years I anticipate quite a bit of dynamic change, within which folks will have to operate and adjust supply chains.
Currie: I think there’s been an assumption that the UK will remain within the single market. But one of the lead factors in the “Leave” campaign was controlling migration and immigration. So, if there are going to be curbs placed on the free movement of people, then within the deal that the UK manages to negotiate with the rest of the EU, it may prove impossible to still have access to the single market.
2- If people can’t move freely, then goods can’t move freely?
Currie: That’s correct. And it’s been made very clear that, if they want to put curbs on people, then the free movement of goods within a single market is no longer open to them.
Naas: The EU was founded on four freedoms of movement: goods, services, people and capital. And if you block one of those four, you lose the other three. If you’re going to restrict the free movement of people, then the European Union says your goods, capital, and services will have to go through the same hurdles as anybody else coming into the EU’s Single Market. I’d add a fifth, which is data. As soon as the UK leaves the EU, there will need to be agreements with regards to the movement of data, as well.
3- What are some of the key issues to be worked out in new trade agreements between the UK-EU and the UK-US?
Naas: When the UK is negotiating its departure from the EU, it will have to negotiate at least three legislative packages. First will be the package to leave the EU itself, which will be a lot of administrative issues involved with its departure. Second, it will be negotiating free trade agreements with other countries, most notably the EU, but also other countries. Right now, its free trade agreements come as part of its membership in the EU—it will have to reestablish or rejoin these existing agreements, or else face different trading conditions than it currently enjoys. And third, it will have to rewrite many of its laws, as its existing laws are based on European law. Those three main changes create this incredibly complex environment for businesses. Some industries may be left untouched, whereas others will need to be prepared for fairly extensive changes.
Currie: Border clearance is going to be an important issue. We probably won’t be able to move things from the UK into the EU as easily as we do today to the 27 member states. There could be customs barriers between the UK and the EU, and it will go both ways, which would add cost and time to the process. Even if the UK somehow stays in the European tariff agreement, the value added tax (VAT), the European equivalent of sales tax, will still require a formal clearance when goods cross the border.
4- What do you anticipate will become the most likely impact of Brexit negotiations and changes on American companies doing business in the EU?
The entry procedures into the UK are not going to change for a US company in the short run, as currently the EU does not have a free trade agreement with the US. However, as the UK-European relationship will change, American companies may not be able to use the UK as a home base for what they do on the rest of the continent as efficiently as today. There are a lot of US companies that have warehousing facilities in the UK and then ship out of those warehousing facilities to the rest of Europe. This could impact their supply chains, including the movement of goods and warehousing, etc.
Also, there will be corporate and VAT tax implications post-Brexit that I think US companies would want to keep an eye on. The UK obviously is a preferred location for US companies because of language, and familiarity with the legal system.
Another interesting question is around contract law. There is a lot of commentary going on about the fact that most UK contracts are based on current EU law. And as they go through all of these changes moving forward, the vast amount of contracts in the UK will have to be re-issued and re-signed. That would range from your credit card application to large contracts that companies may have with a service supplier, or with a subcontractor, in the UK.
5 — What will be the long-term impact of Brexit on world trade policies, and could this curtail global expansion plans for American firms?
Naas: There are some who have said that Brexit is a sign that there’s a decline in support for globalization. And some feel that there’s a decline in support for trade policy in general. And some believe that this discontent with global trade and globalization is being picked up and echoed in US elections.
I actually see the Brexit debate being more of a debate about sovereignty. The campaigners who led the move to leave the EU were actually pressing for a more aggressive trade strategy for the UK when it was unencumbered by the EU. So as a result, I hope what Brexit does is revitalize support for the global growth trade policy agenda.
Currie: I don’t think that Brexit is based upon putting up a drawbridge and creating a barrier between the UK and the rest of the world. It’s quite the opposite. The UK wants to trade. There are some EU member states that are skeptical and distrusting of trade deals, and international trade in general. The UK is not one of them. Neither is Germany, nor the Nordic countries. The UK Foreign Office has been quick to say that we are still in Europe; we may not be part of the EU, but we want to have a trading relationship with Europe.
6 — American companies conducting business in Europe know that EU data privacy laws are much more stringent than they are in this country. How might Brexit impact those rules?
Naas: EU data policies may change, and companies collecting customer data in Europe may need to change their approach to storing it. For example, the EU could decide that consumer data needs to remain on the continent. Companies storing data on servers located in the UK might want to consider alternatives, because cross-border data flows are also very likely to be impacted by all of these discussions.
Overall, the EU may move in a way that’s more restrictive about the use, control, and storage of personal data, as the UK has historically pushed for a balance between personal protection and the use of data for commercial means. So the UK will move in a more business-friendly direction, but you’ll lose the ability to use that location as a point for easy cross-border data transfers into the rest of the EU.
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