EU membership has contributed to unprecedented legal, economic and commercial integration between companies in the UK and mainland Europe. Consequently, the impact of Brexit on businesses is momentous. Companies trading in France and the UK cannot afford to sit and wait until the final outcome of negotiations is known.
The uncertainty and business risk such firms face is simply too great. Instead, businesses should promptly consider (1) a thorough “Brexit” audit of business and (2) make realistic preparations for post-Brexit business operations. Companies trading in France and the UK should focus particularly on:
1) Tariffs: Since the UK has ruled out membership of the EU single market and the EU customs union, tariffs will likely be a feature of the post-Brexit landscape, particularly in the event of a “hard” Brexit and the reversion to World Trade Organisation (WTO) rules. This would raise costs for companies trading in France and the UK, which would either have to be absorbed or passed on to consumers.
Moreover, if there were a UK-EU customs border, the tariff impact could be greater than the cost of the single levy on the import or export of the final product to the end user. Rather, businesses with localised and fragmented supply chains may see tariffs imposed on the movement of parts along a supply chain every time those parts cross the customs border.
Key considerations: How would tariffs affect your business? Are local (or, for French businesses, EU) suppliers an option?
2) Rules of origin/customs clearance: Rules of origin determine the economic nationality of a product and would apply even were a UK– EU free trade agreement to be concluded. Complying with rules of origin will increase the administrative burden on companies trading in France and the UK and raise transaction costs. Businesses will need proof of origin certificates that can be presented to the relevant customs authority. Imports will become international transactions and would thus become subject to the single administrative document.
Furthermore, the requirement for customs clearance may lead to delays which could have knock-on effects for supply chains and business operations. For example, most automotive plants in the UK operate on the basis of “just-in-time” production to improve productivity. If parts are delayed at the customs border for clearance, this will have a major impact on plant efficiency.
Key considerations: What are your import/export legal obligations? Do you have adequate systems and resources to (i) comply with custom clearance requirements and (ii) mitigate customs clearance inefficiencies?
3) Immigration: “Controlling immigration” is one of the UK’s stated negotiating principles. An end to the free movement of people/workers may affect the ability of businesses to attract talent as well as, in certain sectors (e.g. food and hospitality), induce labour shortages.
Key consideration: Who in your workforce may be affected and how you will manage any new compliance requirements/workforce shortages?
4) Service provision: Market access and regulatory compliance should be the top concerns of services businesses. If trade in services were to revert to WTO rules, companies trading in France and the UK would lose the right to provide services in the other’s territory on an equal footing with ‘domestic’ service providers. Furthermore, service provision access is often governed by regulatory compliance frameworks that may not apply post Brexit.
This is the case with “passporting” in the financial services sector. Services businesses should thoroughly evaluate their “routes to market” post-Brexit with a focus on obtaining (where possible) the necessary consents and compliance certifications to continue legally providing services.
Key considerations: What is the regulatory basis of your supply of services into the EU/UK? Will this be available post-Brexit and what alternatives exist?
5) Group structure and business environment: Certain corporate groups should consider establishing subsidiaries in either the UK or the EU to carry out relevant business and/or to take advantage of preferential trade deals concluded by the EU or the UK with third countries. This may involve restructuring commercial operations and supply chains in order to benefit fully. And the macroeconomic climate over the next two years is likely to be volatile and businesses should ensure commercial contracts provide sufficient protection.
Key considerations: Do your commercial contracts protect you against large currency fluctuations or inflation spikes? What flexibility do you require in new contracts to safeguard your interests?
The relationship between the UK and the EU remains in a state of flux. Common sense would suggest some form of transitional arrangement followed by some form of FTA will be agreed. However, businesses are wise to prepare for the “worst” and assess operations on the basis that WTO rules would apply to UK–EU trade and that the rules now applicable to third countries may apply to EU-UK relations. But with thorough and strategic planning, businesses can embrace Europe’s brave new world.
Cristina Audran-Proca and Jonathan Gunn are members of the international and corporate practices at the international law firm of Faegre Baker Daniels.