Brexit is a new world businesses still need to figure out
It took just nine months to strike a trade deal with the EU. It will take more time to get to grips with the details
British businesses probably didn't expect to start 2021 worrying about wooden pallets after a year of grappling with the coronavirus and a meltdown in the economy.
Yet as they start a new relationship with the European Union, securing a supply of heat-treated platforms—baked to 56 degrees Celsius (133 degrees Fahrenheit) for at least 30 minutes—is now one of the myriad issues they face.
The 1,200-page trade deal struck by Prime Minister Boris Johnson on Christmas Eve after a little over nine months of negotiations ended the uncertainty that the U.K. would crash out of the bloc in chaos. While the zero-tariff, zero-quota accord is a relief for British companies, it only marks the next stage in the evolution of the Brexit process—and potentially the most difficult one.
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Be it wooden pallets for shipping goods, customs paperwork, new fish quotas or the recognition of professional qualifications, the next few months will be a case of figuring out the consequences of not just what's in the historical agreement, but also what's not.
"It's going to be a marathon, a very long marathon," said Mark Price, former deputy chairman of retailer John Lewis Partnership and a former U.K. trade minister. "This is why trade deals normally on average take about seven years to agree as they are hugely complex."
Johnson hailed the agreement with the EU four and a half years after Britain voted to leave and said it will "drive jobs and prosperity across the whole continent." But it will take time to divine whether that prediction ultimately will come true.
Bloomberg Economics estimates that U.K. growth will be half a percentage point lower per year for the next decade compared with if the country had stayed in the now 27-member single market. It forecast the economy will expand 6% this year, though that was before the latest tightening of England's Covid-19 restrictions.
In the meantime, businesses have to contend with paperwork before more complex issues can be resolved, such as the financial services industry's future in the EU. There are also regulations around rules of origin determining what goods can be exported to the EU that need to be navigated. Mutual recognition of standards, which would allow firms to make products in the U.K. and market them in the EU without any extra certification, isn't part of the deal.
"There are likely to be a thousand separate unintended consequences from a trade deal of such scale," said Will Hayllar, a partner in the consumer goods practice at OC&C Strategy Consultants Ltd. While "many things will get flushed out in time," there will be uncertainty for businesses "in the intervening period when they have to decide if they will comply with everything or not."
Take wooden pallets. With Britain now having "third country" status with the EU, exporters and importers must comply with rules on preventing the spread of pests and diseases. It may take some disruption to trade for the EU to agree on a solution, said Dominic Goudie, head of international trade at the Food and Drink Federation.
"Heat-treated wooden pallets are not needed for safety reasons and just add extra costs and this is something that should and could have been resolved before now," said Goudie. Britain's food and drink industry alone could face an additional 3 billion pounds ($4 billion) of extra costs a year from increased bureaucracy, the group estimates.
Indeed, when disruption comes, it comes quickly. Dover, Britain's busiest port, has only just cleared a backlog of thousands of trucks after France shut its border for two days in December because of the new strain of the coronavirus that's forced much of Britain into another lockdown.
Companies have sought other routes. Deutsche Lufthansa AG flew another Boeing Co. 777F with fruit, vegetables, clothing, medical equipment and jet-engine parts from Frankfurt to Doncaster-Sheffield Airport in England on Thursday. A load bound for supermarkets is scheduled for Jan. 2.
Irish officials also warned of potential delays from early next week. Around 410,000 trucks or vans come through Dublin port each year from the U.K. and before Brexit virtually all would have passed unencumbered. More than a quarter of these vehicles will contain food or animals that now have to be checked.
For one, the auto industry has maintained a consistently dim view as to just how smoothly trade between the U.K. and EU will be, even though the Brexit accord spared manufacturers 10% tariffs on cars and 4% levies on components.
"Immediate costs and friction are inevitable," said Mike Hawes, the chief executive officer of the Society of Motor Manufacturers and Traders. "Brexit has always been about damage limitation."
Bracing for the end of the Brexit transition period was already a costly endeavor, with the trade group estimating in November that the industry had spent at least 735 million pounds on preparing for new customs declarations, stockpiling parts and other measures.
It remains to be seen whether investments in the U.K. delayed by Vauxhall maker PSA Group and BMW AG pending an outcome to trade talks will now materialize.
The same can be said for Nissan Motor Co., which hasn't yet confirmed whether all models built at its plant in Sunderland, northeast England, contain enough local content to avoid tariffs. The Japanese carmaker opened the plant in the mid-1980s specifically to access the European single market.
Then there's the financial industry. Banks have now lost their "passporting rights" allowing them to trade freely in the EU. Future access to the market will rely on the bloc confirming Britain's financial frameworks are broadly aligned or "equivalent" with its own rules. Both sides had previously vowed to deal with that by mid-2020.
"The deal is done but the reality that businesses have to face has not arrived yet," said Ian Cheshire, the outgoing chairman of Barclays U.K. He predicted three to six months of "minor chaos from paperwork" though ultimately "people will work that out."
Among those people will be workers in Britain's services industry, which makes up 80% of the economy. They face the hurdle of having their professional qualifications recognized in the EU, something that's no longer automatic.
And while the Brexit deal was heralded by Johnson as a new era for the fishing industry, that too has been cast into doubt. A last-minute compromise on how and when to reduce EU access to British waters finally got the deal over the line. A study published on Dec. 29 by the Scottish government, which opposes Brexit, said new quotas reduce the catch for key species of cod and haddock.
"It's quite remarkable that for all the headlines about fishing, there was little on financial services when it is so blindingly obviously more important for our future," said Cheshire. "I genuinely worry that people have not understood quite how difficult the path ahead could be."
Disclaimer: This opinion first appeared on Bloomberg, and is published by special syndication arrangement.
