Brexit: ‘If the worst case scenario happens the UK will make ‘No deal’ and will have to trade on WTO terms’

Speaking at this year’s ECMA Congress (European Carton Makers Association), in Riga, Latvia (September 20-21), David Gabathuler, consultant, Baker Botts said some companies are contingency planning whereas others are waiting to see what happens. But it would not be ideal to end up with WTO trading.  

Deadline looming

Referring to the timeline of events, Gabathuler said it was a three phase process, explaining that the first phase was ‘pretty smooth’, detailing citizen rights and financing and provision agreement on the Irish situation, ‘which is now more complicated with the borders around Northern Ireland’.  

“The second stage now is trying to agree a withdrawal agreement and needs a treaty on withdrawal, the issue again is the Irish ‘backstop’, the other, which is less challenging is the political declaration setting out what the future will look like between Europe and the UK​,” he said. 

Stage three is once the UK has left the EU and can start negotiating a free trade agreement but there are rules which require that the country has to leave first and there will be a summit at the end of November on which the UK will agree to terms.  

“The deadline is now starting to get tight, the main political issue in the UK is can the UK ratify the agreement given the political infighting​,” added Gabathuler. 

“With the March 29, 2019, deadline looming, most free trade agreements take years to negotiate but this is a short timeline because it fits in with the EU budget deadline, and the EU doesn’t want this to drag on​.” 

Customs Union

According to Gabathuler, future trading options include; the EEA Norway agreement, Customs Union, and CETA (FTA) Canada (an advanced free trade agreement).  

He said a Customs Union is an economic integration with a common external tariff, which reduces customs formalities and seems to be the most likely. But it limits the UK’s ability to negotiate FTAs (free trade agreements).  

“The UK says it wants CETA plus more, but the problem is the European Union holds all the cards, the reality is there is no example here that we can draw upon because it will be a bespoke agreement that will require a great deal of consensus,” added Gabathuler. 

“There is now, after much discussion and the loss of a few cabinet ministers a White Paper on the future relations with the EU. The reality is its an additional proposal ‘cherry picking’ in many areas, but many FTAs only cover goods and services lightly. There is a lot of grandstanding on both sides. 

“The idea is that there will be a common rule book, to ensure the rules of the EU to follow a frictionless trade, but it is not clear whether they will follow those directly, the short term model is its business as usual.” 

Gabathuler said if the UK leaves the EU with no deal, trading on WTO terms are ‘quite complex’, with no free circulation of goods, goods are subject to MFN tariff (Most Favored Nation) tariffs, unless you’ve entered into an FTA or Customs Union and there will be a basic framework for trade in servicers, no wider cooperation, and Rules of Origin in place (RoO).  

There will be a lot of customs formalities and border checks meaning 130,000 companies will have to deal with customs formalities for the first time and UK Government is not able to cope with that. It has already put a new system in place but is having teething problems as its an area which raises a lot of challenges.  

SAD document

For example, companies will  need a SAD document (Single Administration Document) import export information. Or, there are options to bypass those with an inward/outward processing relief to claim relief from customs duties or VAT.  

There are also customs warehousing options or tariff suspensions. 

“Trusted traders (AEO) could do the checks for you, mentioned in the White Paper which is relevant for third country exports/imports, an internationally recognized WCO quality mark​,” said Gabathuler. 

“The impact on businesses depends on the sector and on the company. A lot of companies are not yet planning ahead but the impact on your customers may be greatly affected.  

“Companies need to become aware of the customs formalities for their supply chains. Make sure your contracts are Brexit-proof also identify opportunities where one person’s loss is your gain. You may be in a favorable situation but over time that may cause problems with your suppliers​.” 

According to KPMG Economic Insights Brexit​, The Impact on Sectors Feb 2017 the food and beverage industry will be severely impacted, particularly cereals, sugars and confectionery.  

“Politically it would be very difficult for the UK to stay in the EU after the referendum, the reality is it’s no longer within the power of the UK after lodging the Article 50 procedure unless there is unanimity among council to keep the UK within the European Union. It is unlikely it will withdraw Article 50​,” added Gabathuler.