Brexit feature with Kreab

21 Nov 2018,

Brexit feature with Kreab

“Most companies operating in the UK should be able to avoid a crash landing, or at least survive the crash”

The danger of writing any article about Brexit is that anything you write is in danger of being out of date before it is published. Theresa May is triumphant moving policy in her direction one day and in fear of being deposed the next. The mood music from negotiations also swings from wild optimism to extreme pessimism at the drop of a hat. Nonetheless, the fundamentals underlying the discussions have not changed.

At the heart of the negotiations are two issues. Firstly, finding a solution for the Northern Ireland border. Secondly, finding any deal that the UK Parliament will approve.

On the first point, it is hard to imagine what solution can be found that ensures no hard border between Northern Ireland and Ireland and no border between Northern Ireland and Great Britain, at least no solution that is not the UK staying in the EU. Indeed, at this stage the two sides are not even talking about the same border, as the EU is putting forward suggestions to make the border between Northern Ireland and GB less visible whilst the UK is proposing to make the border between Northern Ireland and Ireland less visible.

If a solution to this point is ever found, then how will Theresa May get the required Parliamentary approval for it? There are around 40 Conservative MPs that are likely to vote against any proposal that leaves the UK with any connection to the EU, and 30 who are likely to vote against any deal that makes trade substantially more difficult. To compound matters further, Northern Ireland’s DUP MPs, on whom she relies for a majority, will vote against anything that treats Northern Ireland differently to GB. They are also ideologically close to the 40 hardcore Eurosceptic Conservative MPs.

That is not to say the Prime Minister’s predicament is hopeless. The power of patronage and control of the budget can be very persuasive. While the 40 most Eurosceptic MPs are a lost cause, providing there is no form of border controls between Northern Ireland and GB, then the DUP can probably be brought onside. The most pro-EU Tory MPs are opposed to the thrust of the Government’s negotiations, but she undoubtedly hopes the threat of a no deal alternative and a bit of arm twisting could bring them onside.

But even if May is successful in this, she will still need some votes from the pro-European members of the Labour Party and from discussions we have had with MPs this will not happen, at least in the numbers she needs.

All in all, we have to say that the most likely outcome is a no deal Brexit, given it is almost impossible to see how a second referendum, as demanded by the 700,000 people on the People’s Vote march, could come about.

How is business then expected to plan and respond to what would appear to be a catastrophic outcome for trade? Afterall no deal would mean trains cannot run across borders; new vehicles with parts made in the UK can not be sold in the EU and vice versa, which is all vehicles; and planes would need to have all their parts certified separately in both the UK and the EU rather than each side accepting the other’s accreditation as now. These are just some of the negative consequences.

It is these extremely difficult issues which will force a form of transition period regardless of whether a deal is reached. While it would be more predictable and cause lower risks for business if a formal deal is reached — so companies will know the rules they will operate under — for most areas in terms of standards, mutual recognition is likely to be imposed by both sides because to do otherwise would be too damaging to the economy.

Without a deal, border checks and tariffs are almost certain to be imposed at the end of March 2019, and cross border freight which currently moves smoothly on roll on roll off ferries and through the Channel Tunnel will switch to containerised freight ports. This will cause disruptions for companies engaged in cross border trade, but these can be planned for. It is the non-tariff barriers which are fatal for both trade and the economic outlook.

Both sides know this, and both sides are preparing for it. To be fair to the UK Government, they have been explicit in this and have started the process of legislating to provide for acceptance of EU standards and testing in the UK. The EU has not been so explicit, but it is certain they are planning for it.

The next few months will certainly be a bumpy ride but most companies operating in the UK should be able to avoid a crash landing, or at least to survive the crash.

 

Chris Philipsborn,
Managing Partner, Kreab London

Simon James,
Senior Advisor, Kreab London

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