The implications of a no deal Brexit for EU27 SMEs
This article is part of the FERMA/AIRMIC joint Brexit Newsletter which is designed to give risk professionals unique insight into Brexit related risks and mitigation strategies.
As Brexit uncertainty bites, Ben Butters from Eurochambres, a Brussels based trade association representing over 20 million businesses with over 120 million employees in Europe, discusses the impact on SMEs.
Chambers of Commerce & Industry across the EU have for many months been helping companies – particularly SMEs - to prepare for Brexit. This preparedness process is complex given the many variables at play and the political confusion in the UK surrounding the terms of its withdrawal.
For these reasons, a large proportion of companies have until now preferred to wait, unsure of what it is that they should be preparing for. This is particularly the case for SMEs, for whom setting in motion arrangements for multiple scenarios entails costs that they would typically find difficult to absorb.
However, following the huge rejection of the only deal on the table by the British Parliament on 15 January, Chambers across the EU are raising the alert level to maximum. With 29 March just a few weeks away, they are reiterating to businesses large and small the need to prepare for the Brexit worst scenario.
No deal would mean no transition period and businesses would thus have to respond immediately to many changes, some highly significant to their practices and performance. Frictionless, zero tariff trade between the EU and the UK would end overnight. The UK would be treated as a third country by the EU and bilateral commerce would be governed by World Trade Organisation rules.
EU businesses that have direct commercial relationships with the UK, whether with other legal entities or with private consumers, will be most obviously impacted. However, many more are part of complex supply chains involving the UK, which will also be affected and disrupted by a no deal Brexit.
This supply chain aspect extends the Brexit fallout to thousands of other SMEs across Europe and further explains why Chambers have been so active in helping their member companies take contingency measures. Many have prepared checklists that allow businesses to perform a thorough self-assessment of how no deal could affect them, considering elements such as:
The need for customs declarations and to adapt to supplementary customs procedures and checks at ports
The possibility of air and road transport disruption, in particular long queues at borders
Ensuring that products they use or handle which come from the UK are certified by a body in an EU member state and that, conversely, products exported to the UK are correctly authorised there.
Understanding changes to VAT procedures, intellectual property rights, standards, contracts, employment rules…
Cumulatively, this non-exhaustive list already adds up to a lot of additional non-tariff barriers.
For example, many SMEs that only operate in the EU will never before have had to complete a customs procedure. They must now get to grips with this if they are to continue trading with the UK. It’s not rocket science, but it’s burdensome and thus an unwelcome addition to small businesses’ administrative and compliance costs, which for some may lead them to divert their activities away from the UK.
EUROCHAMBRES is working with the European Commission and Chambers with their national customs authorities to understand how such new obligations will be enforced. While we recognise the necessity for rigorous customs procedures if no deal is reached, we argue that some margin of error by operators – particularly SMEs - should be factored in to the way that these procedures are initially enforced, as unintentional mistakes and oversights are foreseeable to begin with.
On top of all these new non-tariff barriers, no deal would also mean that tariffs – in some sectors very high - would be imposed on goods.
Beyond such immediate implications, the blank canvas nature of a no deal Brexit increases the likelihood of progressive regulatory dealignment. Furthermore, the UK walking away from its ongoing financial commitments to the EU would not provide the ideal context for constructive negotiations on favourable long-term relations. This could all have manifold negative consequences for EU businesses that seek to operate in or with the UK over the years to come and, of course, vice-versa.
The proposed Withdrawal Agreement would mitigate many of these non-tariff barriers and avoid tariffs entirely during a transition period while future economic relations are negotiated. The 15 January vote regrettably leaves this deal in considerable jeopardy; a disorderly Brexit is the default outcome on 29 March if no alternative solution is found.
Of course, there may also be opportunities from Brexit for SMEs in the EU27, particularly as a consequence of shifts in foreign direct investment from the UK. Overall though, the commercial costs of Brexit, particularly the no deal variety that now looms large on the horizon, will considerably outweigh the benefits for the EU27 economy and its business community. While they can still hope for the best, SMEs need now to prepare for the worst.
Ben Butters, Director, EUROCHAMBRES
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