Treasury Today Country Profiles in association with Citi

No-deal Brexit: thinking the unthinkable

Chess pieces on map of Europe with the UK and EU flags

This week will see the issue of a series of government papers outlining its thinking of how ‘business as usual’ can be maintained after 29th March 2019.

Should we be worried? Ever since British voters decided that the UK would be better off outside the European Union, the terms of the divorce settlement have been a matter of conjecture. However, despite Theresa May’s insistence that ‘no deal is better than a bad deal’ the prospect of the UK departing next March with no terms agreed seemed an unlikely one until quite recently.

The Prime Minister’s initial declaration indicated a more hard-line attitude than that reflected in the three-page ‘Chequers plan’, which finally appeared early last month and prompted the departure of Boris Johnson. However, not only has the more concessionary approach won little favour with Brussels but it remains quite possible that May will be deposed before March 2019 and her successor places hard Brexit/no deal back on the agenda.

The official line of the EU itself, whose remaining 27 member states also face significant disruption in the event of no deal, is that it is prepared for such a contingency. Last month it issued a 16-page document recommending basic contingency plans that countries, companies and individuals should be making in response to no deal. The guide stresses the need for companies to take the necessary steps to ensure they have the right authorisations and certificates to access the EU market post-Brexit.

Much of the guide’s language is alarmist. It outlines scenarios where border controls “could cause significant delays – for example in road transport – and difficulties for ports”, with “long lines of vehicles waiting for customs procedures to be fulfilled”. The UK is warned that it risks becoming an insignificant force on trade and regulatory issues, which would “represent a significant drawback compared to the current level of market integration”.

Another sobering read is “The Institutional Consequences of a ‘Hard Brexit’”, a European Parliament-commissioned analysis published in June by Dublin City University’s Brexit Research and Policy Institute. Launched on the first anniversary of the Brexit vote, the Institute describes its remit as “to explore the ongoing impact of Brexit on government, business and society at large.”

Whitehall’s thinking

News that the UK Treasury has started putting together plans to support the City if the exit occurs before new terms governing trade in financial services are in place suggests that corporates should indeed prepare for the worst case scenario.

According to The Times, the department maintains that its core planning still assumes that there will be a two-year managed exit, but acknowledges there is an increasing readiness for other scenarios and “the government will ensure a workable legal regime… whatever the outcome of negotiations.”

What this is likely to mean in effect is that UK regulators will take over the additional rule-making powers that were held by bodies in the EU during our period of membership and a licensing regime will be set up to allow European companies to continue operating in the UK.

Starting from this Thursday, a series of 84 papers are due to appear over the coming weeks, detailing how the government intends to help other key sectors of the UK economy maintain business as usual if the no-deal scenario becomes a reality. Coming several months after the European Commission published its own set of reports on the legal and technical issues affecting EU companies, website BuzzFeed reports that topics range from blood safety to broadcasting and even the graphic photographs used on cigarette packets for persuading smokers to kick the habit.

The site adds that the 84 reports result from a cross-Whitehall initiative that was ordered by the former Brexit secretary David Davis, since replaced by Dominic Raab. Around half cover issues overseen by either the Department for the Environment, Food and Rural Affairs (Defra) or the Department for Business, Energy and Industrial Strategy (BEIS). Others are the province of the Department for Transport or Her Majesty’s Revenue and Customs (HMRC).

Topics of particular relevance to treasury departments include company law; competition; consumer protection; customs and borders; e-commerce; export control regulation; financial services; insolvency; intellectual property; procurement; trade remedies; and VAT. The tone of their content is understood to be factual and neutral.

However, frustration at the continuing uncertainty and slow pace of negotiations has already persuaded several industries to develop their own hard Brexit/no deal contingency plans. The Rail Delivery Group (RDG) a body representing many of the UK’s rail companies is alarmed by the prospect that customs declarations on rail freight inside the EU will become a requirement upon the UK’s departure on 29th March next year.

The RDG proposes the setting up of a series of railway customs areas (RCAs) to provide a single border checkpoint to minimise the risk that congestion will develop as trains are held up on both sides of the Channel.

Individual companies have also been assessing the consequences of a no-deal Brexit. Recently, aircraft manufacturer Bombardier reported that stockpiling to mitigate the impact would cost its Belfast plant between £25m and £30m. The plant, which manufactures wings for the Airbus A220 and uses hundreds of components, operates a ‘just in time’ supply policy to avoid the expense of surplus inventory.

Michael Ryan, head of the group’s Northern Ireland operations, said that spending millions to store goods is “not how we can afford to run a business” and is “cash that I don’t have” but that diverting funds from new product development or R&D to stockpiling might prove the only way to fulfil customers’ expectations.