European automobile manufacturers have called on the EU to take a softer stance regarding the UK’s future market access, and they warned that the bloc’s harsh position could have long-term effects on the automobile industry. In June, more than 50 European and British food and drink trade associations wrote to Brussels to request for more flexibility, underlying the fact that a tariff-free trade agreement needed to be coupled with the assurance that businesses will be able to benefit from it.

Why does the manufacturing sector worry?

For UK and EU importers and exporters, it is important to maintain a frictionless access to the single market. Manufacturing businesses are aware of the damaging effects of Brexit and the ensuing disruptions to their sector. Brexit-related uncertainty has made it very difficult for most sectors to prepare for a post-Brexit business environment and reduced the possibility of securing investment.

UK manufacturing is integrated into the EU single market, as almost half of all UK goods imports and exports are with the EU. Many UK manufacturers are dependent on frictionless trade with the EU so their supply chains are not interrupted. With the possibility of a no deal Brexit, manufacturing sectors are concerned about a potential lack of regulatory alignment with the EU as no business wants to lose the privilege of free trade.  According to independent research from the UK in a Changing Europe initiative, some sectors, such as automotive, could be severely affected if they have to pay tariffs to export cars to the EU in the absence of any agreement with the EU. As they warned, “In almost all cases, Brexit will create additional financial or other cost burdens for companies: tariffs, customs declarations, certification costs, audits to ensure rules of origin compliance, loss of collaboration opportunities in R&D, border delays, EU customers switching to other suppliers, visa costs for EU workers, and so on.”

Letter from the European Automobile Manufacturers’ Association (ACEA)

In a letter from the European Automobile Manufacturers’ Association (ACEA) last week, the association which represents  some of the biggest car manufacturers in the world, including BMW, Toyota and Fiat, warned Brussels that some aspects of the bloc's current stance are "not in the long-term interests of the EU automotive industry.” The ACEA urged the EU to "reconsider its position" on tariff-free trade. In its letter, sent last Thursday, 15th October, the ACEA requested from the EU to reduce the percentage of car components manufactured in Europe or Britain so that the businesses can benefit from any EU-UK trade deal. The car manufacturers are urging that the new rules be introduced slowly so that the automobile industry has the time to prepare and adjust for the new rules and environment. For EU manufacturers, an agreement that provides tariff-free, quota-free trade on all goods is crucial.

EU chief negotiator Michel Barnier has told businesses that “short-term adaptation costs” were necessary to protect “long-term economic interests.”

Nicolas Peter, BMW’s finance director, has said in a press conference last week: "The European Automobile Manufacturers Association (ACEA) has estimated that it could cost car manufacturers and suppliers from 10 to 11 billion euros, so we need tariff-free trade. And even then, it must be seamless. We have a just-in-time production system, so customs administrative processing must be efficient."

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British businesses conducting international trade and transferring their funds cross border regularly are increasingly worried about Brexit and the UK’s future relationship with the EU. Boris Johnson has been warned that the current trade talks are failing and that he needs to press the European commission president, Ursula von der Leyen, and EU governments to focus their attention on the negotiations in order to reach an agreement with the British government.

The prime minister has returned to Downing Street on Monday, and he needs to act fast in order to rescue the negotiations before 31 December when the UK will leave the single market and customs union. Both the British government and the EU have agreed that they need to see progress by June, while the UK government has said that there is a possibility to leave the EU without a deal.

The two sides will be meeting again on 30 April. The UK’s chief negotiator David Frost has rejected an extension of the transition period as the government is confident that it can agree on a free-trade deal.

The prospect of no-deal Brexit

However, the prospect of leaving the EU without a deal has become even more real as there are only two rounds of video-conference talks left, while senior figures from both sides agree that delivering a deal is now highly unlikely. An EU official has also noted the added problems of having to communicate online: “You don’t see all the faces of the people around the table; you don’t see the body language, you cannot have discussion in the margins. But having said that, this is how we are working now; we need to make the best of it.”

Last week’s talks have not been progressing successfully either, as there was disagreement between the EU’s chief negotiator, Michel Barnier, and his British counterpart, David Frost. Barnier pointed out that UK officials failed to engage and instead “listened politely” to the EU’s proposals. As he said: “I regret it, and this worries me.” According to the UK, despite their commitments to maintain high standards, the EU rejected proposals regarding the removal of certain trade barriers. Additionally, the UK disagrees with the central role that the European court of justice will play in dispute settlements.

In regards to the issue of Northern Ireland, there are concerns whether the UK will implement the Northern Ireland protocol  in the withdrawal agreement in order to avoid a hard border in Ireland and maintain checks on goods travelling from Britain to Northern Ireland. An EU official said: “You need to have customs checks on goods arriving in Northern Ireland, veterinary controls, a VAT system needs to be put in place.”

UK government not seeking an extension

The UK government has warned EU leaders that they need to change their position if there is going to be a post-Brexit trade deal. The PM believes that there will not be an agreement unless the EU recognises the UK as “an independent state.”

Michael Gove, Cabinet Office minister, has also told MPs that the government will not seek an extension to the transition period, which ends on December 31. He said that extending the period will only force Britain to make a financial contribution to the EU budget which “could be spent on our NHS.” He added that the EU has failed to recognise the UK’s unique status and instead has treated Britain “like the Ukraine,” as if it were a country seeking closer relations with the bloc.

 

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With Britain’s future trade relationships in question, and a no-deal Brexit looming on the horizon, the government has been preparing for post-Brexit agreements in an attempt to minimise the effects of Brexit.

New Zealand and Britain trade deal

On Monday, Britain’s Trade Minister Liz Truss said that striking a trade deal with New Zealand would be a priority, as officials are working to create continuity and support their non-EU trading partners. Truss, is on a three-nation tour, which includes New Zealand, Australia and Japan, a trip that hopes to pave the way for trade negotiations after Brexit. Ahead of her trip, Truss said: “We’re going to be leaving the European Union on October 31 with or without a deal and as part of that agenda, striking trade deals much more broadly than we have been doing is going to be vitally important. Striking a free trade deal with New Zealand is a very important priority for the UK. It’s one of the first trade deals we expect to strike.”

Official data shows that trade between New Zealand and Britain is at about NZ$6 billion (£3.1 billion), with New Zealand being Britain’s 43rd largest trading partner in 2017.

New Zealand’s Trade and Export Growth Minister David Parker said that he wanted to find a way that will retain the existing advantages of New Zealand traders despite Brexit. Parker said that among the subjects discussed, were finding ways to cooperate such as Britain’s potential accession to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

Businesses preparing for Brexit

If the UK leaves the EU without a withdrawal agreement, it will be treated as a non-EU country. For this reason, it is significant that businesses in the EU prepare for this eventuality, if they have not already done so. Businesses that sell to, buy from, or move through the UK, goods, supplies or services will be affected.

Customs duties and restrictions

Without a transitional period, the UK will revert to the WTO rules. This will mean “declarations will have to be lodged and customs authorities may require guarantees for potential or existing customs debts; Customs duties will apply to goods entering the EU from the United Kingdom, without preferences. Prohibitions or restrictions may also apply to some goods entering the EU from the United Kingdom, which means that import or export licences might be required.”  No longer valid will be UK import and export licences, UK authorisations for customs simplifications or procedures and Authorised Economic Operator (AEO) authorisations. There will be VAT charges for imports of goods entering the EU from the UK, while exports to the UK will be exempt from VAT. Additionally many rules regarding declaration and payment of VAT will change.

It won’t be easy to move goods to the UK, as that it will require an export declaration. Movement of excise goods from the United Kingdom to the EU will have to go through customs before a movement under Excise Movement and Control System(EMCS) can commence.

UK businesses

UK businesses then that export, import or move goods and services through the UK will need to prepare by completing relevant documents so that the transition to post-Brexit Britain is as smooth as possible.

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Businesspeople chatting in a boardroom

A no-deal Brexit will affect the UK economy, despite Boris Johnson claiming otherwise. Johnson, who is the main candidate to become Britain’s next prime minister, has more than once argued that a no-deal Brexit is possible on 31 Oct., or, as he promised more recently, “do or die.”

Speaking to TalkRadio, Johnson said that Theresa May’s withdrawal agreement needed more than a few tweaks, and that “It’s got to be, you know, we need a new withdrawal agreement if we’re going to go out on the basis of a withdrawal agreement.” While, on certain occasions, he gave the impression to some MPs that he was unsure about leaving the EU on 31 October, with certain MPs he was quite definite about the departure date. When he was asked during the specific interview he persisted: “We are getting ready to come out on 31 October. Come what may,” and added, “Do or die. Come what may.”

But Johnson’s stance is considered rather dangerous as many economists and politicians have argued. Let’s see in more detail, how leaving the EU without a deal will affect the UK economy.

 

What economic impact would a no-deal Brexit have on the UK?

Bank of England governor Mark Carney has rejected Boris Johnson’s claim, as he confirmed that the “UK would be automatically hit by tariffs on exports to the EU.” Earlier this week, Johnson had said that tariffs would not be paid if the UK left the EU without a deal, due to article 24 of the General Agreement on Tariffs and Trade (GATT) which covers the international trade in goods. Clearing the confusion, Carney said to BBC: “Gatt 24 applies if you have an agreement, not if you’ve decided not to have an agreement or have been unable to come to an agreement. Not having an agreement with the EU means that there are tariffs automatically because the Europeans have to apply the same rules to us as they apply to everyone else. If they were to decide not to put in place tariffs they also have to lower their tariffs with the United States, with the rest of the world. And the same would hold for us.”

A no-deal Brexit means that British exports would be hit with import tariffs which are currently around 2-3 percent for non-agricultural goods but are higher for cars and farm products. So, claims by Boris Johnson and other Brexiters saying that Britain could avoid these tariffs under world trade rules, have not only been rejected by the BoE’s Carney, but also trade minister Liam Fox, who also argued that an agreement with the EU would need to be in place.

In the possibility of a no-deal Brexit, Britain will eliminate import tariffs for many products for up to a year, something that would “reduce the inflationary hit to consumers but would expose many British companies to tougher competition.”

In a Reuters article, outlining the effects of a no-deal Brexit, it was pointed out that, based on Bank of England’s estimates, the UK economy could be shocked into a “5 percent contraction within a year, nearly as much as during the global financial crisis.” The same article also noted, that “Britain’s finance ministry says the economy could be 8 percent smaller by 2035 after a no-deal Brexit than if it stayed in the EU. The hit would be bigger if migration slowed sharply.” A no-deal Brexit would deter foreign investors, while Britain’s current account deficit would make Britain depend on, what Carney has called, “the kindness of strangers.”

Finance minister Philip Hammond has warned that a no-deal Brexit would postpone the government’s plans to end austerity, while Brexiters have argued that leaving the EU with no deal would help the public finances as the UK will stop payments into the EU budget.

 

Are you worried by a weak pound?

A no-deal Brexit would probably push the pound down, which will consequently drive inflation down.

If you are a business importing or exporting goods and services to and from the EU, you are possibly worried about an abrupt hard Brexit without a transition deal. Universal Partners FX have all the right international payments and FX hedging solutions for your business, so that you access the international market without any worries. Take advantage of their expertise in foreign exchange and get in touch with Universal Partners FX today.