On Jan. 31, 2020, after three-and-a-half years of Brexit uncertainty, the United Kingdom officially left the EU. So what do U.S. business doing business in the UK have to do now? And what’s coming next?
- Understand the dates. The UK is now no longer part of the EU, but almost nothing changes until Dec. 31, 2020. Until then, the UK and the EU have agreed to a transition period during which they will negotiate to determine the exact nature of their relationship going forward. But there is one caveat. “The transition period agreement is between the EU and the UK,” said Adam Jackson, who is heading up Brexit Advisory Services for member firm Grant Thornton UK. “Third-party countries, like the United States, are not officially party to that agreement. So where those countries have international treaties with the EU, it’s a gray area if those treaties still apply to the UK. There is a small tax risk while we wait to see how U.S. and other authorities decide to approach those treaties.”
- Address known issues now. While almost nothing changes immediately, and while the future economic arrangements between the UK and the EU — and then between the UK and its other trading partners — will shape the best long-term approach, there are known consequences to Brexit companies should be planning for now. “No matter what shape future agreements take, come December 31, any trade between the UK and the EU will be subject to customs administration,” said Jackson. “That means valuations, and rules of origin. The UK will be outside the EU value added tax [VAT] area as well, creating sales tax implications for cross-border trade. Some teething problems at ports of entry are likely in January, which could mean supply chain delays.” Certain regulatory changes that take effect on Dec. 31, such as those around food labeling and food safety, are already known. The Northern Ireland Protocol, which will put Northern Ireland in the unique position of retaining some of the benefits of being in the EU customs and VAT regime while still being part of the UK market, also kicks in on Dec. 31 — that could offer some commercial upside. Companies can and should be working now to understand and have processes in place to address these known issues and to take advantage of any planning opportunities.
- Know the present, shape the future. Companies should be developing a holistic picture of their sources of supply, their relationships with their suppliers, their other trading partners, contract manufacturers, their customers and their distribution networks throughout the UK and the EU. Jonathan Eaton, Operations Transformation principal with member firm Grant Thornton US, advised: “You don’t have to wait for final agreements to start thinking about how the locations of those relationships could affect your supply chain cost to serve. For example, suppose you’re a U.S. company buying product from the EU, but that product is manufactured in the UK. You could end up in a situation where you’re paying duties twice.” The bottom line? Understand your flow paths and start thinking about where they are versus where you want them to be going forward.
- Keep up with trade negotiations. Future trade agreements between the UK and the EU, and then between the UK and the United States, will largely shape U.S. companies’ best long-term European strategy. While the terms of those agreements can’t be known now, all sides have articulated goals, and some sticking points can be predicted. Keeping up with negotiations will best position companies to respond timely as agreements are finalized. Mike Eder, managing director in the Public Sector Advisory Services practice for Grant Thornton US, explained: “U.S. trade representatives have laid out many of their key objectives for a trade deal with the UK. Reducing tariffs is a key goal, but the real emphasis will be on aligning UK and U.S. standards on things like health, food safety and the environment. The United States views many of the current EU standards as barriers to trade.” The United States would also like the UK to reduce regulations around the pricing of pharmaceuticals by the UK’s National Health Service and in the transportation sector, so that U.S. firms can bid on and provide services in those areas.
Agreement on some of these areas will be tricky. The phrase “chlorinated chicken,” which has to do with the practice of washing chicken products with chlorinated or other chemically treated solutions, doesn’t mean anything to most U.S. consumers. But in the UK it is a rallying cry for many, who are suspicious of what they see as overly lax U.S. food safety standards. Jackson said: “The prime minister has already come out and said that the UK will not accept chlorinated chicken. But he’s also stated that he doesn’t believe in what he called ‘a lot of mumbo jumbo’ by British people about U.S. food safety standards.”
Alignment on standards will also be a contentious issue in UK-EU negotiations. “Both sides are looking for tariff-free, quota-free trade,” said Jackson. “However, there’s significant concern on the EU side about maintaining a level playing field.” The UK would like to be able to move away from EU standards in areas such as state aid, new technology and financial services. And the EU is concerned that this risks giving UK businesses an unfair advantage.
Then there’s timing. The immediate focus for the UK will be finalizing a deal with the EU, so serious progress on a U.S.-UK deal will likely have to wait. And the looming Dec. 31 deadline is problematic. Eder said: “The UK has referenced the Canadian bilateral treaty with the EU as a good starting point for its deal. The problem? It took almost eight years to finalize that deal.” Parties on all sides are skeptical of any, much less all, necessary trade deals being finalized and ratified by the end of the year.
Finally, the U.S. elections could significantly alter the nature of a U.S.-UK trade deal. “If the Democrats win,” said Eder, “I anticipate a significant shift in U.S. trade policy and strategy.”
- Watch for opportunities. Much of the attention on Brexit is focused on risks and issues, but U.S. companies should also be approaching Brexit as an opportunity to reevaluate their European business strategy. “Over the past few decades, many U.S. businesses have built up their presence in the UK as a platform to access the EU market,” said Eder. “In 2018 alone, U.S. firms invested $758 billion in the UK. I think once a EU-UK deal and bilateral deals between the United States and the UK, and the United States and the EU, are in place, that investment will increase.”
Alignment of health, safety, environmental and other standards among the United States, the UK and the EU would create a variety of opportunities. During the Obama administration, the proposed Transatlantic Trade and Investment Partnership (TTIP) sought just such standardization. Jackson said: “We often think of large multinationals when we talk about international trade. But when we looked at TTIP, we found that it was going to benefit midsized businesses most. They often lack the resources to deal with regulatory barriers.”
Jackson pointed out that the UK is seeking to develop a more entrepreneurial, innovation-driven economy. “A sort of UK-wide Silicon Valley,” he said. “There are really three major trade blocks in the world — the United States, the EU and China. The UK will be outside those now. Best case, we’ll be nimble and do deals with all them. At worst, we will be at the mercy of larger beasts.”
Listen to the conversation for more details and guidance.
Principal, Operations Transformation
Grant Thornton US
+1 704 632 3523
Managing Director, Public Sector Advisory Services
Grant Thornton US
+1 703 637 2747
Leader, Brexit Advisory Services
Grant Thornton UK
+44 (0)20 7728 2385