Trading with the EU: A ‘No Deal’ Scenario
The World Trade Organisation (WTO) is a forum of 164 member nations, where countries negotiate the rules of international trade. It is used as a platform to develop free trade agreements, but where no such agreements exist, two nations (or economic blocs like the EU) trade under ‘WTO rules’.
With continued speculation about a ‘no deal’ Brexit, politicians have been discussing the so-called ‘WTO option’. Chief Executive of family-run Cumbrian chartered accountancy firm Lamont Pridmore, Graham Lamont, looks at the impact this could have on those tourism and hospitality businesses which rely on importing and exporting with EU countries.
- Consult your suppliers to understand their supply chains, and where in the world their goods and services come from.
- Ask what action suppliers are taking to mitigate the impact of a ‘no deal’ Brexit and determine the financial impact on your business.
- Use this information to help set prices for 2020 and offset cost increases. Consider whether your economic model should be reviewed/changed in light of the new financial situation.
Unfortunately, many smaller businesses will have to rely on their suppliers/supply chains to help mitigate the financial impact of a ‘no deal’ on their behalf. Many large importers and exporters to the UK have already invested heavily to deal with the issues raised so far.
What are the WTO rules?
WTO members have a list of tariffs (taxes on imports of goods) and quotas (limits on the number of goods) that they apply to other countries. Known as schedules, these are the methods through which trade is done and they are broken down by sectors.
The EU has a fairly low average tariff of around 2.8% for most sectors, but some sectors such as agricultural goods have incredibly high tariffs to protect industries in certain nations.
As an example, dairy is 35%.
The UK Government says a temporary schedule put in place in the event of a ‘no deal’ Brexit would mean that 87% of imports by value will be tariff-free, compared with 80% before Brexit. Some sectors will also be offered extra protection through free trade.
What will be the likely impact of trading under WTO rules?
- The cost of some imported goods will increase due to EU tariffs.
- The temporary schedule should mean that British goods remain competitive on the European market for a while. Long-term, the UK will have to seek some form of trade agreement with the EU if it wants to continue free trade.
- Supply chains for some businesses may be affected, as suppliers are forced to cut back on imports due to cost or increase the price of goods throughout the chain.
- Some sectors are likely to be harder hit than others, such as agriculture.
Does the UK already trade under WTO rules?
As part of the EU, the UK already uses WTO rules for the United States, China, Brazil and Australia, none of whom have a free trade agreement with the EU.
Although the EU doesn’t have free trade agreements with these countries, they do have agreements with the EU that help regulate specific areas of trade, covering everything from wine and bananas to insurance and energy-efficiency labelling. These, or a more comprehensive free trade agreement will need to be created after Brexit is concluded and this could take years.
What other barriers should small businesses be aware of in the event of a ‘no deal’ Brexit?
Likely non-tariff barriers include limitation due to product standards, safety regulations and sanitary checks on food and animals. The UK and the EU need to find a way to work with each other’s regulations.
The UK Government says it is committed to maintaining these standards in a number of areas to maintain parity with the EU. However, despite this, the EU has indicated that it will have to perform border checks anyway. These checks will frustrate imports and exports, and long delays are expected at borders as a result. The likely impact is an increased cost which is passed down supply lines.
How can businesses prepare for this?
- Businesses that plan to import or export goods to the EU should acquire an EORI (Economic Operators Registration and Identification) number. VAT-registered businesses that have previously traded with the EU may already have received one automatically.
- Read Government and EU guidance for entities that trade between the UK and the EU-27. This will clarify any customs formalities.
- Importers to the UK should explore the use of TSP (Transitional Simplified Procedures) in order to transport goods from the EU without making full customs declarations at the border or paying import duties straightaway.
- Exporters should decide if they want to hire an agent to make import and/or export declarations or make them themselves (eg, by buying software that interacts with HMRC’s systems).
Seek specialist assistance around VAT procedures