With 31 December 2020 marking the end of 48 years of the UK membership of the European Union, the largest trading block in the world, it would be unrealistic to believe 1st January 2021 was going to be business as usual. Throw in the worst international pandemic for a century, and businesses are reassessing what the new, post-Brexit, post Covid-19 world will look like. What does the real landscape for UK businesses, and companies trading between the UK and the EU look like? Let’s consider the evidence so far and try and come up with some lessons we can learn at this early stage.
Trading UK-EU – how hard is it?
The Trade and Cooperation Agreement signed on 24 December 2020 between the EU and the UK was the first in history to erect barriers between two parties where few, if any, existed before. Trade agreements are normally designed to remove barriers! So of course it is now harder to trade with the EU, but the level of difficulty will vary a lot depending on the sector operated in:
- Ask Scottish shellfish producers exporting live seafood to the EU and they’ll describe the new red tape they have to navigate and the delays to get their products to their EU clients
- A London-based business who has been importing products from Vietnam to the UK before despatching them again to EU-based clients for many years is seeing its business model challenged: those French, Italian and German loyal clients are now questioning the rationale to do business with them, such are the additional delivery delays, and the London business is facing more costs and more paperwork and dissatisfied clients
- The financial services industry faces unique challenges: the City does have the resources and energy to recover, but having to swap passporting rights for equivalence is inevitably going to dent its reputation as a world-leading financial centre
- By contrast, for many a service business (services account for 80% of the UK economy) working with the EU – it feels in many respects that life goes on. Not quite business as usual of course, but this can be blamed on the pandemic, rather than Brexit. Businesses have adapted remarkably well to working remotely, so in a sort of perverse way, the pandemic has prepared them for dealing with EU clients and business partners without having to travel to meet them. However, as lockdowns start to relax across Europe we will discover how problematic (or not) the return to near-normality will be. Difficulties may occur where UK staff need to be seconded to an EU-based client for any length of time; conversely, there will also be issues for inbound workers. The new UK immigration regime treats EU nationals on the same basis as other countries’, so the days of hiring talents from another 27 countries as if recruiting from the UK are over.
Some options to deal with the new regime
Examples of companies successfully navigating the post-Brexit landscape:
- The UK business importing products from Vietnam, is registering in the EU – in this case France – and obtaining an EORI number. Products are imported directly into the EU from Vietnam, so bypassing the UK, then shipped to EU-based customers. Customs formalities and some of the management of the process, that were previously done in London are now handled in Le Havre
- Some businesses are starting to expand their UK-based supplier network to try and be less reliant on EU imports, reducing cross-border movement, saving paperwork, possible delays and additional costs. Pushing that logic further and contradicting the feeling that the UK is less attractive now, we have seen this practice in the food and drinks industry, with a EU-headquartered group already present in the UK seeking to expand market-share by acquiring a UK business – it grows the business and adds a local supplier
- EU businesses also continue to make acquisitions in the UK market: I am currently working on four transactions by two French companies and one Spanish group. While M&A activity slowed dramatically at the onset of the pandemic in Europe, it had bounced back by early summer and hasn’t stopped since. Judging an opportunity to buy a UK business is driven, amongst other things, by sector-specific considerations and those clients that do pursue expansion into the UK see an opportunity, Brexit or no Brexit.
Conclusion – Write off the UK at your peril
Having lived through the Brexit maelstrom for almost five years, understandably not all businesses were ready for the changes that came in on 1st January 2021, especially as it was so closely followed by the challenges of the pandemic. After 48 years of membership, it will take businesses longer than a few months to adapt. It is also likely that things will get worse before they get any better: we are currently in a “transition after the transition”, i.e. British Customs are not checking goods coming from the EU until July 2021, so the introduction of UK customs checks could lead to further disruption. Yet the UK is still seen by many as a marketplace of 65 million, largely solvent customers with a stable legal system, flexible employment regime and an uncanny ability to bounce back. I would strongly advise anyone having doubts not to rush to conclusions and to take stock again after the summer, when the new post-Brexit regime will have bedded in a little more
Olivier Morel, Partner and Head of International at law firm Cripps Pemberton Greenish