On June 23rd, 2016, the UK voted to leave the European Union, and the departure is scheduled for 29th of March, 2019. Last month, UK Prime Minister Theresa May went to Florence to deliver her vision on a post-Brexit UK and its relationship with the EU. The speech was aimed to deliver the message that Britain was “leaving the EU but not leaving Europe”, hence, the PM reassured businesses of the possibilities to create ‘the unique relationship’ with Europe and proposed a two-year transition period after departure from the EU, during which access to the single market would continue on current terms. She also reassured EU citizens living in the UK that they would be welcome to stay. Finally, the prime minister showed commitment towards paying into the EU budget while remaining an EU member, all in all, displaying the UK’s willingness to move forward and jump-start Brexit negotiations.
In general, the tone and vision provided in Florence sounded quite positive, and were supported by business representatives as well. According to FT sources, Carolyn Fairbairn, director-general of the CBI business group, said that “Firms will welcome the proposal of a ‘status quo’ transition period for business that averts a cliff-edge exit”.
Despite this generally positive vision though, October headlines are rather speaking of a Brexit divorce deadlock and lack of any progress following five rounds of UK-EU talks. Indeed, although the question about EU nationals living in Britain may be a relatively ‘easier’ one to address, both parties still need to agree on the amount of the divorce bill, Northern Ireland’s borders, and, naturally, trade conditions. These are not easy to settle; hence, no-deal Brexit is something in the air as well.
What could this no-deal—and it is probably fair to say ‘worst case scenario’—mean for global businesses then?
According to a recent BBC article, no-deal Brexit would certainly influence all aspects of life. In terms of trade, with no agreement with the EU, the World Trade Organization rules would apply. For many business sectors the WTO rules would mean increased trade tariffs. Moreover, a no-deal scenario would mean that businesses would need to obtain licenses for trade with each individual country. Naturally, cliff-edge Brexit also means an increase in regulations and administrative arrangements. A good example provided in the article is that approximately 130,000 businesses that export to the EU would have to deal with customs for the first time. Finally, the current residency rights of foreigners in the UK most probably cannot be guaranteed in this scenario, despite current assurances by Theresa May. Again, for some industries this lack of clarity and risks around the freedom of movement of people might be very impactful. For example, the hospitality sector in Britain seems to be heavily relying on an immigrant workforce, and as the chief executive of the British Hospitality Association (BHA) said: “The BHA has a 10-year strategy to encourage more British workers to enter the hospitality industry and we believe this is how long our industry will need to reduce our reliance on EU workers.” Given the possible changes in tariff rates, foreign exchange rates, immigration policies and so forth, the retail, automotive and technology sectors are thought to face the biggest risks of disruption as well.
Following the general life hack of ‘hope for the best, yet prepare for the worst’, it seems reasonable for global businesses to prepare for the hard Brexit scenario. In his Wall Street Journal article James Allen, co-leader of the global strategy practice at Bain & Co., suggests companies should indeed prepare. More specifically, in order not to let Brexit become the monster everyone talks about but no one acts upon, James practically suggests to break down Brexit into specific and realistic scenarios, and then focus on “how should we change our supply chain in response to them.” As noted by the author, such process has a side benefit, as preparation for hard Brexit will make companies more agile and help to brace any other supply-chain risks, which are common in today’s volatile market.