International Trade

Preparing for Brexit

Martin Johnson, HIE's regional head of international and key sectors, explores the ups and downs for businesses of leaving the EU

The UK remains on course to leave the EU on the 31 October. If, as some predict, this is without a deal, then there will be some immediate and lasting changes to the UK economy.

The most likely is the introduction of tariffs, an import tax on the invoice value applied by other countries to goods and services coming from the UK. This will affect exporting businesses directly and will resonate through supply chains.

Currently, UK businesses undertake international trade in a framework of trade agreements. These have been negotiated by the EU, so when the UK leaves the EU, we also leave these trade agreements.

For some products and services, the tariffs are nil, such as for alcohol, so our distilling and brewing businesses will not be affected.

For others, the tariffs are considerable. For example, there is a 12% tariff on langoustines, cod, and on knitted or woven goods; smoked salmon is 13% (fresh salmon is 2%); prawns are 18%; jams and marmalades 24%; and for lamb, it is equivalent to 40%. These are examples of important sectors’ products from Scotland, and the Highlands and Islands.

As a result, some businesses will find it more challenging to remain competitive in terms of price and to retain customers and profit margins; all of which are essential to keep businesses going and protect jobs.

Even if a company is not exporting directly, the effects could be elsewhere in the supply chain, with similar impact on competitiveness, customers, profits and jobs.

For imports, the UK Government policy is to set zero tariffs for a large range of goods – some 87% of total imports to the UK by value - but with a mix of tariffs on a limited number of products, such as beef, lamb, textiles, dairy and fish. This is mainly good news for importers but could create a more complex situation for businesses thinking about an import-substitution strategy to deal with Brexit, depending on their specific products.

In addition to the impacts of tariffs, exporting UK businesses will likely also face greatly increased paperwork around regulations and customs. This can be highly technical and complicated initially, and it has been estimated by the OECD to add between 2-24% onto the invoice cost. Plus, at least in the early stages, there are concerns at customs arrangements for UK goods entering the EU. Considerable delay is the primary concern, as this could affect customers with agreed delivery times. Perishable goods could potentially be rendered worthless if delays are excessive.

Since the UK EU-referendum in 2016, sterling has depreciated considerably, and some commentators are expecting it to hit a level of parity, or below, with the Euro and the Dollar post Brexit. This is generally good news for exporters, as it makes UK goods and services cheaper to buy, and for some sectors will more than negate the imposition of tariffs.

For importers, on the other hand, it will push their costs, and therefore prices, up. Then there’s the fact that for the wider economy, much of our input commodities are priced in Dollars, so petrol, oil and energy in general; plastics, paper and many other things could become more expensive. This would have a knock-on inflationary effect that eats into profit margins or increases prices, or both.

While there are still many uncertainties about Brexit, there are steps that businesses can take to help prepare for the impacts. The ‘prepareforbrexit.scot’ website is a good first stop. This provides information and tools to help business plan for life beyond the UK’s EU membership. It is the main Brexit information website of the Scottish Government and its agencies, including HIE and Scottish Enterprise. The site is kept up to date with news coming out of the UK Government, and is tailored to the Scottish economy.

In time, it is expected that the UK will negotiate new agreements with other countries, reducing the impacts of tariffs and customs regulation on businesses. The average time to negotiate these agreements is about seven years from scratch. It is hoped that the UK could achieve this in half the time, with the expectation that many of the existing trade agreements can be “rolled-over” to be UK-specific.

Beyond that, businesses should also look to their membership organisations, such as Federation of Small Businesses, chambers of commerce or other trade bodies for events, information, networking, and advice.

The Highlands and Islands economy is diverse and dynamic and has adapted effectively to many changes in circumstances in the past.  Through collaboration, innovation and access to information, we need to be as prepared as it is possible to be for the changes that Brexit appears poised to deliver.

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