Philip Munn

Written by: Phil Munn

Philip Munn

Partner

Three things to do before a trade war

Over the weekend, it was reported that Irish foreign minister Simon Coveney said the UK government was '…deliberately forcing a breakdown in relations and negotiations between the two sides' raising the possibility that the Trade and Cooperation Agreement (TCA) between the UK and EU may be withdrawn. The ramifications of a breakdown in the UK's relationship with the EU, both politically and economically, are too complex to cover in this piece, and it is to be hoped that a sensible negotiated position can be agreed between the parties. 

In the meantime, we consider what practical actions UK businesses should consider to cope with the current uncertainty.

1. Stockpiling

Recent history suggests that, if there is a significant breakdown in the UK/EU trade relationship, the most likely reaction by many businesses will be to stockpile inventory in the UK or EU distribution hubs to allow for a smooth transition. However, with supply chains already experiencing significant disruption, for many businesses this may be difficult to accomplish. 

2. Pricing  

Brexit prompted many UK businesses to revisit their terms of business with EU customers and suppliers. However, in the context of a tariff-free trade agreement (subject, of course, to the rules of origin question) many of the thornier issues around customs duty costs were avoided. Nevertheless the introduction of customs formalities was inevitable and has proved to be a continual barrier to trade. In the event that trade between the EU and UK reverts to the World Trade Organization (WTO) rules, whilst businesses will be prepared to cope with customs formalities to an extent, there will be questions about whether the supplier or customer will  bear the customs duty costs that will result. While commercially speaking, the renegotiation of customer and supplier contract will be highly complex (to say the least), understanding the default position could be invaluable.

3. Northern Ireland 

The most complex features of the TCA were measures to avoid a hard border and maintain trade on the island of Ireland. If the TCA is revoked, a hard border would exist in Ireland, forcing both governments' tax authorities to implement border controls. Customs duty and VAT would be levied on trade between the UK and the EU across the border. 

The implementation of a hard border would require the EU to fully implement its third-country border protocols, requiring physical checks to be completed on goods crossing the border. This is unlikely to be the stance of the UK Government which is at liberty to introduce its own border protocols. Therefore taxpayers will be in a similar position to that they experienced prior to Brexit, with zero clarity on how imports into the UK from Ireland will be handled.  

Given the inherent restriction in the use of freeports in relation to UK exports, any suspension of the TCA is likely to  prompt businesses to reconsider the benefit of freeports which were recently extended in the last Budget to cover sites throughout England. In the past, feasibility work on such sites may have concluded that the cost outweighed the VAT, duty, NIC and corporate tax benefits associated with these sites. As the suspension of the TCA would result in the imposition of customs duty on imports into both territories, freeports may become more attractive. 

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