The October 17th EU summit is approaching, and MNCs are wisely finalizing their contingency plans for a downside scenario in Brexit negotiations between UK and EU; this is merited in light of the major impact a No Deal (Hard) Brexit would have on business. Currently, the media has an appetite to overstate the likelihood of No Deal Brexit, giving it a 50-50 chance. Any positive Brexit headlines signal the UK’s compromise with the EU, triggering the strengthening of Conservative party Hardliners, who are in turn increasing pressure to PM Theresa May to walk away from the negotiation table.
Despite all the noise about a No Deal (Hard) Brexit, our research indicates that the UK will manage to avoid a such a scenario on March 30, 2019. No Deal Brexit isn’t in the UK and EU’s interest, and both sides will do their best to avoid economic disruptions from Brexit, encouraging them to make the necessary compromises. The UK is likely to obtain a transitional deal until at least December 2020 and seek a so-called ‘plus plus plus free trade agreement’ with the EU – including tariff-free trade in goods and some type of regulatory harmonization (in broad line with the White paper on Customs, aka Chequers plan).
Recent developments have further solidified our view that the UK is unlikely to end up with a No Deal Brexit, following signs of the UK and EU softening their Brexit stances. Key UK hardliner Brexit negotiators – David Davis and Boris Johnson – resigned in July, as a protest to PM Theresa May’s softer approach with her Chequers plan. In early September, EU chief Brexit negotiator Michael Barnier confirmed that the EU is ready to offer an unprecedented deal to the UK and has agreed on more than 80% of UK’s withdrawal, which could be eventually settled by early November. In early October, President of the European Commission Jean-Claude Juncker reiterated this, highlighting an agreement between the EU and the UK is possible within the next two weeks. Likewise, both sides seem open to finalizing the exact details of the Irish border issue during the transitional period. In response to these positive developments, the pound against the dollar strengthened, currently trending above 1.31.
From a legal standpoint, the UK parliament has made significant progress in legislating the EU Withdrawal Bill to ensure regulation continuity. The EU Withdrawal Bill received Royal Assent and became law in the summer. However, the March 2019 Brexit deadline is approaching, and EU Withdrawal Bill legislation is pending regarding Northern Ireland’s status, necessary to streamline the EU-UK customs arrangement. Thus, No Deal Brexit still remains a distinct possibility with a 10% likelihood, and MNCs should continue to plan for it.
MNCs shouldn’t discredit the ramifications of No Deal Brexit; it is a low-likelihood event, but it will have a detrimental effect on business operations if it materializes. In the short-term, a no deal Brexit will result in severe disruption in supply chains and will prompt the renegotiation of existing contracts with distributors and partners. Tariffs will automatically be imposed, increasing the cost of importing goods and manufacturing (ranging from 1.5% to 26% depending on the product). Non-tariff barriers will be the real challenge for businesses (additional paperwork for product compliance, for example), adding an additional 7% to 21% of tariff-equivalent cost to products. Long-lasting delays at the border and logistical disruptions (stock availability, quality of the product, etc.) will be the new reality for cross-border trade between the UK and the EU. In the medium-term, inflation will double on the back of a depreciating pound, trimming suppliers’ margins and consumers’ real purchasing power. Regulation could diverge in the long-term, and individuals and businesses will be under general confusion over their legal rights and where to claim them because the UK legal authorities might lose their designated legislative power.
Moreover, no deal Brexit can be highly unpredictable. Time is running out for the UK government and failure to respect the strict deadlines to ratify the transition period could result in an accident, leaving no time for MNCs to adjust their supply chains. MNCs can’t afford the risk for such an important market in EMEA and globally. MNCs should activate their no deal contingency plans in December if the transitional deal discussions aren’t concluded by mid-November.
As planning guidance, FSG clients can use the Brexit playbook, highlighting a simple 6-step process for firms to efficiently plan for the base case and downside; the Brexit Scenarios report, providing the five potential scenarios and economic forecasts through 2028 linked to those scenarios; the UK Market Spotlight, offering an assessment of the economic impact of Brexit on the UK market in 2018 and into 2019, across various industries and segments; the WEUR Quarterly Market Review – Q3, including our Brexit tracker with quarter-end analysis on the UK economy and important events to watch for the course of Brexit negotiations.
Not a client? Review our Harvard Business Review post, How Multinationals Should Be Planning for Brexit or contact us to learn more.