No-Deal Brexit Chaos Still On The Table Despite Emphatic Johnson Win

Boris Johnson's resounding win in British elections became official Friday morning. But for shippers making preparations for the U.K.'s departure from the European Union (EU), very little has changed.

As reported in FreightWaves, once Parliament has ratified Johnson's withdrawal agreement, the European Parliament will give its consent in January before the U.K. leaves the EU at the end of next month. The two sides will then try to strike a free trade deal by the end of 2020.

However, as FreightWaves previously reported, that will be no easy task and a no-deal Brexit, which would be hugely disruptive to supply chains, is a strong possibility.

"Boris Johnson's emphatic win will certainly allow him to get his Withdrawal Bill through Parliament and enable the U.K. to leave the EU on 31^st January as planned," U.K.-based Andy Cliff, managing director of freight and international logistics experts Straightforward Consultancy, told FreightWaves earlier Friday.

"The concerns which many have, as I have said previously, is that the most important stage, trade negotiations with the EU, kick in straight away, and if they don't go well in that 11-month time frame, we could indeed face a so-called hard Brexit [no-deal Brexit], which Boris will have the authority to carry out by way of his commanding majority in Parliament.

"Many, including myself, feel that a free trade deal is highly unlikely, as the U.K. could then be used as a ‘back door' into the EU, allowing the U.K. to set more attractive import tariffs which they're unable to do now whilst in the EU Customs Union for imported goods, thus starving the EU of revenue and also incentivising companies to locate in the U.K. instead of the EU.

"When you consider this, a free trade deal has to be very unlikely, as the EU will do whatever is needed to protect the integrity of the single market, so a hard Brexit may well happen after all. So be prepared!"

In an exclusive interview last week ahead of the election, Cliff explained to FreightWaves' Mike King how shippers should best prepare for the many potential Brexit outcomes. The full interview follows:

FW: Brexit was delayed again at the end of October until Jan. 31. But for shippers, has anything practically changed in how they organize shipments between the U.K. and the rest of the world since the original referendum in 2016?

Cliff: It's a good question, Mike, and many companies based in the U.S. are thinking quite justifiably that something must have changed, especially with the amount of time that's passed and the extensive negotiations that have been taking place ahead of the U.K.'s departure from the EU.

However, nothing has changed both in terms of logistics and Customs procedures for U.K. importers and exporters, and they won't change until we [the U.K.] either leave the EU with a deal or we opt for a so-called "hard Brexit," where the U.K. then becomes a third country and defaults to World Trade Organization (WTO) rules.

If we do leave with a deal, a transitionary period of 12 months will kick in where everything stays the same, and talks over the actual trading relationship will begin, although that transition period will most likely need to be extended given the size of the task!

FW: So, the big focus for shippers throughout this more than three-year process has been about how to prepare for a highly disruptive ‘hard' or no-deal Brexit, and that is still possible Jan. 31?

Cliff: Absolutely, Mike, and this is why the U.K. Parliament became logjammed in November — which then brought about the general election set for Dec. 12. We have had many discussions with U.K. companies [some with U.S. operations] on making sure that not only they are prepared, but that their freight providers are ready too, because in a hard-Brexit scenario, we will see the return of Customs borders between the U.K. and EU, and this will then require Customs declarations on both sides and all it entails.

When you break it down, there are three key areas to consider: Are you ready, is your freight forwarder ready, and just as important, have you engaged with your EU customers to explain how their delivery times will be impacted, and to agree who will bear extra costs such as Customs duties.

Also, Incoterms will now come into sharp focus in this market, as in the past U.K. companies would often sell or buy on a "delivered price" and Incoterms were either vague or not even quoted in contracts. In October we compiled a Brexit checklist to assist U.K. companies with hard-Brexit preparations that is written in plain language and covers guidance for both U.K. importers and exporters that has been well-received.

FW: Previously FreightWaves has explored how and why Brexit will reshape Europe's logistics landscape in the medium and long term. But more immediately, what does a no-deal Brexit mean for shippers outside of the EU — for example, in the U.S.?

Cliff: Well, Mike, as I said earlier, many U.S. companies have a European headquarters in the U.K. that will then distribute their products around the whole of Europe. So if they currently operate in this way, then they will be affected. They will need to understand that delays in delivery or extra costs from the U.K. to the EU may need to be communicated to manufacturing and sales so they manufacture or ship earlier and potentially review their export pricing to help their U.K. operation retain margin.

FW: What should shippers in the U.S. be doing to prepare for a no-deal Brexit?

Cliff: They need to be talking to their U.K. sites to satisfy themselves that their U.K. operation is prepared and their EU customers are clear on the terms and costs of future purchases, and also, most importantly, delivery times. This is an area we have come across several times, where the front-line shipping/logistics operation in the U.K. tells their senior management that they're ready, but when you conduct an analysis of the basics, they just aren't ready, and they haven't covered all the bases I referred to earlier.

FW: What is the state of preparedness of U.K. shippers and their EU counterparts in your view?

Cliff: To be honest, based on the companies we've talked with and met, we've been pretty concerned, as they really haven't found out enough from their freight forwarders about how the service they currently receive will change, both in cost or transit time, and there's been little engagement with end-customers to communicate how they will continue to supply them, and at what cost and time frame.

From the EU side, where a U.K. company is buying product from, say, Germany, these EU suppliers have come to the party quite late and you get the distinct impression that they are also getting vague assurances from their EU-based freight providers on how they will operate in a hard-Brexit scenario.

So, overall, we are very concerned about the state of readiness of both the logistics providers and U.K. exporters in particular. In the U.K., however, we do have special measures set in place by U.K. Customs to help U.K. importers through a hard Brexit — so- called "Transitional Simplified Procedures" — but again, many companies have not applied for these procedures or, even if they have, they haven't had the necessary dialogue with their freight forwarders to make it work from Day One.

FW: What can U.K. or EU shippers do now to prepare better for a no-deal Brexit?

Well, they really need to carry out an urgent review of the three areas I mentioned earlier, and only then will they know where the gaps are. Based on the dialogue we've had with freight forwarders, although they may have issued customer Brexit bulletins, they're often overloaded with industry jargon and incomplete. We also don't feel they've considered the whole sales transaction (from shipper dispatch to final customer delivery) and everything that will be affected as a result. For example, if you decide you will sell on Incoterms DAP, where the U.K. exporter pays for all freight costs to the door, excluding duties and brokerage, has your freight forwarder had any dialogue with your EU customer to set up Customs brokerage procedures and credit arrangements for costs of Customs entry, duties and taxes to ensure continuity of service? It's unlikely.

FW: Aside from a no-deal Brexit, Boris Johnson's government had already agreed to a deal with the EU. If after the general election that becomes law, what are the key takeaways of that deal that shippers should be aware of?

If Boris Johnson's Conservative government wins the election on Dec. 12 with a clear majority, he should be able to get this new deal through Parliament, and then we enter the transitionary period, where everything remains as it is now.

It's worth saying again, however, that many think the December 2020 time frame is way too short to secure a U.K./EU trade deal, and if the U.K. had left with a deal on the original leave date of March 29, we would then have had 21 months to get this over the line.

If we assume that Boris Johnson wins on December 12 with a clear majority, he will push his withdrawal agreement through Parliament and we will leave on Jan. 31, and the transition period kicks in along with the start of trade deal negotiations. The concern many have is that if the EU won't play ball and give the U.K. a "free trade deal" akin to what we have today, he may then take us out with a hard Brexit on Dec. 31, 2020, or potentially even before that if things are going badly.

So, in our opinion, the best approach is to prepare for a hard Brexit and avoid placing your supply chain and business at risk. It's the only way to be sure. Then you can sleep at night!

Andy Cliff, managing director of freight and international logistics experts, Straightforward Consultancy.

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