Articles and Briefings
It is not true to say that business requires certainty and stability. Uncertainty creates risk, but it also creates opportunity. Risk and profit are inextricably related. It is, however, true to say that business does not normally expect government and the legislative process to be a source of uncertainty and instability. In the UK, such normal expectations continue to be severely tested by Brexit.
The UK is due to leave the European Union (EU) on 31 October 2019. That "exit date" is fixed in law, but is the result of extensions to the previously fixed deadlines of 29 March and 12 April. On each occasion, businesses and individuals had to prepare for the impact of a "no deal" or "hard" Brexit, only to find at the last minute that government decisions and Parliamentary measures had temporarily delayed Brexit. Under the new Prime Minister Boris Johnson, the UK government's position has hardened to one of Brexit on 31 October 2019 – "do or die". However, that hard-line stance has cost the government its majority and galvanised Parliamentary opposition.
While political commentators salivate over the Parliamentary drama, businesses and individuals remain in a difficult position, unsure of whether, when and in what form Brexit will finally take place.
Overcoming government opposition, Parliament has passed emergency legislation designed, but not guaranteed, to fend off the risk of a "no deal" Brexit. Its drafting reflects the careful compromise required to secure support from opposition parties and "rebel" Conservatives. Consequently, it is more accurate to say that the legislation averts a "no deal" Brexit unless the House of Commons agrees to proceed with that outcome. It specifically provides that if the government has not, by 19 October 2019, secured approval for a withdrawal agreement or a motion agreeing to a "no deal" Brexit, then the Prime Minister must seek an Article 50 extension to 31 January. In essence, a "no deal" Brexit is blocked unless the House of Commons decides otherwise.
While it is clear that the current House of Commons has a majority against a "no deal" outcome, a general election might alter that position – either increasing the majority opposed to a "no deal" Brexit or creating a majority committed to, or at ease with, that outcome. A general election on the government's favoured date of 15 October, two days before the next scheduled EU Council meeting, would therefore leave open the possibility of a new government, committed to "no deal" and determined to effect Brexit on 31 October 2019, "do or die". If that were the outcome of a 15 October general election, then businesses and individuals would have only 15 days to prepare for a "no deal" Brexit.
However, opposition parties appear determined to prevent a general election taking place before Prime Minister Johnson is obliged to seek an extension, forcing him to break his most frequently-repeated promise to pro-Brexit voters. The opposition's hand is strengthened by legislation passed in 2011 to secure the position of the Conservative-Liberal Democrat coalition government by requiring a two-thirds majority in the House of Commons before an early election can be called. The government might seek to avoid that requirement, but any such attempt would involve the extremely odd spectacle of a government trying (and possibly failing) to pass a vote of no confidence in itself. The minority government might be held in place, against its will, until it is clear that it has failed to deliver Brexit.
what is a "no deal" brexit?
The original expectation was that the UK would negotiate an orderly withdrawal from the EU, with a transitional period of up to two years to allow institutions and businesses to adapt and also to allow detailed negotiations on the future trading relationship between the EU and the UK. Key points for negotiation include the potential imposition of customs duties and regulatory check on goods passing between the EU and the UK, the recognition of UK laws on data protection and privacy as "adequate" for EU purposes, and provisions to govern rights to live and work in the EU and UK.
A "no deal" Brexit would mean that the UK would simply cease to be a member of the EU, and would immediately be treated as a "third country" with no special arrangements or favourable trading provisions. To meet World Trade Organisation requirements, the EU would be compelled to impose customs duties, while the integrity of the EU single market would require regulatory checks on any goods moving from the UK. A recent UK government statement confirmed that "freedom of movement" would end immediately on the occurrence of a no deal Brexit. Freedom to transfer personal data from the EU to the UK would also end, requiring businesses and other organisations either to find lawful means to support such data transfers, or to relocate mission-critical data in advance of Brexit.
Every sector would be affected by a no deal Brexit. For example, imports and movement of chemicals and other potentially hazardous substances would require separate registrations in the EU and UK. manufacturers would have to consider, and cater for, the adverse impact of customs duties on processes that currently involve goods and components crossing UK and EU borders. Even something as minor as carrying samples of goods for display at trade shows and expositions would require additional documentation and customs procedures. Whether considering taxes, import or export duties and licences, movement of staff or entitlement to provide financial or other services across the EU, a "no deal" Brexit would have to be factored in as a significant risk.
when will risk become certainty?
Even with the emergency legislation passed by the House of Commons on 4 September, "no deal" remains a credible potential outcome. Any further extension would require agreement by the European Union, whose patience has been severely tested by the UK's political drama and by the new government's often offensive rhetoric. As the 31 October deadline draws nearer, currency exchange rates and property prices are likely to be increasingly volatile, and worst-case business planning is likely to be increasingly important.
Based on the UK's experience leading up to the aborted 29 March and 12 April deadlines, September and October 2019 might well be characterised by stockpiling of components and essential supplies for business operations, increased pressure on freight and logistics capacity and urgent moves to relocate key elements of financial and professional services businesses into the EU27.
Looking beyond 31 October, it is possible that a "no deal" Brexit would have an adverse effect on several aspects of the UK's international position, potentially including its credit rating. A "no deal" Brexit would, arguably, also involve a breach of several international treaties, including the Good Friday Agreement in relation to Northern Ireland. That is important because a "no deal" Brexit would not describe a permanent state of affairs. It would form the backdrop against which the future relationship between the EU and UK would have to be negotiated, and the context in which trade agreements with other potential partners would have to be reached. Going into such negotiations in circumstances that involved highly contentious steps, such as withholding the £39 billion "divorce settlement" from the EU, might adversely affect the UK's international reputation. Should that prove to be the case, then the uncertainty and volatility stemming from a "no deal" Brexit could have longer term implications for the UK's economy and trading position.
The alternative, positive, view from those within the UK advocating a "clean break" Brexit, is that overnight the UK would be "Britannia Unchained", free to trade with the world and unfettered by the "precautionary principle" that characterises EU regulation in areas such as foods, medicines, chemicals, electrical and electronic goods.
Either way, the closing months of 2019 and 2020 are likely to prove whether negative or positive predictions concerning Brexit are closer to the truth. Uncertainty will create or exacerbate risks and, as ever, risks might bring profit or loss. As the UK works through its solipsistic episode, there will be much to gain, and much to lose.
