The Uncertainty Principle: Brexit?
Two things seem to remain certain about Brexit at this point – that the ultimate trade deal between the UK and EU is still uncertain, and that we are going to run to the wire in forming a political deal.
Time is moving on, and uncertainty remains very significant. And for business leaders, that is a very challenging situation. We also need to remember that the October deadline is the real deadline, and while the probability of a hard Brexit seems reduced, it is not gone.
At a high level, the key issue for businesses will be the nature of trading relationship between the UK and the EU. Four models are often mentioned as possible:
1. Free Trade Area: (i.e. EFTA / NAFTA) – eliminates barriers to trade between members but no common external policies.
2. Customs Union: Harmonises external tariffs. No rules of origin between members. Turkey a good example
3. Single Market (Essentially the EU 28)
- All tariffs removed and free movement of labour, harmonisation of monetary and fixed policies
- Supranational Committees govern behaviours
4. Common Market – removes barriers to labour, capital and other resources
Of course, this ignores the ‘Hard’ Brexit of a W.T.O. only arrangement.
It seems to me that a possible and desirable landing zone is Customs Union – Free trade in many areas, but not for services and not for agriculture. The current relationship with Turkey is in this form – an overall Customs Union but agriculture and financial services remain separate – dealt with by specific agreements.
At a more micro position, we need to look at the relative positioning of business in Ireland – and there are two points to be made here; the first is to do with what I’m calling the ‘Trust’ issue.
Ireland has a very long history of doing business with the UK. Even if we have reduced our interdependency, we are still extremely comfortable dealing with UK business – it’s a matter of law, practice, custom and culture. We understand and trust that UK way of doing business. If we look at the CSO stats for trade since the creation of the single market – and the Eurozone most particularly – we see highly integrated trade with the UK. Less so with Northern Ireland and much less so with the EU beyond that.
This underlines our interdependency. One also might recognise another issue – that the typical position for many Irish businesses is the supplier – and often in those industries that are most vulnerable to Brexit the weaker supplier in a trading relationship. The balance of power is largely with the UK buyers.
The second point relates to currency – we have seen a marked and sustained devaluation of Sterling, with consequences for our export sector, and increasingly other sectors. This is likely to sustain. This again is something that firms need to plan for – and an area where, traditionally, small and mid-sized Irish businesses have not been very active in management.
Finally, briefly, and perhaps controversially I want to mention tax. Against the backdrop of austerity economic policies - Corporate Taxation is a real bug-bear politically and socially. For Ireland it is a particularly pointed discussion - our differentiated taxation strategy really is all about Corporation Tax, and we compete against many countries that are subtle in how they seek to achieve the same ends. We are and will remain in the firing line as long as our policy remains the same - simplicity and transparency is an important element of what makes our FDI system work, and the price of that is the attention of others. It is, at the end, a competition point.
So, what to do? Well, the political deal remains uncertain. At a policy level, I believe that this makes a good case for an extension of the transition period beyond 2020. I also think that the EU should provide support to businesses damaged by transition – which may be challenged from a State Aid perspective but I am sure that mechanisms can be found if the political will exists.
Planning for Brexit at a glance:
· Form of new trading relationship still very uncertain
· More prudent to plan for a less positive outcome
· Transition period needs to be lengthened
· Tariffs will impact certain key sectors
· Administration and related “market costs” will be significant
· Currency position unlikely to improve non-tariff costs
· Balance of power to be considered in strategy
· Staffing issues – Ireland’s free travel status can be a benefit (and a threat?)
As directors, what should we look to, how should we react given the inherent uncertainty facing many businesses? The first step is to recognize that the issue is a strategic challenge and requires an approach which encompasses a re-examination of plans. This should include:
- Full assessment of exposures
- Supply chain
- Markets and customers
- Distribution network
- Regulatory alignment
The directors may wish to consider a strategic appraisal of options – on a prudent basis this might include interims such as restructuring of supply chain; currency management; and new market strategies.
It is also worth noting that the resourcing and administrative costs associated with whatever new regime emerges will be significant and this needs to be planned for – companies may lack the relevant skills and structures to deal with tariffs and regulatory challenges at present.
An important final point – Brexit will be a challenge. Nonetheless, Ireland as part of the EU remains well placed to take advantage of global opportunities. Re-examining strategies is a chance to look again for these opportunities.
Mark Kennedy is Managing Partner, Mazars.