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Companies and the Hardships of Brexit. Three Questions to Pierre Sellal

BLOG - 9 October 2018

By Institut Montaigne

On 29 March 2019, the United Kingdom will officially leave the European Union. With less than six months to go, London and Brussels are still struggling to agree on the terms of their divorce. What can British and European companies expect? How are they preparing for this event? Pierre Sellal, former Permanent Representative of France to the European Union, President of the Fondation de France and Senior Counsel at August Debouzy, shares his take on the matter.

How are companies preparing for the United Kingdom’s planned exit from the European Union?

Companies’ state of preparedness for this this event varies widely according to the sectors they belong to, the share of their activities affected by trade between the United Kingdom and other Member States, and the degree of integration of production processes when they involve British components. This applies to companies both based in the United Kingdom and on the continent. Many considered that Brexit would not occur, or that political arrangements would provide a status quo on all matters relating to trade, customs formalities, or continued access to the internal market.

This attitude of denial is no longer appropriate at less than six months from the 29 March 2019 deadline. The European Commission was right, last July, to remind all stakeholders, starting with companies, that it was their responsibility to prepare for all potential scenarios, including that of an exit with no agreement reached. This would mean that the United Kingdom, ceasing to be a Member State, would become a "third country" overnight. It is the responsibility of each company to rigorously analyze the legal, economic and financial impact of such a change on its activities and projects. 

It should also be recalled that if, as hoped, a withdrawal agreement is eventually reached and implemented, companies will have additional time to adapt to this change, until January 2021.

What do you think are the main risks for the development of British and European companies?

The strength of the internal market lies in its fluid and unimpeded trade within an area subject to the same rules, with millions of consumers. While its amputation will harm all companies that benefited from its size, the British economy, which is more dependent on trade with the EU27 than the EU27 is on the United Kingdom, will be most impacted. The United Kingdom will no longer be part of the internal market (nor of the customs union, if so confirmed by the British government). It will of course still be able to access it, but under conditions that remain as of yet undefined, and which will involve a certain degree of procedures and controls. Such "frictions", inherent to trade between the EU and third countries, may hinder cooperation and partnerships between companies on both sides of the Channel, or challenge investment or establishment projects in the United Kingdom. Indeed, free access to the internal market is often a crucial condition in the choice to develop.

Moreover, some companies in the United Kingdom are worried that the restrictions envisaged by the British government on the free movement of people will impact their recruitment policy and their ability to attract talent.

For continental companies, adjusting to this new situation could take time and translate into costs of adaptation, especially if it involves new production models, for example. They will also have to pay attention to the level playing field established by the new relationship between the United Kingdom and the EU. The less the applicable rules - and not only those directly affecting trade - remain aligned, the higher the risk of distorting competition, and the less fluid British companies’ access to the internal market will be.

Conversely, could the United Kingdom provide more opportunities to British firms, as Brexit defenders would like?

According to this view, the United Kingdom would benefit from a renewed attractiveness and competitiveness by recovering its ability to reach bilateral trade agreements and by emancipating from European rules and disciplines. It's a very uncertain bet. On the one hand, it is very likely that major trading partners will continue to prioritize their economic relations with the EU rather than with a third country that no longer provides them with an access to the European internal market. The fact that the United Kingdom will no longer take part in the development and adoption of European standards and regulations will also undermine its influence and attractiveness.

On the other hand, the quest for greater competitiveness through deregulation and relaxation of environmental, social, fiscal and financial competition standards would be a very uncertain path, both regarding the domestic political support that such a strategy could receive and the United Kingdom’s image and reputation. Above all, any sign of regulatory dumping would further restrict the country’s access to the European market.

 

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