Brexit - The Implications for Ireland’s Exporters

Brexit - The Implications for Ireland’s Exporters

The 12 step programme for a deal with the EU on Brexit, outlined by UK Prime Minister Theresa May, will form the framework for a negotiated exit. At best, it is a wish list; at worst, an exercise in delusion. Either way, Irish exporters need to start planning for the hard Brexit they describe.

Transition Period

The good news is that a transition period seems likely. The challenge of amending 43 years of treaties is a colossal task! An extension - possibly for a number of years - appeals to both the UK and EU negotiators as it may dampen market volatility and allow positions to soften.

The issues

The key areas of focus and division are UK access to the Single Market and the free movement of people within the Single Market. Identifying them is the easy part: coming up with workable solutions will challenge the diplomatic skills of both sides.

Trade with Britain in a post Brexit world

For Irish exporters, currency depreciation and the lack of competitiveness that arises from Sterling’s depreciation is just one of the headwinds that Brexit will bring. Supply chain, tariffs, VAT collection; legal status of contracts and staffing implications must all be considered. And business plans reassessed to ensure it suits for dealing with a country outside the EU.

Currency Risk

Currency volatility is part and parcel of doing business and contrary to a commonly held view a degree of currency volatility is not detrimental for importers or exporters. It can offer up opportunity.

What can be very difficult to cope with is rapid one directional FX movements as we experienced in the immediate aftermath of the UK vote

As that has reversed somewhat, businesses should now be organising a foreign exchange credit line with their bank or currency provider. This will allow them to hedge their future currency receipts and payments.

Forward FX lines generally allow businesses to hedge their FX exposure for a period up to one year ‑ up to two years may be available on a case by case basis. These FX lines may be secured or unsecured credit lines and again this will depend on your currency supplier and your businesses individual circumstances.

Businesses over the last couple of years have used the spot market to transact their currency flows. This may be a dangerous strategy going forward. When the market figures out whether Britain is destined for a hard or soft Brexit, there will be a large directional move. This time there may not be a quick rebound – don’t be on the wrong side of that move!

Supply chain

 There are immediate benefits to sourcing goods and services from the UK. There is likely to be a one off reduction in the Euro value of these inputs. Exporters to the UK can reduce FX exposure by sourcing materials and services from there. However they need to also have a long term perspective. A weak pound will likely lead to increased inflation and labour costs for UK suppliers. Will the reduced currency risk be enough to compensate for a 10% increase in supply line costs? European businesses may take a longer term view and decide now is the time to shorten the supply line and take advantage of a growing consumer demand for locally sourced and produced product.

Tariffs and Levies

Britain wants “tariff-free” trade and for cross-border trade with Europe to be “as frictionless as possible”. Easy to say, it will be very difficult to deliver. If the UK and the EU are unable to agree a trade agreement, trade between the two will be subject to World Trade Organisation (WTO) rules.

Failure to come to an agreement could lead to the UK to implementing an aggressive low tax policy - the worst possible outcome from Dublin’s perspective.

The current balance of trade between the UK and the EU is heavily in the EU’s favour, the UK would collect roughly twice as much tariffs on imports from the EU than the EU would from UK exports. The UK will be in a position to adjust its tariffs to favour certain industries; it can for instance reduce its tariffs on input products for UK manufacturers. The EU cannot do this as easily as any reduction in specific tariffs will apply to imports from all their MFNs.

Irish businesses should test a number of scenarios (that have tariffs at increasing increments) to discover is there a level that makes them uncompetitive for the UK market.

Vat collection

It is probably not widely known that VAT was introduced in the UK as a condition of joining the European Economic Community (EEC). It is safe to say they won’t be removing it when they leave the European Union but they will be free to change and amend it as they see fit. They have already signalled their intention to reduce it to 15% to attract investment and to counteract some of the negative impacts of Brexit.

Irish trade transactions with the UK will have to be recognised as imports and exports with the normal VAT collection obligations that this will entail. An up-front import VAT charge is likely to be levied at the point of entry; this will likely apply to imports of both countries.

Irish businesses need to examine existing supply chains to consider the implication of VAT and customs changes.

Trade related contracts

 Initial thinking is that commercial contracts may be less impacted than one might expect. They tend to be less heavily regulated than other areas of contract law and there is substantial cross over between UK and Irish commercial law.

However there will be areas where future divergence may require contract amendment or redrawing. Brexit is likely to increase trade barriers and thus costs. Agreements may need to be revisited to reflect the change in circumstances.

Some agreements will be restricted to the EU in their territorial scope and will now need to be considered and amended accordingly. If you are providing services to the UK, you should review any service level agreements, particularly in relation to freedom of movement of people, goods and services.

Though the UK will still be part of the EU in May 2018 when the new European General Data Protection (GDPR) is due to be introduced, its subsequent withdrawal may not bind Britain as tightly to these rules as its EU trading partners and could mean the UK is no longer automatically a safe destination for transfer of personal data.

Finally Brexit could provide businesses with genuine grounds to exit existing contracts under adverse change or force majeure clauses.

Staff and people issues

One of the first things that Irish businesses should do is to conduct an impact assessment to see if Brexit is going to impact your business and your staff. You should be particularly sensitive of the need to communicate as early as possible with employees based in the UK. Factor in that salaries in the UK may increase as a result of higher inflation and a tightening labour market as the UK will have access to less migrant labour. Examine your employee value proposition. Will Brexit negatively impact it and if you should amend it.

Re-examine any major people projects. Should they be delayed, or amended? Are they essential to the future of the business?

Review current employee data collection policies and procedures. Is fresh consent required? What about policies and procedures to transfer data across borders?

Reassessing your business plan

All of the items that have been considered, briefly above, contribute to your business plan and will be key components when analysing the impact Brexit will have on your business. However you will need to consider their impact in their totality and the best way to do this is to conduct a critical analysis of your plan. This should include scenario analysis and stress testing to identify when the business may no longer be viable.

Brexit will initiate opportunities as well as threats. When completed talk to your board. Your board of directors need to have a clear strategy to deal with the challenges and opportunities that lie ahead.

Eamonn O’Connor worked in the Markets division of an Irish Bank for thirty five years both as a Trader and on SME and Large Corporate sales. He has extensive knowledge and experience of the challenges presented by cross border trade.


Comments 1

Fionan Murray on Wednesday, 15 February 2017 15:32

hiring at moment in cambridge. 2 great candidates didn't want to work in UK because of brexit. a chinese phd who was studying in cambridge went to singapore instead and a latvian phd didnt want to go to UK so we're bringing him to cork instead. serious brain drain for british research community as well as unnecessary hassle for our company setting up in the UK

hiring at moment in cambridge. 2 great candidates didn't want to work in UK because of brexit. a chinese phd who was studying in cambridge went to singapore instead and a latvian phd didnt want to go to UK so we're bringing him to cork instead. serious brain drain for british research community as well as unnecessary hassle for our company setting up in the UK
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