The United States Law Week

INSIGHT: British Political Crisis Over Brexit— U.S. Companies Need to Prepare

Feb. 5, 2019, 9:00 AM

The British political crisis over Brexit is now likely to persist at least until mid-February, and probably until early March, with no resolution of the UK’s manner of leaving the European Union.

Following votes in Parliament on Jan. 29, MPs seem to be against an extension of time, against “no deal,” and only for renegotiating a deal — the UK - EU Withdrawal Accord — that the EU says it will not reopen. Nevertheless, the prime minister is now expected to seek some concessions from Europe and present her deal to Parliament again on Feb. 13.

She will probably gain a few votes, but it seems unlikely that she will overcome the historic margin of defeat, 432 to 202, suffered by the Withdrawal Agreement on Jan. 29.

As the date for Britain’s EU exit, March 29, draws near, the British government faces a narrowing set of realistic options. The current agreement—despite talk of “renegotiation” -- seems to be dead. British Prime Minister Theresa May apparently hopes that if she can frighten enough MPs with the prospect of “no deal”, more than 100 MPs will switch their vote before March 29 – this seems very unlikely.

A general election also seems unlikely, given that the government survived a vote of confidence even after the defeat of the exit agreement. If one thing scares Conservative MPs more than a deal with Brussels, it is the prospect of Jeremy Corbyn as prime minister.

Finally, while Britain could withdraw its notice to exit the EU, this would undoubtedly require a second referendum—something the Prime Minister has vowed will not happen. There is growing talk of a “Peoples’ Vote,” but no consensus to hold one or on what the question might be, and time is running out.

Three Options Likely

Three options now stand out as more likely:

  • Renegotiating the current deal—The EU has made clear that it will not reopen the exit agreement, although it is willing to further polish language in the non-binding statement accompanying the negotiated text. This is unlikely to win enough support in Parliament to pass, especially as long as the “backstop” on the Irish border remains. Still, there seems to be hope in London that the EU will rethink just before the deadline, and perhaps it will. Whether the UK will be united on what it wants out of a renegotiated agreement is far from clear.
  • The British requesting an extension of the March 29 deadline. The prime minister has said she will not ask for such an extension, and Parliament recently defeated an amendment mandating that the government make such a request. If the prime minister’s next plan is defeated again, however, we could see this resurface. But a key fact lost in the British debate is that any extension requires the approval of all 27 EU member states. While some governments will want to be flexible, they are all frustrated by the inability of the British government to reach consensus and unlikely to agree to an extension simply to continue the current turmoil. They might agree if an extension were needed to run a new referendum, but there is no consensus for that in the UK. The European Parliament elections at the end of may further complicate the situation.
  • No Deal—Both the EU and the UK are now undertaking significant preparations for the UK to leave the EU at midnight on March 29 with no deal in place. They are training new customs agents and stockpiling essential goods. The EU has laid out some emergency measures that will, for example, temporarily allow air travel between the UK and the EU. Apart from some Brexiteers, few people in either in UK or the EU27 want to see “no deal,” but there is a real danger that the failure to reach consensus will mean that “no deal” becomes the only real option. Every day that passes without some agreement makes “no deal” more likely.

Impact on U.S. Companies

What does this mean for business? First, none of the remaining options are good options. The defeat of the exit agreement in January removed the best option for allowing a relatively smooth transition period over at least two years.

Even in the unlikely event that the exit agreement is somehow renegotiated and approved by Parliament, time is so short now that companies must prepare for this option to fail.

Similarly, if the UK requests an extension of Article 50 in February, EU agreement will take some time – if it can be done at all. Again, it could be that an extension is granted only a month before Brexit Day – and depending on the length of the extension, we could go through this all again in six months!

Thus, it is past time to begin preparing for a no deal scenario. U.S. companies shipping goods across the Atlantic will certainly face some disruption, although external UK tariffs and customs procedures should stay the same for a while. Companies who export to the UK as a transit to the EU27 should already be thinking about other ports of entry.

Even more disruption will be faced by U.S. companies with investments in the UK and EU, who built a single, integrated supply chain. They will find tariffs, customs, and other barriers suddenly in the middle of that supply chain, causing delays and higher costs.

Those who deal with services will also find their world turned upside down. Even though the UK is a leading provider of services around the world, including in the EU27, there has been little discussion about how services would be treated post-Brexit. Banks that have used London as their entrance to the EU may lose that valuable right and have to re-establish themselves elsewhere in the EU27.

A less obvious risk comes from the many agreements the UK signed with third countries as a member of the EU, ranging from Passenger Name Records and Open Skies to the EU free trade agreements with Canada, Japan, and many others.

All of these will have to be renegotiated by the UK, and even though most third parties, such as the United States, are approaching this task with good will, it will take time. Whether this will be completed by March 29 is unclear, nor is it certain that existing arrangements can simply be extended, even temporarily.

Businesses that are used to operating on the basis of these agreements—for example, U.S. businesses that export from Canada or Mexico to the UK on the basis of those FTAs—will have to navigate a potential breakdown in rules and figure out how their supply chains may be affected.

As the political turmoil in London continues, a disruptive exit is becoming more likely. Even if a solution is found at the last minute, it will be a very bumpy ride for any company involved.

Author Information

Frances G. Burwell is a senior advisor at McLarty Associates and a distinguished fellow at the Atlantic Council.

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