Richard North, 16/07/2020  

Some companies, it seems, are taking the threat of a no-deal TransEnd seriously – according to the Financial Times. Several large listed companies are starting to increase their stocks of supplies, having exhausted stores accumulated ahead of the last time a no-deal scenario was expected.

They are also, apparently, working on contingency plans to ensure that they can manage the worst-case scenarios of high tariffs and hard borders, despite the extra costs they have incurred adapting to the coronavirus pandemic.

This is just as well, as it would appear that yesterday's round of EU-UK talks have not – as expected – broken any new ground. "Team Johnson" is pushing the EU to agree the outline of a deal by the end of July, while Brussels seems not to have changed its stance on demanding concessions on level playing field issues such as state aid.

Three companies are cited by the FT. One is Electrocomponents, the FTSE 250-listed electronics distributor. It says it is building up its inventory in case of a no-deal TransEnd, that will see it hold millions of pounds of extra stock.

"We are building up the Brexit buffer again, which last time was about £30m of fast moving inventory", says chief executive Lindsley Ruth. "Regardless of the outcome of trade negotiations, we are well prepared for the future and have a plan for all scenarios".

Carmaker Bentley – which, typically of the motor industry, relies on just-in-time delivery of supplies from Europe - is to start preparations in the event of border disruption. It has increased warehouse space to carry up to ten days of supplies of parts, up from two days.

Then, Paul Forman, chief executive of Essentra, says his FTSE 250 supplier of plastic and fibre products would "hope for the best and prepare for the worst". His company is beginning to stockpile again.

He tells the FT: "We have had a pretty robust dress rehearsal with Covid. Our plans are in place and have been reviewed by a Big Four accounting firm". He adds: "The B-word started moving back up the board agenda again about six weeks ago. In the second half we will build the inventory up by only £3-4 million".

On the other hand, Geoff Mackey, corporate affairs director at BASF, the German chemicals group, says his company is not actively stockpiling. But it is looking at the government's border operating model (such that it is) for the impact on operations, alongside the costs of switching to a new UK regulatory regime.

In a no-deal scenario, the chemicals industry expects to face average tariffs of about 6 percent. Mackey estimates this could add around £40m to the UK company's costs.

However, illustrating the relationship between the costs of tariffs and non-tariff barriers, he is able to identify the additional costs of re-registered products with a new UK regulatory regime that will come into force at the end of the transition period. This could cost another £60-70 million "with no added value", Mackey says.

Well-established, wealthy international companies such as BASF are better able to deal with such major changes than smaller companies, which lack both the resources and corporate skills to prepare for post-transition life. The Covid-19 pandemic hasn't helped, pushing many to the brink of collapse.

A typical example might be the engineering company Northern Industrial. Its managing director, David Lenehan, says he hasn't given "Brexit" a second thought since the Corona pandemic. He has been fully focused on trying to get through the current crisis. He thinks Brexit "will be a walk in the park compared to coronavirus", but there again, he could be thinking of Jurassic Park.

That brings us to John Glen, an economist at the Chartered Institute of Procurement and Supply. He warns that the government has problems getting businesses to prepare for 1 January.

There have already been three false starts, he says. "Getting business engaged, and in particular small and medium sized firms, when they are still trying to survive coronavirus will be a major challenge". Finding the right sites for the new customs areas and designing the technology would also be a challenge in five months, he adds. "All of these pieces need to be in place to keep the trucks rolling".

However, life cannot have been made easier by the government's latest plans to give control of around 70 regulatory areas currently dictated by Brussels to devolved UK governments.

Sectors covered include environmental law, renewable energy policy, flood risk management, land use, water quality laws and forestry policy. Matters such as animal welfare, blood safety, the control of hazardous substances, and public procurement are also covered.

These will be devolved to the Scottish, Welsh and Northern Ireland governments as part of the government's cunning plan.

Where divergences occur, the government will rely on the principle of mutual recognition of standards, to ensure frictionless functioning of the UK's internal market. Products from any of the four UK areas will be acceptable throughout the whole UK, even if they are made to lower standards in one or more areas.

Reflecting the chaos over facemask policy, where the "advice" from No.10 seems to be all over the place, creating more confusion than clarity, one wonders whether the government has really understood the implications of this move.

In trading terms (certainly within the EU's Single Market), the principle of mutual recognition applies only in the absence of harmonised standards. Thus, if there is a standard applicable to any particular product (or component), mutual recognition doesn't apply.

Where UK companies are planning to export goods to the EU, their products must conform with Union standards, where they exist. But where the products (or their components) are potentially sourced from four zones each with their own individual regulatory codes, demonstrating conformity could get quite tricky.

This is especially the case when it comes to such issues as environmental law, where the "level playing field" requirements could exclude products even where there is nominal conformity with posted product standards.

That problem intensifies over time as legislation is a dynamic field. Future conformity cannot be assured if Brussels changes its laws and any one of the four UK regulatory areas fails to keep up.

At the very least, with no border controls between the areas (with the possible exception of Northern Ireland), Brussels might be expected to intensify its own border checks when importing goods of UK origin, as well as requiring "rules of origin" declarations to identify goods sourced in the devolved areas.

If one didn't know better, it is possible to think that HM government is going out of its way to make things more complicated for businesses, hampering their ability to trade with the EU, above and beyond the basic constraints which will inevitably apply.

Needless to say, Whitehall claims it is doing the right thing by the devolved administrations, arguing that the plan is a "power surge" for them. Even without the EU implications, though, those administrations remain suspicious. Scottish officials fear that Johnson will use this as a back door, bringing in substandard goods from the US, which Scotland and other devolved areas will be obliged to accept.

Michael Russell, the Scottish government's constitution secretary, says that London’s stress on powers that the devolved administrations would gain is a "deceitful smokescreen". Speaking for his government, he adds: "We will not be co-operating in any way with that action and will challenge it in every possible way including in the courts".

Even if the government's intentions were pure, therefore, it seems it will come unstuck on the horns of complexity and suspicion. Any which way, this is another fine mess we have to deal with.

Also published on Turbulent Times.

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