U.K. plays the U.S. card as Brexit gets ugly

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The U.K.’s exit from the European Union, Brexit, is getting ugly. And now the U.S. is wading in, with U.K. and U.S. political leadership cozying up on a potential free trade deal to intimidate the EU over the trade terms.

For U.S. firms advising clients who sell internationally, these evolving tailwinds suggest the rewards of a U.S.-U.K. bilateral deal could be major. The U.K. is the world’s fifth largest economy, and America’s fifth largest destination for investment. Since 2017, President Trump has called for a speedy deal opening trade in goods, services, agriculture and government procurement. The U.S. pharmaceutical and agriculture industries are at the front of the chorus looking for a quick free trade agreement with the U.K. before the EU commits.

But the EU may yet attempt to restrain the U.K. from opening up transatlantic trade in a way that may set up the U.K. as a cheap offshore European hub for American commerce.

U.K. enters EU purgatory till end of 2020

Following the 2016 U.K. public vote to leave the world’s biggest political and economic union to discover an unfettered global role, the U.K. finally exited the EU on Jan. 31, 2020. However, it remains within the EU’s trading structures — the Customs Union, Single Market and Value Added Tax (VAT) regime — until Dec. 31, 2020. This means goods and services still move freely between the U.K. and the other 27 EU states. And U.S. firms selling into the U.K. still face the same tariffs, quotas, regulatory approval, customs declarations and VAT restrictions.

During this 11-month “transition period,” the U.K. is negotiating a future trade deal with the EU. This will cover the customs duties, goods standards and tax rules the two will trade on from 2021. It is a matter of EU market access for the U.K. versus the U.K. continuing to accept EU rules and restrictions on employment, environment, taxation and state aid for industry.

The U.K. rankles at the EU retaining jurisdiction over U.K. trade laws after Brexit. “Taking back control” of U.K. laws was a rallying cry for the U.K. “Leave” vote in 2016.

So, the U.K. is playing the U.S. card. It has in the past week confirmed plans to open up U.S. talks alongside the EU agreement discussions. The U.K. is hoping the EU will fear the U.S. turning the U.K. into a low-cost production base for exports into the EU.

U.S. looms with “chlorinated chicken”

The U.K.’s exit from the tightly controlled trade and regulatory EU regime makes for a major market opportunity for U.S. firms. The EU has long been viewed as protectionist by corporate America, imposing high regulatory, tariff and quota controls on US imports — pharmaceutical and agricultural in particular. The current U.S. government has emboldened the U.K. with its tough talk against the EU. In return, the U.S. wants unfettered access to previously EU-restricted U.K. markets. At the top of the list is the U.K.’s National Health Service, one of the world’s largest buyers of medicines.

The defeated, but still vocal, EU support in the U.K. warns of an imposition in a U.S. deal of low product standards. Stories of an invasion of U.S. chlorine-cleansed chicken make daily headlines in the U.K. This is certainly screech-rhetoric from the pro-EU trade lobby in the U.K., but it’s tainting the U.K. public view on the attractiveness of pivoting from EU to U.S. trade.

The U.S. rescues the imperialist?

This U.K. dual negotiation strategy will perplex U.S. and EU negotiators since they will not wish to cement any terms until they see what the other side gets out of the U.K. But the U.K. must focus on its EU free trade agreement. The EU is the U.K.’s most important market, and industries like pharma, car manufacturing and food are built around the existing frictionless flow of goods.

This will leave many businesses in the U.S. disappointed. But the next nine months may yet see the statist Europeans drive the newly liberated U.K. into the arms of the U.S., an ironic reversal of the U.K.-U.S. imperialist tale.

What advisers should be saying – new costs on Jan 1, 2021

Whichever way negotiations go, the U.K.’s exit from the EU will mean major changes on tariffs, customs rules and VAT compliance. The U.K. government earlier this month warned all businesses to brace for an entirely new compliance regime. It’s important, therefore, that accountants alert their client base selling to the U.K. that they need to review their sales channels, supply channels and trading terms to ensure new duties and taxes don’t unexpectedly fall on them. Margins on global cross-border trade can be razor thin, so having to pick-up the tab on the U.K.’s new border regime could flip the economics on their head. Make sure your clients are not amongst the losers on Jan. 1, 2021.

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Brexit Trade agreements International taxes Avalara Sales tax Politics European Union