Brexit causing headaches for many Canadian exporters

In about a month the United Kingdom could unceremoniously stumble its way out of the European Union—the patchwork of nation states that came together in the wake of the Second World War and gradually formed what was intended as a lasting political and economic federation unlike anything the world had ever seen. It would be a solution to centuries of cross-continental conflict—or so its architects hoped.

Now, the world’s fifth-largest economy is poised to pull out and, to date, effectively has no plan as to how it’s going to do so without torpedoing its economy, spiking unemployment and sending the British pound spiraling into the currency abyss. A recent New York Times article revealed that the British government has even dug Cold War-era plans out of the attic to guide the evacuation of the royals from London should rioting break out in the capital in the event of a no-deal Brexit. That news comes amid reports of Britons stocking up on essentials such as food and medicine if the country’s trade ties to the E.U. are severed at the stroke of midnight on March 29th, thereby disrupting the normal exchange of goods.

An unclear path to Brexit

While a no-deal Brexit is still relatively improbable, that nightmare scenario became more credible after the British parliament rejected a deal negotiated with the E.U. by Theresa May’s Conservative government. Hardcore Brexiteers are giving the thumbs up to a no-deal exit. Many Conservatives are pressing May to renegotiate with the E.U., which she continues to attempt. Moderates and Remainers are calling for the entire messy plan to be delayed or scrapped at the eleventh hour. A Brexit delay is now emerging as a preferred option, even if it would require E.U. approval, which is by no means guaranteed.

And Canadian companies that do business in the U.K.—or with the E.U. via the U.K.—are caught in the middle.

According to government statistics, about 600 Canadian firms have commercial interests in the U.K., with Canada and our British allies exchanging about $26 billion in goods and services in 2017. While Canada recently signed the Comprehensive Economic and Trade Agreement (CETA), which removed almost all barriers to trade between our jurisdiction and E.U. member states, the agreement creates a unique Brexit predicament: the U.K. is a natural beachhead for Canadian firms doing business with the E.U. thanks to a common language, similar laws, a generally favourable time difference and a host of other factors. That gateway to Europe could well be shut and locked, at least in the short term, if the parties involved can’t get their act together and hash out a mutually-acceptable Brexit divorce agreement.

Canadian companies impacted by Brexit turmoil

We’ve heard from several Canadian companies fretting over the movement of their goods from ports in the U.K. to customers on the continent should a Brexit nightmare scenario play out. In one case, a manufacturer’s clients in Germany and Spain were recently warned that goods originating in the U.K.—where this manufacturer bases its European operations—will soon face tariffs. Needless to say, management at that company is at a loss with how to proceed. Should they cross their fingers and hope that a deal gets done? Or act now, but risk upsetting their hard-won overseas export success by uprooting their British infrastructure and operations and relocating, only to possibly watch as a status-quo deal is struck at the last moment?

It’s a dilemma without a clear solution. Our Russell Bedford International affiliates in London are reporting that many of their British clients are establishing entities on mainland Europe, with plans to ship items destined for the U.K. market to English ports.

Our advice is to think strategically and plan for the most likely scenarios: the approval of May’s negotiated deal, but with revisions around contentious issues such as the so-called Northern Ireland back stop; a hard no-deal exit; or a delay or absolute reversal of Brexit that sees the U.K. remain in the union longer, or for good. No matter the outcome, Canadian entrepreneurs should be prepared for:

Increased costs

Because the U.K.-E.U. trading relationship could see a rollback to decades-old World Trade Organization rules, a new set of tariffs would be imposed on goods moving across the English Channel. This would increase the cost of purchasing Canadian goods and could, in turn, make our products uncompetitive. CEOs will be forced to make hard decisions, such as whether to absorb tariff-related costs to the detriment of profit margins, or attempt to pass along trade charges to end customers. Neither scenario is preferable.

Trade disruption

The biggest challenge with a no-deal Brexit is that the U.K. will lose access to the E.U.’s free trade agreements with outside countries—including Canada. While officials from both countries are reportedly working to patch together an interim Anglo-Canadian free trade pact, there are no guarantees that trade will flow as usual on March 30th. Canadian firms should have a contingency plan in place if their export strategy is heavily reliant on British clientele.

Possible relocation

On that note, Canadian firms that base their operations in the U.K. still have time to consider moving to the continent. Again, this is a costly manoeuvre and one that could backfire, but it may be the least-worst option, particularly if your company does most of its sales on the continent.

Nervous clients

While your own employees are likely peppering you with questions about how Brexit will impact the success of the business—and their employment—customers are likely making similar queries. It’s time to begin preparing communications that outline your plans for business continuity if (or when) the likely Brexit scenarios outlined above play out. Better yet, be proactive. Don’t wait for clients to come knocking, and panicking, about the potential loss of access to your goods or services. Make them aware that disruptions could occur, but you have a plan. Some companies are stockpiling their products on the continent, for example, in the hope that when supplies eventually run out, any border delays will have been fully resolved and business can carry on as usual. Whatever the strategy, be transparent, state it clearly and be prepared to reassure nervous customers.

Immigration issues

There are many Canadian entrepreneurs who leverage E.U. citizenship to work in the U.K. Brexit could well upset those cross-border privileges, erecting immigration barriers virtually overnight. At this point it’s worth consulting with a U.K.-based immigration lawyer to determine how to navigate potential legal hiccups to living or working in the U.K.

Last point: if you haven’t already, invite an experienced chartered professional accountant with international expertise into the conversation of how Brexit will impact your business, and what to do about it. Tax and strategic (as well as tactical) advice will be critical to keeping your export strategy on the rails in the months ahead.

Marshall Egelnick, Managing Partner

Marshall Egelnick

905-946-1300, x. 226