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Grayling's Brexit Bulletin - 7 October 2017

9th October 2017


 

The BREXIT Bulletin: Are Supply Chains your Weakest Link?

 

The Grayling Brexit Unit was delighted to recently host an event for our clients examining the impact of Brexit on firms' supply chains. Our guest speakers represented a global auto manufacturer, a UK regional business association (with significant SME membership), an EMEA Supply Chain Director for a diversified global consumer company and  the Deputy-Head of EU Exit Analysis at the UK's Business, Energy and Industrial Strategy (BEIS) Department. This  was the first time that a British civil servant has spoken publicly (under Chatham house rules) in Brussels about Brexit planning and the logistical challenges ahead. We also had expert comment from the trade association representing European SME's. We'd like to thank all our guests and speakers for their participation.

Below we offer some of the highlights- we express our views and not necessarily those of any of the speakers


We list the 6 main points that emerged from the presentations and the ensuing discussions with the audience:

Business must deepen and widen engagement with decision-makers:
Businesses need to

  • Continue to increase their engagement with the UK government, not only in terms of their positions on key issues, but also offering information about how their businesses are organised along the supply chain
  • Share with decision-makers their timeline for making investment decisions, bearing in mind the current rumours about companies deciding to pull out of the UK.
  • Consider engagement with Ministers
  • Engage with the detail of the UK’s position papers, particularly those concerning customs – for example, by mapping out the full 'product journey' of their goods and services. Businesses should map this journey under both of the UK’s two proposed customs models and also consider potential alternatives that they may want to flag up in their engagement with civil servants and Ministers.
  • Offer input with two aims in mind: shaping Brexit decisions and the UK's domestic policy response, as government is simultaneously considering changes to both.

SMEs face a particular information gap and bureaucratic hurdle

  • “Rules of origin” can be a challenging concept to grasp for many  SMEs as they typically have not exported to third markets. After Brexit, the EU will be such a third market.
  • According to a survey carried out earlier this year in a key UK region, Brexit presents a particular challenge to SMEs, particularly in regard to a ‘hard’ Brexit scenario and the extra administrative burdens.
  • At the same time, 78% of companies indicated that they are not taking measures to prepare for Brexit.

The precise impacts on supply chains will vary by company but are likely to be significant. 

Impacts may include:

  • Bearing extra administration burdens
  • Carrying extra inventory
  • Mitigating foreign exchange rate changes—an often overlooked impact that in many cases dwarfs any economic impact of tariffs/regulatory burdens.

The supply chain challenge is likely to be significant.

Some statistics about industry operations help to illustrate the challenge ahead. 350 trucks arrive at a particular UK automotive factory from the EU every day, with additional parts coming in from the US, Mexico, India, China, Thailand and Japan. 35% of this factory’s goods go to the EU-27, and 50% go to the rest of the world.

There is likely to be an impact on Customs operations.

Today it takes a lorry just 2 minutes to complete EU-UK customs, but if the UK is seen as a third country, this may increase to 20 minutes. As a result, there is an obvious risk of congestion at ports, with 80% of the UK’s imports arriving by road.

Business are keen on the idea of a transition period and would ideally like it extended beyond two years when possible.

  


If you have any suggestions about the Brexit Bulletin or want to find out more about a specific aspect of Brexit, please do let us know. Please visit the Grayling Brussels website, follow us on Twitter @TheEULobby, and don't forget to check out our Brexit Papers and Timeline
 



This week's contents:
 

Grayling Sectoral Insight - Energy and Environment

Grayling Network Insight - From Cardiff, Wales

UK Highlights -

Brussels Highlights - 

Our Reads of the Week - 

 

 

 

Grayling Brexit Unit Events 

11 October 2017 - 4th Installment of the Grayling Brexit Breakfast Club

Venue: Grayling’s Brussels Office, Floor 4, 46 Avenue des Arts, Brussels 1000

For more information contact Nick Crosby - nick.crosby@grayling.com

 

 

 

 

Grayling Sectoral Insight: Energy and Environment

Brexit proofing the Emissions Trading Scheme 
In 2005 the European Union introduced the Emissions Trading Scheme (ETS), which aimed to ‘promote the reduction of greenhouse gas emissions in a cost-effective and economically efficient way.’ In essence, the system restricts the greenhouse gases that may be emitted by certain sectors: energy-intensive industry, power producers, and airlines. The mechanism works by firms being allocated or buying allowances to emit greenhouse gases. As time goes on, the cap is brought down, with the result being a decrease in emissions.

However, the system was long beset by problems. In the shadow of the economic crisis and subsequent downturn, the demand for emissions permits fell, and with it, the price. Additionally, the amount of allowances in the system accumulated. In light of the dysfunctionality of the system, and the central role which the ETS is intended to play in the achievement of the EU’s climate targets (namely, cutting emissions drastically), reform is needed.

At present, the ETS is under reform in the legislature of the European Union: the European Commission presented a proposal to this end in July 2015. However, this was before Brexit. The United Kingdom is one of the European Union’s biggest emitters of carbon dioxide and other greenhouse gases, and as a Member of the EU its businesses hold a considerable number of emissions allowances under the ETS.

In the context of the revision of the Emissions Trading System aviation elements, European parliamentarians have foreseen the dangerous situation whereby British firms could ‘dump’ their emissions allowances if no deal is reached by March 2019. If the UK – the second biggest emitter of greenhouse gases – suddenly has a surplus of allowances which it no longer needs, it could resell them back to European firms at a profit (many of these allowances were freely allocated by the UK). UK firms gain a windfall, EU firms are able to boost production by polluting a little more and the carbon price tanks.

To prevent this scenario the European Parliament has moved to protect ‘the environmental integrity of the EU emission trading system’. In the first Brexit amendment to an active piece of European regulation in the legislature, the Parliament amended the ETS Directive thus: ‘In order to protect the environmental integrity of the EU emission trading system, aviation operators and other operators in the EU ETS may not use allowances that are issued from 1 January 2018 onwards by a Member State in respect of which there are obligations lapsing for aviation operators and other operators.’ Essentially, once a Member State leaves the Union, ETS allowances are rendered null and void.

The Grayling View
In the ongoing drama about what kind of divorce settlement the UK will reach, or what kind of future arrangement the EU and UK will have, the spectre of a ‘cliff edge scenario’ lingers on. Indeed, now legislators in the EU are taking active steps towards protecting the interests of the Union (in this case, environmental) in new or recast legislation – surely a new level of preparing for the worst.

In this case, the EU is trying to future-proof a (hitherto disappointing) flagship scheme to reach its own targets – and those of the Paris Climate Agreement – for emissions reductions. However, this little episode signals something altogether more concerning. As negotiations continue to flounder without any tangible progress this seemingly small amendment on ETS is indicative of legislators’ attempts to fire-proof their house from the Brexit ‘fire’ – before it all goes up in smoke. The open question is where else might the EU’s legislators feel obliged to Brexit proof legislation.
 



Grayling Network Insight - From Grayling's Office in Cardiff, Wales

See Brexit and Dai
In a country so reliant on European funds, the shock of Brexit has been cataclysmic.
 
With some of the poorest regions in Europe located on the Welsh side of Offa’s Dyke and The European Union paying for new roads, new schools, helping our hill farming industry prosper and protecting some of our most famous foods, the expectation was that Wales would vote Remain; so when the Wales result was announced, shockwaves emanated through the country. However, those in power in Cardiff Bay swiftly accepted the results and began work on securing the best deal possible for Wales.
 
The result has led to a sticky situation constitutionally within the UK, as some of the major areas of power are devolved to the Senedd in Cardiff Bay. This has led to friction between the First Minister, Carwyn Jones, and Theresa May. The First Minister, and the majority of the Senedd believe that the powers that cross into devolved competencies in Wales should rest immediately with Cardiff Bay, whilst the UK Government believes that a ‘cooling off’ period is needed, with the powers resting in Westminster for the time being.  To complicate matters even further, there have been calls from The First Minister for UK wide frameworks, particularly in area such as agriculture, a wholly devolved area, meaning that there must be some confluence of devolved and national policy.
 
The Grayling View
The full impacts of Brexit for the Principality are yet to be fully understood. The Welsh Government have promised that they will do whatever they can to secure the best deal for Wales, and to prioritise trade with the rest of the world. But with Welsh Ministers facing months of work to wade through EU regulations, with the Cabinet Secretary for Environment and Rural Affairs claiming that she had over 1000 pieces to go through, and jobs already re-locating to the EU, the Welsh Government faces an uphill battle to ensure that Wales can prosper from the decision to leave the EU.
 



The highlights from the UK: 

Conservative Party Conference: What the f's been going on?

This year’s Conservative Party conference will forever be remembered for the unhappy speech by the Prime Minister: she suffered  a prolonged bout of coughing, a heckler confronted her from the audience and the letter ‘f’ fell off the slogan on the  mise-en-scene  behind her. 

And some may say that is a good thing for both Theresa May and her Government. The challenges facing May going into Conference were huge. She had to apologise to party members for a poor election result and provide enough policy interventions to placate growing concerns on housing, transport, the NHS and student fees. Most importantly, she had to speak about Brexit in the same conciliatory tone that she utilised in her Florence speech, whilst also providing enough space for her more hard-line Brexiteer membership to discuss Brexit. The poor May speech was a distraction then from a lacklustre agenda; the week was as a whole a missed opportunity.

The opening days of conference were dominated by Boris Jonson and Ruth Davidson, both of whom consistently brought conference to stand still as they moved their way from event to event. Their star quality was probably heightened by the fact that so few Conservative MPs had decided to attend conference. The membership was broadly disciplined and on message about the need for May to continue in post although there was a notable sense of frustration with the entirety of the top team. The Cabinet bickering that has dominated media headlines over the summer was also notably absent in the public appearances of MPs although behind closed doors, it was sometimes a different matter.

On Brexit this conference must be seen as a success for the Government. Last year’s conference shared the same slogan as this one; “a country that works for everyone”. Yet last year, it seemed that conference was all about “Brexit means Brexit”. Although there were plenty of events with a Brexit focus in Manchester, the majority focused on the industrial strategy, energy policy and how the Conservatives can win over younger voters. In those meetings where Brexit was discussed, the hard-line Brexiteer MPs and members were vocal, but there was also significant caution expressed by MPs, businesses and members who were clearly focused on getting on with the job of delivering the best Brexit possible. The key note Brexit speeches in the main hall were only notable for their message discipline on Brexit. There were no new developments. Brexit barely made the headlines – a success for a Government who wanted this Conference to be about domestic policy.

The Grayling View
It has often been a criticism of the Conservative Party that they are blind to the problems in the UK. This can certainly not be said of the present Government. There was a clear recognition throughout conference of the many challenges that the Government faces – what were not forth-coming were radical solutions. To the most pressing issues facing May as she entered Conference, she provided only incremental solutions. A bit more money for housing, a bit more money on rail, a freeze in student fee repayments. Nothing radical. Nothing to seize the opportunity of the platform that Conference offers. The message falling off the wall behind May towards the end of her speech served as an apt metaphor for the entire week. Whilst the Conservatives do have several messages for the country, ultimately, nothing seems to stick.

 

 



The highlights from Brussels (and Strasbourg)
 

Parliament holds the line and the Commission waits for more progress


The Brexit resolution in the latest plenary session in Strasbourg passed with a huge majority -  557 votes in favour, 92 against and 29 abstentions.  The majority of the Political Groups expressed their disappointment with the lack of clarity from the UK Government on precisely what it wants from Brexit; and strong  consensus that "sufficient progress" has yet been achieved on the Withdrawal Agreement to allow Phase 2 of the negotiations to begin. Two Conservative MEPs Julie Girling and Richard Ashworth broke with their party whip to support the resolution, earning them predictably virile criticism in some British newspapers.

Meanwhile, Michel Barnier's Commissions Taskforce is preparing for the last scheduled round of negotiations which will begin on 9 October ahead of the European Council Summit that was meant to act as the checkpoint for "sufficient progress". 


The Grayling View
Given that Jean-Claude Juncker, the President of the European Commission, has said it would be a 'miracle' if "sufficient progress" were to be made in Ocotober and that Mr Barnier at his latest press conference signalled that there has been insufficient movement on the Financial settlement - it is unlikely that this week will see any breakthrough. Meanwhile the EU side displays continuing unanimity in its positions and the British side appears weaker again after the Conservative Party Conference. This raises the odds of a 'no deal' scenario; and paradoxically, a total collapse of  the UK position and a wholesale acceptance of the EU agenda in Phase 1, in order to move swiftly to the complexities of the trading and future relationship.
  



Dates for your diary

w/c 9 October 2017 - Fifth Negotiating Round
11 October 2017 -
GBU Brexit Breakfast Club
8 November 2017 - GBU Brexit Breakfast Club
19-20 October - European Council Summit - Sufficient Progress Checkpoint
14 December -
GBU Brexit Breakfast Club
14-15 December - European Council Summit
1 January 2018 - Bulgarian Presidency of the Council
1 July 2018 - Austrian Presidency of the Council
End of October 2018 - Negotiations expected to end
Autumn 2018 - Spring 2019 - Possible Scottish independence referendum
1 January 2019 - Romanian Presidency of the Council
March 2019 - UK expected to leave EU

 


 

Grayling Brexit Unit

Our Grayling Brexit Unit brings together the very best consultants from across the Grayling network and includes those who have direct experience of working alongside the leading political figures charged with negotiating Brexit in London and Brussels.

The Grayling Brexit Unit is here to support, guide and inform the success of your business and identify how the political dynamics will change as a result of Brexit in both London and Brussels. We are your Brexit experts.

Please contact Robert Francis Tel +32 2739 47 34 (robert.francis@grayling.com) in our Brussels team or Jonathan Curtis (Jonathan.Curtis@grayling.com) in London for more information, and check out our brochure.


 


 

 

 

 #Brexit Papers 


Brexit Negotiating Documents
The 'Great Repeal Bill'
Brits working in the EU institutions
Article 50

Sir Julian King - The Last UK Commissioner
David Davis – UK Brexit Secretary.
Sir Keir Starmer – Shadow Brexit Secretary.
Sir Tim Barrow – UK Permanent Representative.
Michel Barnier – EU Chief Negotiator.
Sabine Weyand – Barnier’s Deputy.
Guy Verhofstadt – EP Brexit Lead


Updated Timeline


Grayling Team

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