Product Manufacturers and Suppliers: what should you be doing now to protect your business against Brexit risks?

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1 Brexit Law your business, the EU and the way ahead Product Manufacturers and Suppliers: what should you be doing now to protect your business against Brexit risks? September 2016 Introduction Manufacturers and suppliers of products or raw materials which are exported from, or are imported into, the UK have the potential to be significantly affected by the renegotiation of trading terms between the UK and its main trading partners. Not only could these terms result in new tariffs being imposed but they could also see non-tariff barriers impede the free trade of goods and associated services. At this early stage, there is no definitive answer to what these impacts could actually look like in the medium to long term. For most businesses, it is too early to start reshaping their trading structures in any significant way. There are, however, a number of steps that you should consider taking now so as to ensure you re well positioned to mitigate risks which may arise from both the UK s exit from the EU and the redefinition of its global trading terms. Amongst many, there are two key questions: What steps can you take now to better understand how Brexit could disrupt your current trading arrangements and how the UK s new terms of trade could impact on your products, supply chains and markets? How can you and your industry sector better inform Governments and the European Commission of issues that need to be addressed as part of new trade settlements between the UK and the rest of the World? Your Brexit strategy will need to adapt and evolve alongside the political negotiations. The period prior to the service of the Article 50 notice affords critical preparation time. Once the notice is served and the two-year clock is ticking, the dynamics will likely change given the immense amount of work to be done if the UK is to have a smooth exit and minimise disruption to businesses. This paper is not intended to provide you with a complete list of all the issues you should be considering as part of your Brexit strategy. Nor is it focused on a particular sector. Each business will have its own issues and challenges driven, in part, by the current regulatory requirements which affect it and its sector. This paper is, however, intended to provide some initial considerations for those businesses that have a trading relationship with the UK and, in particular, those: manufacturers of goods in the UK (finished or otherwise); exporters of goods (including raw materials and component parts) from the UK to the EU; UK-based importers of goods (finished or otherwise); exporters of goods (finished or otherwise) into the UK; businesses that use the UK as a storage, distribution or other form of trading hub for their finished or semi-finished goods and raw materials. Allen & Overy LLP

2 Issues to consider There are a number of issues you may want to consider now. Develop a risk profile for each of your product and business lines and prioritise your efforts You will need a clear picture of the impact Brexit will have on each of your product s routes to market. Each of your business lines may be affected differently. This should be mapped into an evolving document taking into account many of the issues discussed in this Paper. It will allow you to develop a proper mitigation strategy including prioritising areas of the business where you need to focus greater efforts to minimise potential disruption. This risk profile will also inform discussions with Government(s) and others as the detail of the UK s separation from the EU and new trading terms start to emerge. Identify which of your upstream supply chains are most likely to be impacted Raw material, component and other suppliers into the UK are likely to be reassessing their export supplies in light of Brexit. This reassessment will continue as the terms of the trading relationship between the UK and EU becomes clearer. As with any regulatory change, Brexit has the potential to disrupt upstream supply chains in a number of ways whether through pricing, regulation or more commercial factors. This will also be influenced by tariff arrangements that may arise as a result of new trading terms which the UK will need to put in place. Assess the need for transitional or other legal provisions as part of the separation of UK and EU law The expiry of the two-year Article 50 notice period (or extension) produces a cliff edge for the separation of UK and EU law. A critical part of the UK Government s preparations for exit will be to find an appropriate way to ensure that there is a smooth transition from a legal system significantly influenced by, and interwoven with, EU law into a national regime. The impact of this will differ between sectors and the devil will clearly be in the detail. For instance, for those businesses who supply chemical or petrochemical related products out of the UK into Europe and rely on an existing REACH registration, transitional provisions may well be needed to deal with either the transfer of existing registrations held by UK entities or some other mechanism to ensure that the benefit of registrations is not lost from day one. This is merely one example. There are multiple examples across specific regulatory regimes that could apply to your business. This assessment should include a review of what EU/third country free trade agreements you currently benefit from and whether these benefits will be lost after Brexit. The key for businesses, at this stage, is to identify where you need appropriate transitional or other arrangements to be put in place so as to minimise supply chain disruption. Start to model the impact of product related non-tariff barriers on the business Exporters may face a variety of non-tariff barriers in key markets. For instance, countries impose safety, environmental and product standards which operators and sellers are required to meet. Europe has, for many years, adopted a broad range of such standards from CE marking for electronic products and certain medical devices to product content rules. If you are currently exporting products from the UK, you will be familiar with, and meeting, the requirements of your markets. In this regard, very little may change in the near term. However, in the longer term, as countries such as China and Korea have experienced, you will need to track and adopt new standards and requirements imposed by the EU as you will for any other (non-eu) market. You may also find an increase in non-tariff barriers as the UK negotiates new trading terms with non-eu countries. If you currently export products into the UK from a non-eu country, you may currently benefit from preferential access to the UK as a result of a trade agreement with the EU. These terms will no longer apply after Brexit. Aside from tariffs being applied, 2 Allen & Overy LLP 2016

3 this could result in delays in getting products to customers and greater administrative burdens at the point of entry. You should start to think now about which barriers to entry could significantly affect the business and how you monitor and influence the new terms of trade with the UK. Determine how best to protect intellectual property rights in your products Whether you are a UK manufacturer, importer or exporter of goods, Brexit will affect the intellectual property rights you hold in your goods and in their components. The patent infringement liability of importers or exporters of infringing goods to other European countries will be left unaffected in the short term because the Unified Patents Court project has been placed on a temporary standby. As regards all IP rights, a number of EU laws and legal principles have made the circulation of IP-protected goods across the EU smoother. Unless some of these laws are incorporated into UK law, cross-border trade will be made more burdensome. Under IP exhaustion principles, for example, an EU IP owner cannot prohibit goods to which their IP is attached from circulating in the whole of the EEA if he consented to them being first put on the market in an EEA member state. Unless the UK remains part of the EEA, it is likely that consent by the IP owner to goods being marketed in the EU will no longer mean the goods can circulate in the UK and vice versa. New trade deals struck between the UK and non-eu countries ancillary to Brexit also have the potential to affect the IP position of UK importers, exporters and manufacturers beyond the EU. Stay on top of your antitrust compliance Businesses with operations in the UK will remain subject to competition law post-brexit. While EU competition rules would no longer apply in the UK post-brexit (unless the UK remains in the EEA or if otherwise agreed as part of the post-brexit arrangements), the UK has its own well established competition law regime and the UK Competition and Markets Authority (CMA) has extensive powers to enforce the rules and does so actively. In addition, post-brexit, any UK businesses wishing to offer their goods and services in the remaining 27 EU Member States will remain bound by the EU competition rules. Antitrust compliance programmes and strategies will need to be adapted to take account of this potential extra layer of enforcement and businesses need to stay well-informed of any Brexit-related competition law developments, for example dealing with exemptions from the scope of the rules for supply and distribution agreements. Consider the tax implications for your products Brexit does not of itself result in any changes to the UK tax system, and we would not expect significant changes to be made to existing taxes, including VAT, at least at the outset. However, the detailed operation of the VAT rules of the UK and the EU to cross-border supplies will have to be resolved. On the face of it, the UK will cease to be able to benefit from the rules on intra-community supplies, and equally supplies from the UK to the EU would simply be treated as supplies to third countries. The consequences of this have not yet been worked through at a policy level, and you should keep a watching brief on developments here in case they impact the VAT profile of your business. The UK will have the opportunity to introduce different VAT rates for different products post-brexit, or to change the categories of exempt and zero-rated supplies, and industry bodies will no doubt be making representations to government in sectors that could particularly benefit from a lower VAT rate or the addition or removal of exemption or zero-rating. Unless the UK remains in a customs union with the EU, which seems unlikely, a major practical change is that imports from the EU may be treated in the same way as imports from third countries. This would require import VAT to be accounted for on their entry into the UK. You should consider how the logistics of this could affect the timing of delivery of products and your cashflows, and what mitigants may be available. Similarly, exports from the UK are likely to be subject to similar procedures in their countries of destination in the EU. UK businesses importing from third countries that currently use a non-uk port of entry to the EU Allen & Overy LLP

4 customs area will need to consider whether these arrangements will remain appropriate. Start to model the impact of tariffs on your products The precise trading relationship between the UK and its main trading partners (including the EU) immediately after the expiry of the Article 50 notice period is highly unclear at this stage. It is important to remember that this is ultimately a political negotiation that will involve balancing the political and commercial priorities of, as a minimum, 28 countries. Understanding the potential impact of particular trading terms (or the lack of) on your supply chains is critical. This should include determining how complex rules of origin may apply. Work should start immediately on determining what the impacts of the different trading models may be. This will help inform your view on the shape of the deals of most benefit to your business and sector. A bespoke trade deal with the EU, as the UK Government has suggested is needed, will rely on clear negotiating principles being developed and the UK Government (amongst others) being well informed about the practical impacts certain types of deal will have on a sector by sector basis. Assess how dependent particular business and product lines are on the fluid movement of skills and related services between the UK and the rest of Europe Certain businesses are highly dependent upon the rapid deployment of skills across their markets. It is too early to tell how this will be affected by the redefined terms of free movement. However, you should start to develop a picture for your business as to which (if any) product and business lines could be most affected by any barriers to free movement. Similarly, for certain businesses that rely on a centralised internal service centre for the provision of, for instance, legal, financial, tax or other services to the wider corporate group, Brexit has the potential to disrupt this support. An early assessment of the impact of anticipated restrictions on the free movement of people and services across the EU (and vice versa) will help inform the shape your business may need to take post-brexit. Review existing supply and sale contracts to ensure they adequately address Brexit risks (and ensure new contracts deal with the known issues) There are a variety of ways in which Brexit risks could have an impact on your existing trade contracts. Clearly, longer term trading or supply contracts are likely to be the most susceptible to an unforeseen Brexit effect. For instance, how would a contract deal with the imposition of tariffs or country of origin rules in respect of the sale of your products or the acquisition of component parts or raw materials? Would force majeure or the termination events as currently drafted cover Brexit implicitly? Whilst it is difficult to put in place a once and for all suite of Brexit clauses at this stage, key contracts, and certainly new contracts, should be looked at to ensure that the legal and commercial landscape as we currently see it is properly dealt with. Build a strategy around the terms of new trade deal(s) with the EU and other trading partners Many of the priorities discussed in this paper are central to your overall strategy. At the earliest opportunity, you should have an informed view as to the type of trading terms you would like to see in place between the UK and its key trading partners (including the EU) and which terms would be most damaging. This requires a sector by sector analysis and an understanding of the functioning and structure of international trade agreements. Whilst many hope for parallel negotiations on both new trading terms and the exit terms during the two-year Article 50 notice period, if no new trade deal is struck between the UK and EU by the end of this period, the UK may find itself seeking to rely on WTO trading rules. What those trading terms look like is beyond the scope of this paper but these have the potential to be much less favourable to the UK than preferential trading agreements negotiated on a bilateral basis. There are also some significant legal questions over what the UK s trading terms would be under the WTO rules. 4 Allen & Overy LLP 2016

5 Consider whether, and how, you wish to make your concerns understood by Governments and the Commission For certain businesses, it will be important to find a voice in the Brexit negotiations either collectively or individually (through bilateral channels). There are very difficult decisions to be taken across a range of legal and commercial issues that will play out over the next few years as the UK redefines its trading arrangements. Business will need to ensure that politicians and civil servants tasked with negotiating those relationships fully understand the implications of the deals they look to strike. It is still unclear how transparent the Brexit and trade negotiations will be. In the latter regard, the terms of trade negotiations are often confidential. You should start to consider what the appropriate channels will be to ensure you have the visibility on the discussions and can make your voice heard. Assess the role of trade associations in your strategy What role could your trade associations have in the debate? Some of you may have active trade associations that are the right vehicle to formulate views and be the industry voice. This may be the time to revamp associations and ensure they have sufficient capacity to deal with the work ahead. You may also need to decide whether you wish to have these discussions with purely UK associations or their EU affiliated organisations. As always, care should be taken that any formal or informal discussions remain on the right side of the competition rules and do not lead to the illegal exchange of confidential information. Assemble the right team Many of these issues require a range of experts. This will be a mixture of legal, financial, public/government relations to name but a few. Do you have the right team in place to formulate, and manage, your strategy across the business? Comments We are at the very beginning of the Brexit process and the redrawing of the UK s global trading relationships. It would, therefore, be misleading to suggest that a complete and final Brexit strategy for your business can be put in place now. However, the coming months should be used to build a strategy which identifies the potential impacts Brexit may have and to model preferred solutions both in sector regulation and the new terms of trade. Allen & Overy LLP

6 Your Allen & Overy contacts If you would like to discuss the issues raised in this paper in more detail, please contact any of the experts below or your usual Allen & Overy contact. Richard Cranfield Partner Chairman, Global Corporate London Co-Head Financial Institutions Group Tel Matthew Townsend International Regulatory Law Tel Jeff Sullivan International Dispute Resolution Tel Charles Borden Partner Washington, DC International Regulatory Law Tel Neville Cordell Intellectual Property Tel Lydia Challen Tax Tel Dominic Long Senior Associate London Antitrust Tel Sarah Garvey PSL Counsel London International Dispute Resolution Tel Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. MKT: Allen & Overy LLP 2016