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Brexit is here: What are the pitfalls and opportunities for multinational companies?

The U.K. and the European Union will part ways on January 31 and begin negotiating a trade deal with significant implications for companies that do business in E.U. member states (and soon-to-be former member states.)

To discuss the impact, Thomson Reuters turned to John Grayston, who has practiced E.U. law in Brussels for 15 years, and in 2007 founded Grayston & Company, an independent law firm specializing in E.U. regulatory and trade law.

The interview, which was edited for length and clarity, is being published in two parts. Part One is available here; and this is Part Two.

Thomson Reuters: You have said the commitment to move forward with Brexit creates opportunities for companies. Can you elaborate?

John Grayston: Although there are lots of problem areas, there are also potential opportunities here. At the end of the 11-month transitional period that starts January 31 — and unless otherwise altered by a trade deal — the U.K. has said it will change customs duty rates and the scope of anti-dumping measures. This means some trade with the U.K. will be free of such duties when, for the rest of the E.U., imports would be subject to both customs duties and anti-dumping duties. There is surely an opportunity here.

Thomson Reuters: What are the challenges for U.K. companies to maintain access to the E.U. market?

John Grayston: There are certain structural things that they will need to do after the end of the transitional period in order to establish themselves with an E.U.-based presence. Only companies with an E.U. presence will be able to act as importers. Similarly, European companies who want to continue to sell into the U.K. will need to make sure they’ve got a suitable presence in the U.K., whether it’s a branch or a subsidiary or whatever, to undertake imports and exports and make sales.

Thomson Reuters: Is that a critical component, a physical presence?

John Grayston: Well, yes. Let’s take if you’re a U.S. business with a distributor in the U.K. and your distributor is responsible for importing in the U.K. — nothing’s going to change. On the other hand, if your U.K. distributor has also been selling to other E.U. countries, and Ireland would be a classic example, then your distributor will now need to create a presence in Ireland in order to continue to supply its customers directly.

John Grayston

It’s not something that you can totally contract out to third parties. Third parties will do the logistics, but you need to have a presence. You will have to consider the U.K. as a separate location so you’d then have to decide, Do I need a presence in the E.U.?

Thomson Reuters: What about E.U. member states?

John Grayston: Let’s say I would have Belgian companies who have been selling into the U.K. from Belgium. They want to continue to sell to their customers in the U.K, but they don’t want to ask their customers to act as the importer because if they ask them to do that, the customers will probably get rather disinterested in the offer and would go to somebody else. So, they’re going to have to set up a presence in the U.K. so they can act as an importer in the U.K., or, alternatively, appoint a distributor in the U.K. to do that for them. I think those are the, let’s say, structural issues. Same thing applies to the U.S.

Thomson Reuters: What are some of the other business implications?

John Grayston: Another thing to look at is U.K. companies producing or selling to countries that are outside the European Union on the basis of E.U. free trade agreements. For example, the E.U.-Korea agreement, E.U.-Canada, or E.U.-Japan.

The U.K. will not be a member state for the purposes of these agreements after it leaves, and that is on January 31, so it’s imminent. The E.U. has agreed that during the transitional period the U.K. will continue to benefit from these arrangements, but the third country involved also has to agree. For example, South Korea and the U.K. have already agreed that the terms of the E.U. free trade agreement will be continued during the transitional period and beyond until the U.K. and South Korea negotiate a new free trade agreement.

The reality is that companies have to plan in advance and the only logical approach is to take a worst-case scenario approach, which is generally the no-deal hard Brexit.

But Canada has not formally said it will carry on CETA (the Comprehensive Economic Trade Agreement between Canada and the E.U.) during the transitional period. Everybody’s expecting it to. I recently asked somebody on the U.K. negotiating team, though, and they said, “No, we’re still discussing this.” So, there are some little hiccups there that could happen on January 31.

I don’t think, at the end of the day, it’s likely to end up in a major dispute. I think something will be resolved. But let’s put it like this: It’s getting quite close to the line, and that affects producers in Canada who are selling to consumers or to intermediaries in the European Union, in the U.K., or under CETA, and it also affects U.K. producers who are exporting to Canada.

If the U.K. and Canada do not reach an agreement, companies would need to consider how best to alter their supply chains. There are a couple of relatively easy work-arounds, but nothing that would match the simplicity of applying CETA directly.

Thomson Reuters: What can companies do now to minimize their risk and seize opportunities?

John Grayston: The first thing to do is to keep watching! The story is far from over.

The reality is that companies have to plan in advance and the only logical approach is to take a worst-case scenario approach, which is generally the no-deal hard Brexit. Plan for this and then anything else will be a bonus. Of course, the problem here is that for many companies this involves very considerable investments with no certainty that they would be necessary. For many companies, the default position then becomes ‘wait and see.’

If change is to bring new opportunities, we need to look at the U.K. It will be in the U.K. that changes to customs and trade defense measures will take place. Industry will also need to focus on the detail of the E.U.-U.K. trade negotiations as well as the U.K.- U.S. negotiations, should they start in earnest.

It promises to be a busy and challenging year.

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