We cannot just draw a line around these islands and go back to a time past. In 1973 when Britain voted to join what was then the EEC,  the email had only just been invented and the Internet wasn’t even conceived. In 1992,  the Single Market was established and the Internet went commercial. From the mid-1990s, low-cost flights came in and little bags of salad leaves became the norm in our supermarkets. Since then, business has changed to an inter-connected model,  underpinned  by electronic communications and laws designed to support cross-border trade. Standards matter, not just within State borders, but across borders. The rupture from the Single Market created by Brexit in any form  will have massive consequences for industries,  both manufacturing and services, that have based their business model on the EU legal framework.

This article – part 1 of 2 – explores the how  withdrawing from the EU Single Market will result in  a dual-compliance regime.  It draws on EU Preparedness Notifications and UK government ‘no deal’ notices, as well as announcements, media reports and statements from a range of British-based businesses.

Many businesses have gone public on the huge risks that Brexit poses. Airbus, Nissan, Toyota,  Jaguar LandRover, BMW  have all warned against the consequences of a hard Brexit on their supply chains. John Lewis has warned about delays to fresh food supplies.  Couriers say they could go out of business. Derivatives clearing houses highlight contractual issues. Fish processors fear loss of EU trade. The CBI says that 8 out of 10  businesses have put investment on hold.

So what’s going on?

Brexit in any form will create a systemic change.  No deal Brexit or hard Brexit, or a Brexit with a Free Trade Agreement – any of these will alter the legal landscape for the way trade is conducted.  That is what all of these businesses are struggling with. Systemic change is about the way things are done.  

The UK is breaking out of a regulatory framework which has been the basis of business models for the past 28 years since 1992 when the European Single Market was created .* The aim of the Single Market was to bring down the barriers for cross-border trade and reduce market fragmentation,  in order to create a large home market that could  enable European business to  compete against the United States. It introduced  common rules and standards, that all Member States would comply with. ** The Single Market means that a British-based supplier of routers can sell  in Germany – the old restrictive practices that allowed only German equipment are long gone. It means that a pharmaceutical company needs one product certification for 28 countries.

It  has been a consistent framework, based on a set of principles that are known and understood. The framework has evolved in line with changes in  technology and business practice, but the essential foundation remained the same.

As the EU rules are rolled away, the rules of the game will be altered. The processes and  procedures that businesses have to follow in order to trade will have to be re-aligned  to comply with the new rules.   That  creates costs, and administrative burdens. It may mean switching suppliers. It may mean altering the infrastructure. It may mean moving  teams to another country. Or it may mean inablility to find suppliers or staff.

Imagine a football game in progress, and at half-time the players are handed a  new set of rules. How would the players cope?

The risk subsists in different parts of a business. It does not only concern tariffs and border checks, with the consequential effects on supply chains.  That is just one  element, albeit an important one. It also concerns compliance with standards, matters related to safety, contracts, licencing and regulatory supervision.

For example, Airbus  has highlighted how, in a safety-driven industry, every product, supplier and maintenance firm must be compliant. Assuming that a transition period is agreed, from 29 March next year  the UK’s Civil Aviation Authority will no longer be in the European Aviation Safety Agency which regulates everything from aircraft parts and maintenance to pilots and their training.***   Certifications for airworthiness obtained in the UK will no longer be valid in EU countries under the mutual recognition system.  It puts in jeopardy the certification for aircraft flying into the EU and around the world.

The UK government says that it will continue to recognise EU certifications for a period of up to 2 years after 29 March next year.   After the 2 year period, the UK government will be bringing in a new system.  That might be fine for planes flying on domestic routes, but  ignores the cross-border element.         

For companies trading in the UK and in the EU27, this change will impose a dual regime where there has previously been one.  Brexit will result in  new compliance procedures in the UK. It  will mean  duplication of tasks for businesses .  The duplication will occur because companies will have to comply with two regulatory regimes. Compliance will be certified for the UK by our national bodies, and for the EU27, by an EU-based certification body. Hence, two regulatory bodies, two lots of paperwork, two certificates, two different procedures.

The same will apply to other industries that are regulated.  These include medicines (including vetinary); toys; automotive; and  electrical.  Initially, the standards will be same.  Potentially it will lead to  divergence of standards. This will entail more than just paperwork for businesses which may have to make variations of their products in order to ensure compliance with both regimes.

For those companies which have thousands of product lines, or thousands of suppliers, this represents a huge challenge. Just as one example, BT has over 18,000 suppliers  with whom it will have to review compliance arrangements, amongst other things, on data flows.

In general,  post-Brexit compliance means more red tape, more bureacracy,  and all in a foreign language unless they go to Ireland. As such, it will re-impose barriers and it will  reduce the opportunities for those businesses that want to scale up.  In that way, Brexit  will fragment the market. 

Like it or not, trade in  today’s world is governed by regulation – that’s what keeps companies in line and protects consumers and citizens against malpractice. In today’s inter-connected world of cross-border trade facilitated by electronic communication, regulation too is increasingly governed at international or supranational level. The EU is one of three regulatory power blocs, the other two being China or the United States. EU is bigger than  China at 14.65 trillion with UK,  and about the same as China  - around $12.03 billion  - without UK. The real politik  is that many businesses will comply with EU rules knowing that it is likely to be accepted anywhere.  

This runs counter to the pro-Brexit argument that a post-Brexit Britain will relax regulation and this will make it easier for British-based businesses.  Reduced regulation in the UK would not  alter the fundamental issue of dual compliance, rather it reinforces it. Relaxation of regulation would create divergence, meaning  two sets of rules and two compliance processes, instead of one. If the UK moved to a US-centric framework, as is proposed, that would only deepen the divergence and intensify the market fragmentation.

This is why we are hearing so many announcements about businesses moving teams of staff and even their European headquarters, to Amsterdam or Paris or other EU capitals. Large business can survive by making the necessary adaptations in their operations.  Some have already announced moves into the EU27 in order to ensure regulatory compliance. For example,  Ferrovial, the Spanish company which manages London’s  Heathrow airport,  moving its international holding company from Oxford to Amsterdam. It said it wanted to stay under the umbrella of EU legislation, post-Brexit. Easyjet is  moving to Vienna, and Japanese bank Nomura  setting up hubs in Frankfurt (trading)  and Paris (lending).  As many as 40 asset managment companies,  are moving parts of their business out of the UK, with Dublin apparently a favorite choice.

Polydron, Cirencester-based vendor of educational toys is opening a branch in Germany – that branch will handle 30 per cent of its operations, according to the Financial Times.

These changes can be costly. Astra Zeneca says it has spent £40 million on Brexit preparations, which includes  setting up new research facilities in Sweden that  will duplicate the resource it already has in the UK.

For a small firm operating on tight margins, these kinds of changes can be enough to put it out of business, as the London plumbing firm Pimlico Plumbers has pointed out.   

Oxford-based Metaphysis, which makes medical devices, is an SME that is preparing for  Brexit. In order to  continue trading in the EU27, it will have to ensure it can retain its EU certification.  It is changing its  regulatory jurisdiction by moving part of its business from the UK to Germany. The firm says that its Brexit preparations have already cost £40-50,000, which, for an SME, is a significant cost. This is a firm which makes eqiupment that helps people with injuries  - the product they will sell next week is for an injury that hasn’t happened yet.  In their case, additional red tape could cause delay to product shipments that are potentially life-threatening and it provides a salient example of the possible impacts if regulatory barriers are re-instated.

Metaphysis Susan Hartman points out that an EU CE mark is accepted in countries as diverse as Saudi Arabia and Australia:  ‘Tariffs hit your margins, the other things kill the business’ she says.

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*Quick re-cap on the Single Market.

Twenty-eight years ago in 1992, the European Single Market was born. The aim was to bring down the barriers for cross-border trade in order to create a large home market that could  enable European business to  compete against the United States.   It sought to address the fragmentation among national markets that operated to different technical and regluatory standards. It aimed to remove restrictive practices and  break up monopolies. 1992 was the year that the customs barriers between EU countries fell and  that the restrictions on sale of equipment were swept away.

In order to achieve that aim the EU set up a regulatory framework that could be enforced, based around  European standards and harmonisation of laws. This is why there may be a perception that the EU is bureacratic. However,  it is actually trying to ensure that all Member States follow the same rules in order to create a level playing field and create economic growth.

The Single Market was created by the Single European Act of February 1986, which came into effect on 1 July 1987, and 1992 was the implementation date. The person who signed for the UK was a Conservative Minister Lynda Chalker.  The initiative was led by Lord Cockfield,  who was the British Commissioner appointed by Margaret Thatcher.

**This book provides the contemporaneous perspective from the late 1980s: Paolo Cecchini (1988) 1992 The European Challenge – The Benefits of a Single Market, with Foreword by Lord Cockfield, UK Commissioner. Published by Wildwood House (Aldershot, Hampshire).

***See EU Withdrawal Agreement: a deep and special loss of influence

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About me: I have 10 years experience analysing European Union policy. I hold a PhD in EU Communications Policy as well as a Post-graduate diploma in marketing. For many years I was a telecoms journalist where I interviewed people from  industry about the single market, and I've also worked in a service planning role in a telecoms industry start-up. More recently, I've worked with the Council of Europe on Internet governance issues, a role which involved travelling around the EU and neighbouring countries.  All of these roles have somehow contributed to this analysis of Brexit business models.

If you are interested in my work, please see my books advertised on this site, or contact me via Contact Us page or Twitter.

If you cite this article, please state the author as Dr Monica Horten, www.iptegrity.com.

Photos: courtesy of European Commission. Brexit negotiations Autumn 2018, and the CE mark Robot.

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