Brussels - The UK withdrawal from the European Union threatens an
integrated market underpinning more than 40 billion Euros ($42 billion) a year
in two-way trade.
Marco Mensink, director general of the European Chemical
Industry Council representing manufacturers such as BASF SE, Akzo Nobel NV
and Dupont Co., said the UK
and its EU partners are starting two years of talks on Britain’s
departure with widely differing positions. That’s a particular risk for the
chemicals industry because of the intensity of its cross-Channel shipments, he
said.
“We are going to ring many, many alarm bells during the
Brexit negotiations,” Mensink said in an interview in Brussels. “Things risk veering off course.
There seems to be a disconnect in communication between both sides.”
The industry will serve as a barometer of the economic
damage that could be inflicted on Europe, if the UK tumbles out of the 28 nation
bloc without an agreement. Also highlighted the risks that Prime Minister
Theresa May and her EU counterparts will contend with when discussions start in
May, as scheduled.
BASF Chief Executive Officer Kurt Bock, told shareholders
that Brexit was a key uncertainty and warned that it would affect “our
competitiveness as well as that of our customers in our home market of Europe.”
Regulatory Hurdles
Brexit poses so many regulatory challenges that a
business-friendly transitional arrangement will be needed for the period between
the UK’s
departure in 2019 and the entry into force of any accord on the country’s
future relationship with the EU, said Mensink.
“The real question is: will there be political will for a
transitional agreement?” he said. “Settling the Brexit questions affecting
chemicals will be like unscrambling an omelet back into eggs. We urge policy
makers to find solutions.”
For clues to the complexity of separating the UK
from the rest of the EU chemicals market, take an everyday consumer good like
soap.
Read also: Brexit set to change SA's bilateral economic relationship with the UK
One popular detergent sold in UK
supermarkets is made from chemicals that cross the Channel several times during
the manufacturing and distribution processes, according to Mensink, who said
the raw material is produced in France,
reworked in the UK, shipped to
Germany and returned for
packaging to Britain.
The finished product is then distributed throughout the EU. A UK, exit from the single market without any
transitional arrangement would increase taxes paid on goods and disrupt the
flow of materials between the EU and Britain, boosting costs for
manufacturers and end users.
In addition to consumer chemicals, the top product groups
for both sides include petrochemicals and plastics. “If they don’t organize
this, we go back to a situation where trucks are waiting in front of a border,”
Mensink said.
A further threat to chemical businesses comes from tariffs.
Under the World Trade Organization regime, they would average around 3 percent
to 4 percent for commerce between the UK and the rest of the EU were no
transitional deal and no subsequent free-trade accord to be reached. Because many chemicals in
manufactured goods cross the Channel more than once during the production
process, the ultimate tariff burden would often be higher, said Mensink. In some cases, the extra costs for companies could lead to a
halt in trade, he said.
“One tariff is a difference in profitability, two times the
tariff is no profitability and three, four, five times the tariff means you
won’t ship it,” Mensink said.
Medium Priority
As part of a Brexit negotiating strategy designating various
industries as high, medium and low priority, the UK government has placed chemicals
in the middle category, behind banking and ahead of steel. The Times reported
in February, citing a leaked memo.
More than 40 percent of Britain’s chemicals are sold in
other EU countries, according to the European industry group, which is
also known as Cefic. UK
chemical exports to the rest of the EU in 2015 totalled 19.8 billion Euros,
almost on par with British imports from the bloc’s other
members valued at 23.5 billion Euros, according to Cefic.
Beyond customs red tape and duties, the chemicals industry
is concerned about Brexit’s impact on the ability of personnel to move freely
between the U.K.
and other EU nations and on the uniform enforcement of safety standards set
under a landmark 2006 European law, according to Mensink.
The prickly political question is the extent to which the
British government would be subject to the agency’s rulings while no longer
having a say in preparing them. “We’ll need a tool where the UK complies with
ECHA decisions,” Mensink said.
Amid all the uncertainties for the industry, Cefic is
collecting more detailed data from companies on their supply chains. It’s also
warning them against complacency.
“Very soon reality will kick in,” Mensink said. “We’re
telling members to be prepared.”