Brexit: Deal or “No Deal”? Preparing for a “No Deal” Brexit

Our colleagues Matthew LewisMatthew Kirk, and Robert MacLean have prepared another in-depth analysis of the current status of Brexit.  You can read and download the full update here.
The range of options, and timescales, days after the UK should have left the EU, remains as wide as ever. We are still some way from knowing what future trading relationships will look like. Any final “no deal” preparatory steps should be taken between now and 12 April – it is not our predicted outcome, but the chances of it happening have increased. Our pulse update focuses on:
What Could Happen?
The effective deadline for the UK government and Parliament to decide a way forward is Friday 5 April, possibly slipping to Monday 8 April. The European Council will meet on 10 April to assess the situation and decide whether to extend the Article 50 deadline beyond 12 April. It is impossible to predict what governmental and parliamentary manoeuvres will lead to this week.
Top 10 Impacts of Tariffs on Imports
Changes to UK import policy in the event of a “no deal” Brexit will mean an increase in tariff costs on a range of imports from the EU (including some important products for retailers such as meat, dairy, fish, clothing and ceramics) and a reduction in tariff costs on a much wider range of products from outside the EU.
Impact of a “No Deal” on UK/ EU Borders
A “no deal” Brexit will mean a sharp end to “free circulation” of goods inside the EU’s single market, with goods traded between the EU and UK being treated as “imports” and “exports”. This will involve a complete reconfiguration of existing customs formalities carried out at EU and UK borders, with the introduction of import declarations, customs checks and – potentially – customs duties.

When Politics Affects Supply Chains

According to recent WSJ reporting , immigration issues at the Mexico-US border are disrupting commercial trade, as US Customs and Border Patrol agents who typically handle trade traffic have been redirected to migrant issues. This redistribution of resources has reportedly caused a pile up of truck traffic and delay of inspections for agricultural and automotive components. This has reportedly resulted in an estimated tens of millions of dollars in losses for supply chain partners. Who is saddled with the risk of loss when politics impacts the flow of goods at international borders?
This complicated question involves the convergence of trade policy, supply chain contract rights, and insurance coverage, such that each instance of loss must be determined on a case-by-case basis. If trade partners have force majeure provisions in their contracts – and even if they don’t! – suppliers may be excused temporarily or permanently by border actions beyond their control. (In the US, courts do not take a uniform view as to whether political risk constitutes a force majeure event.) On the other hand, carriers may be looped into the equation, if their carrier agreements broadly assign them risk of loss during transit. In addition, smart shippers will require carriers to have insurance coverage for situations such as this – so in some instances, insurance companies (and their reinsurers) may bear the ultimate risk.
As border tensions heat up, we expect more impacts to North American supply chains. Supply chain partners should develop multi-tiered strategies to minimize loss, allocate risk, and cover potential liabilities.

US Supply Chains Face Tariff Increase on Beef Exports to Japan, Unlike Member Countries of the CPTPP

Cows

US beef companies shipping to Japan likely will have to pay higher tariffs beginning in May due to the United States’ rejection of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). To protect its own beef industry, Japan increases tariffs on frozen beef imports if import volumes pass a certain threshold, which Japan is now approaching. However, Japan exempts CPTPP members from the tariff increases. Hence, most major beef exporters to Japan, such as Canada, New Zealand, and Mexico will be exempt from the tariff increases.
The United States therefore faces a tariff increase from 38.5% to 50% on beef exports through March 2020 (relative to the 26.6% tariff imposed on CPTPP members). To some extent, this has happened before; Japan’s tariff increase on beef was most recently triggered in 2017. However, at that time, the United States’ main beef competitors were subject to the same increase as non-US suppliers.
This also may be the tip of the iceberg. CPTPP members may have a competitive tariff advantage over US suppliers in Japan for other food products, including wheat and pork. These issues will likely loom over the upcoming trade talks between the United States and Japan. Negotiations regarding a free trade agreement between the US and Japan are set to begin in April, and President Trump plans to visit Japan in May.

Brexit: Where Do We Stand at the End of February?

What Next?

The UK is scheduled to leave the EU on March 29, 2019, but so far the UK has failed to ratify a Withdrawal Agreement.  Whether the UK will leave with or without a deal remains unclear, and the analysis changes on a near-daily basis.  Regardless of outcome, however, the nature of the UK’s future trading relationship with the EU will need to be determined in a relatively short period, and the product of those negotiations will form the basis of the UK’s future trading relationships with the rest of the world, including the United States.  The UK will also have the opportunity to act in other areas post-Brexit – such as tax policy, immigration, and supervision of regulated industries.  These developments will significantly impact many global supply chains.

Our colleague Ambassador Matthew Kirk has prepared another in-depth analysis of the current status of Brexit, posted on our dedicated Brexit Legal Page, which you can read below.

Where are we now?

The UK’s progress towards leaving the European Union has been a tortuous and turbulent affair. It has been marked by Prime Minister Theresa May’s Government suffering repeated heavy defeats in Parliament, which would normally have led to a change of policy if not of Government, but carrying on with its Brexit stance unchanged. So you could be forgiven for assuming that a series of votes initiated by backbenchers at the end of February in which the Government suffered no defeats would also signal no change. Not so. Even more paradoxical, the significant change to the Government’s approach at the end of February may make the outcome the Government has been aiming for all along a little more likely.
What happened? In mid-February, the Government headed off a serious push to give Parliament more influence over the process through an amendment tabled by Labour’s Yvette Cooper, by promising more opportunities to vote at the end of the month. Amid rumblings of discontent among the hitherto loyal Brexit Delivery Group (100+ Leave and Remain supporting Conservative MPs who have supported the PM throughout) and the threat of mass resignations of Ministers, at the end of February the PM effectively adopted the Cooper amendment as her own policy, which led Cooper to propose a further amendment designed to bind the PM to stick to her commitment – this passed with a very comfortable majority, though around 110 Conservatives failed to support it (most abstained, 22 voted against).
What does it all mean? On 12 March, Parliament will vote again on the Withdrawal Agreement, with whatever adaptations the Government has been discussing with the EU (see below for the likely status of these). If Parliament accepts, this will form the basis for the UK’s departure from the EU. If not, on 13 March Parliament will vote whether to proceed to leave the EU with no deal. If Parliament declines to do that, it will vote on 14 March whether the Government should request an extension to the Article 50 deadline of leaving the EU on 29 March.
If the Withdrawal Agreement does not pass on 12 March, it is virtually certain that Parliament will then vote against “no deal” and to ask for a delay to the Brexit process, in the belief that the EU will grant such a delay. The risk of a “no deal” exit on 29 March has therefore been reduced to close to zero (though of course the EU has also to agree any delay – see below), but, as the PM was at pains to stress in Parliament, delay does not remove “no deal” at the end of the delay period. The Parliamentary arithmetic however seems inexorable. It is doubtful that, as some have asserted, the risk of “no deal” was putting much pressure on the EU side of the negotiation: the EU can read the Parliamentary arithmetic as well as anyone. The moves in Parliament at the end of February increase the likelihood that Parliament will assert the majority against “no deal” Brexit into the future.
Continue Reading

Brexit: Where Do We Stand at the End of January?

The UK is scheduled to leave the EU on March 29, 2019.  At this time, however, the UK has failed to ratify a Withdrawal Agreement, risking a “no-deal” exit.  Whether the UK will leave with or without a deal remains unclear, and the analysis changes on a near-daily basis.  Regardless of outcome, however, the nature of the UK’s future trading relationship with the EU will need to be determined in a relatively short period, and the product of those negotiations will form the basis of the UK’s future trading relationships with the rest of the world, including the United States.  The UK will also have the opportunity to act in other areas post-Brexit – such as tax policy, immigration, and supervision of regulated industries.  These developments will significantly impact many global supply chains.
Our colleagues on both sides of the Atlantic, in particular Ambassador Matthew Kirk and Donald Moorehead,  have prepared an in-depth analysis of the current status of Brexit.  More information can be found in the attached briefing.

Bill Creating Council to Address Threats to Supply Chain Security Passed in the Senate

On December 18, 2018, the Senate unanimously passed a bill which would create a council responsible for addressing federal supply chain security. Because the bill was not presented for a vote in the House of Representatives, it will begin the legislative process again in the current Congress.
The Senate bill provided for the establishment of the Federal Acquisition Supply Chain Security Council, which would be comprised of a number of individuals from different departments and agencies. The council would work with the private sector to create criteria that could be used to identify products that present risks to the supply chain including terrorism, piracy, and theft. It would also establish protocols for sharing information between federal and non-federal bodies. Further, the council would develop rules regarding the issuance of exclusion or removal orders that prohibit the purchase of particular products. Such orders, issued either by the Department of Homeland Security, Secretary of Defense, or Director of National Intelligence, could be challenged in the D.C. Circuit.
The Congressional Budget Office estimated that the council would spend $2 million annually.

Free Trade Agreement Takes Effect Without U.S.


The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free trade agreement, went into effect on December 30, 2018 for six countries: Australia; Canada; Japan; Mexico; New Zealand; and Singapore.  The CPTPP became effective for Vietnam on January 14, 2019, and four additional countries (Brunei, Chile, Malaysia and Peru) plan to ratify and enact the Agreement.  Combined, the eleven member countries’ economies represent over 13% of the global GDP.
The CPTPP, a version of the Trans-Pacific Partnership reworked following the United States’ withdrawal in early 2017, facilitates free trade amongst its member parties.  The CPTPP repeals tariffs on an estimated 95% of goods in a variety of markets, with some tariff cuts implemented immediately.  Japan will reduce tariffs on beef, Mexico on fish and poultry, and Canada on dairy products. Tariffs on imported passenger cars will be reduced or eliminated in Canada and Vietnam. The footwear and apparel industry will embrace a reduction in import duties. The CPTPP also imposes regional intellectual property protection and labor standards.
These dramatic changes present exciting opportunities within the member countries.  In contrast, the Petersen Institute for International Economics has estimated that, in addition to losing out on the benefits of the TPP, the U.S. may lose as much as $2 billion annually from the reduced competitiveness of its exports within CPTPP member countries.
Another free trade deal to keep an eye on is the EU-Japan Economic Partnership Agreement, which is expected to come into force on February 1st.

Cross-Post from the frESH Blog – Latest News and Perspectives on California Prop 65

Under California’s Proposition 65 (Prop 65), any business with 10 or more employees that manufactures, sells, or distributes any consumer product containing a listed substance in California – directly or indirectly – must label the product with a clear and reasonable warning.  As such, understanding and complying with Prop 65, including the new regulations that became effective on August 30, 2018, is critical to companies with supply chains involving California.
Our colleagues Kendra Sherman and Danelle Gagliardi recently posted important updates on Prop 65.  Of particular note, the article contains an update on proposed amendments to clarify how parties in the supply chain can warn or pass along warning information to parties downstream.  You can read the article on our frESH Blog here.
 

Brexit: The Next Three Months

Under Brexit, the UK is likely to leave the EU at the end of March 2019 – a development that will impact many global supply chains.  Whether the UK will leave pursuant to an orderly arrangement, or whether it will leave without a deal is still unclear, and will likely remain unclear for the next several weeks and perhaps months.  Even if the UK leaves the EU in an orderly manner, the nature of its future trading relationship with the EU will need to be determined in a relatively short period, and the product of those negotiations will form the basis of the UK’s future trading relationships with the rest of the world, including the United States.
Our colleagues have prepared a summary briefing analyzing the likely impacts of BREXIT.  The key point is that, although there is likely to be short-term disruption, BREXIT is likely to give rise to a significant number of opportunities, including in supply chain operations, and it is important to anticipate these developments and plan for them now rather than later.  For example, both the US and UK governments are now actively laying the groundwork for a new free trade agreement.
More information can be found in the attached briefing.

Quoted in Bloomberg Law: Human Trafficking Case Could Lead to Expanded Supply Chain Liability


In Ratha v. Phatthana Seafood Co. Ltd., Cambodian plaintiffs sued various companies under the Trafficking Victims Protection and Reauthorization Act (TVPRA), alleging that the companies benefitted from human trafficking in the shrimp and seafood industries in Thailand.
A California district court found that the claims against certain defendants failed because those companies did not knowingly participate in or benefit from human trafficking; that decision is now on appeal to the Ninth Circuit.
Bloomberg Law’s Federal Contracting News examines the significance of the case for government contractors and large companies with overseas business.  Sarah Rathke provides comments on the substantial risks that companies with global supply chains could be subject to if there is a finding of passive TVPRA liability.
You can read the article here: Human Trafficking Case Could Increase Supply Chain Stress.

LexBlog