product manufacturers and suppliers: what should …...product manufacturers and suppliers: what...

© Allen & Overy LLP 2016 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.

Brexit Law | Product Manufacturers and Suppliers | September 2016

2 © Allen & Overy LLP 2016

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,



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



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.



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.



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 +44 20 3088 3200 [email protected]

Matthew Townsend Partner – London

International Regulatory Law


Jeff Sullivan Partner – London

International Dispute Resolution


Charles Borden Partner – Washington, DC International Regulatory Law

Tel +1 202 683 3852

[email protected]

Neville Cordell Partner – London Intellectual Property

Tel+44 20 3088 2754

[email protected]

Lydia Challen Partner – London Tax

Tel+44 20 3088 2753

[email protected]

Dominic Long Senior Associate – London

Antitrust Tel +44 20 3088 3626

[email protected]

Sarah Garvey PSL Counsel – London

International Dispute Resolution Tel +44 20 3088 3710

[email protected]

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