In a little over a year, the UK will be withdrawing from the European Union. Yet the future of the country and its chemicals industry is even more uncertain now than it was when a majority of UK voters decided, in June 2016 to back Brexit.

The extent of the increasing gloom in the country’s chemicals sector was reflected in a vote at a conference on Brexit on November 16 organized by the UK Chemicals Industries Association (CIA). In total, 62% of participants thought Brexit would have a negative effect on the industry. This compared with 50% expecting a negative impact at the same conference in November 2016.

Only a few months ago, UK-based chemical companies were optimistic that after Brexit, due to take place on Mar. 30, 2019, the country’s trade with the European Union would be governed by rules much the same as they are now for the EU single market and customs union.

Furthermore, this arrangement, dubbed a “soft” Brexit, would endure through a transition period of at least two years, during which the UK and the EU would draw up a permanent free trade agreement (FTA).

But in recent weeks this hope has been fading as expectations of a “hard” Brexit strengthen, mainly because of splits in the UK’s ruling Tory party that have undermined progress in the UK-EU negotiations on a withdrawal agreement. It is generally recognized that this has to be clinched by October next year to allow time for the government of the 27 EU member states and the European Parliament to endorse the deal.

Now “No Deal” – which has been described previously by some experts as an impossibility – is becoming a genuine prospect. This would mean there would be no withdrawal agreement covering the key issue of financial settlement payments and the rights of EU citizens in the UK and a “frictionless” border between the UK’s Northern Ireland and Ireland, an EU member state.

Also there would be no transitional arrangement or even the start of negotiations on an FTA between UK and EU.

World Trade Organization Rules

Instead, immediately after Brexit in 2019, the UK will be trading with EU and other countries under the rules of the World Trade Organization (WTO). Chemicals traded between the UK and EU would be subject to WTO tariffs of 5.5-6.5%.

With the EU accounting for 60% of UK chemical exports and 75% of imports, tariffs of that size would seriously weaken the industry’s competitiveness, particularly in supply chains that involve the re-exporting and re-importing of chemicals as raw materials, intermediates and final products.

Nonetheless, the main worries of UK-based chemical producers and distributors will be less focused on the complexities of WTO tariffs and the accompanying customs procedures.

The big concern – with or without a withdrawal deal or even with an agreement on a transitional period – is the impact on post-Brexit trade of non-tariff barriers, in particular regulations. “Sorting out the regulatory uncertainties is becoming a top priority for UK-based chemical companies,” Steve Elliott, CIA chief executive, told the London conference.

In a recent Q&A on its website, the European Chemicals Agency (ECHA) made clear the post-Brexit legal position of the UK in respect of EU chemicals regulations. These included REACh, the Biocidal Products Regulation (BPR) and the Classification, Labelling and Packaging (CLP) Regulation.

As after Mar. 30, 2019 the UK will no longer be an EU member state, it will have the legal status of a “third country” similar to that of other non-EU countries. As a result any REACh registration, for example, by a company in the UK would be regarded as being “non-existent.”

“Unique” Free Trade Agreement

The UK government contends that the UK should not be given the status of a third country like other non-EU states because it is in the unusual position of already having the same rules and standards of the European Union. This, it argues, should be reflected in a “unique” UK-EU free trade agreement, which would be finalized during the transition period.

However, according to EU documents leaked to the media in mid-November, EU leaders believe that the UK has sacrificed its right to a “unique” status because of its insistence that it would not stay in the EU single market or customs union post-Brexit.

The UK government’s plan is to transfer by the end of March, 2019, all the REACh registrations of companies in the UK to a register administered by a UK equivalent of ECHA. In the same legislation a UK central body, probably an existing government department, would take over the roles of the European Commission in the REACh legislation such as the endorsement of ECHA recommendations.

A key issue then would be how the EU would treat chemical exports with UK registrations. Currently since the UK is still a member of the single market, checks on the compliance of EU chemical exports with EU regulations, including REACh, are done, like with those of all EU member states, at points of sale or production. Post Brexit these checks on UK products will be conducted at the EU border.

There is also at the moment a conformity assessment system under which EU-approved agencies in each member state certify products as being compliant with EU regulations, including REACh. These certificates will also, under EU law, no longer be valid.

One option is a UK-EU deal on a mutual recognition of the equivalence of each other regulations, including REACh registrations.

Otherwise, without a mutual recognition arrangement, UK exporters of chemicals into the EU will either have to persuade their EU-based customers to register the chemicals themselves, relocate the manufacturing of the substance to an EU state or use an Only Representative (OR) in an EU member state or the three states of the European Economic Area (EEA) – Norway, Iceland and Liechtenstein – that are members of the single market.

Second Substance Registrations

The UK is a leading user of the OR system in the EU under which importers, usually distributors, undertake REACh registrations of chemicals being imported from a non-EU/EEA country. For OR distributors in the UK, Brexit could cause a big loss of business unless, as some are already being reported to be doing, they move their operations to an EU/EEA state.

UK chemical companies do not wish to undergo the financial and administrative burden of making second, identical registrations.

“Companies have spent a lot of money and time on making their REACh registrations, so they don’t want to go through the process again,” Tom Crotty, CIA president and Ineos group director, told the meeting.

The need to avoid duplication seems to be accepted by the UK government. “We don’t want companies to be put in a position where they have to change their registrations twice,” said Susannah Storey, director general for economic partnership at the UK Department for Exiting the European Union. (DExEU).

Lawyers are claiming that as long as the UK keeps EU regulations, like REACh, virtually unchanged in its post-Brexit legislation EU officials will not be able to block UK chemicals and other products on the Union’s borders without breaching WTO rules on non-discrimination.

The UK would be complying with the same regulations as it was before Brexit. Thus, on the basis of WTO regulations, EU would not have ground for barring entry of UK goods.

However, the UK could soon start to diverge from EU rules as result of a failure to incorporate in UK legislation post-Brexit amendments and other changes to EU regulations. Then the EU would be in a stronger position to restrict or even ban UK exports on the grounds that regulatory equivalence no longer existed.

Contingency Plans

The level of uncertainty about the post-Brexit future of the UK chemical industry is now becoming so serious that companies are reluctant to commit themselves to further investments in the country.

A large proportion – as many as two thirds – of foreign-owned chemical producers with UK assets are understood to have contingency plans for cutting investment or even reducing production capacity if some key issues in the UK-EU negotiations have not been resolved by the spring.

“Why should we invest in uncertainty?” asked Peter Huntsman, president and chief executive of Huntsman, which has several manufacturing sites in the UK.

He told the meeting of his concern about the effects of Brexit on intra-European supply chains which involved process steps with multiple border crossings. “We can do these processes on single sites elsewhere, such as Geismar in the US or at one of our locations in China,” he said.

Several speakers warned about the harm that Brexit would cause not just the UK but the whole of the European chemical industry. “We have got to stick together in what is a damage limitation exercise,” said Heinz Haller, executive vice president for Dow Chemical in Europe and chairman of the Brexit task force of the European Chemical Industry Council (CEFIC).