A strong chemical manufacturing sector is at the heart of every successful economy. In the UK, the sector contributes £18 billion per year to the economy, employs 500,000 people and has £50 billion worth of exports – the largest of any manufacturing sector. Most importantly, 60% of these exports go to the EU and 75% of the UK’s chemical imports come from the EU. The terms of the UK’s exit from the EU are, therefore, critical for the future success of the sector. The report “Making Brexit work for the Chemical Industry”, produced by the Chemical Industries Association (CIA) in partnership with law firm Squire Patton Boggs, examines some of the critical issues, challenges and opportunities for the sector as the UK progresses its Brexit negotiations.

The authors of this report are acutely aware of the effects Brexit could have on the chemicals industry. Given the significance of the chemicals industry to the UK economy, it is vital that the interests of the UK industry, as already flagged by the CIA, are recognized as fully as possible in the final Brexit deal between the UK and the EU and the core principles of the UK’s post-Brexit relationship with the EU is agreed as soon as possible. There are a number of critical issues.

Tariff-Free Access to the Single Market and the Prevention of Non-tariff Barriers to Trade

Over the past decades, the UK chemical sector and its EU counterparts have developed stronger trade links so that UK’s value chain integration in the chemical sector is mainly with the EU27. For this reason, it is in the interests of both negotiating parties that the European chemical industry and the CIA unite in advocating for a zero tariffs on chemical trade between the UK and EU27 following Brexit. It is essential to ensure that the zero-rated principle between the UK-EU27 extends to intermediate and specialty chemicals which face higher tariffs than raw materials.

Going beyond tariffs, customs should be at the heart of the EU27 and UK trade negotiations. As recognized by the Government, customs is a cliff-edge issue for many sectors, but most importantly for UK chemical trade. Any delay at borders would disrupt a highly integrated UK-EU supply chain and have repercussions for business partners, buyers, consumers, end-users and most importantly patients. It is matter of public safety and security that UK chemical trade continues to function smoothly post Brexit. It is worth bearing in mind that companies, and most importantly SMEs, will need time, money and practical help from the government to adjust to new trading requirements where they have been functioning under a frictionless system for the past decades.

Legal clarity over what will be a new UK/EU trade regime is and remains a priority to ensure that investments continue to flow in the country, and that business decisions are not halted. It is crucial indeed that the UK chemical sector will only face “one set of legal change only” and for this reason, priority should be given to trade rules over the implementation phase. Any legal change should be known as soon as practicable, and its entry into force pushed back to when the final bespoke trade deal will have been agreed.

Regulatory Consistency and Continuity

As REACh is founded on the basis of a single market model it appears unlikely that the UK will remain regulated by EU REACh. It is therefore vital that the government provide certainty around future regulation and policy and as a minimum confirms their intention to negotiate a significant (2 year minimum) implementation period (during which EU REACh would continue to apply) in order to allow for the conversion of EU REACh into UK law in a way that would address potential data sharing/duplication of costs issues and not inhibit the ability of UK manufacturers/distributors to access the EU market.

UK Environmental Legislation Derived from EU Law

Over 80% of the UK environmental legislation is derived from EU law. It is essential for business continuity and certainty that industry understands at the earliest possible stage how EU-derived environmental legislation will operate after the UK leaves the EU. This is particularly pertinent and complex where there are associated EU standards and measures, such as BREFs [short for Best Available Technique (BAT) reference documents], that will continue to evolve and change after the exit date. In the worst case scenario, the UK may find itself having to continue to comply with BREFs that are updated after the UK’s exit, without having a vote in relation to the adoption of those measures. The EU’s circular economy package is another range of legislation and policy measures that is likely to be in the process of being adopted and implemented when the UK leaves the EU, so the UK could be left with a somewhat incomplete set of transposed legislation. On the other hand, that may mean this is an area where the UK has an opportunity to lead the way and embrace a more circular economy more quickly than the rest of the EU.

Full and Free Access to the EU’s Energy Markets

It is critical for the UK to ensure supply of energy at competitive costs. Retaining full and free access to the European internal energy market can contribute to that, but there has been little detail provided on this to date, which has a detrimental impact on business confidence and stability. This is even more crucial for energy users in Northern Ireland that shares a Single Energy Market (SEM) with the Republic of Ireland. The UK should use the opportunity offered by the SEM to advocate for the desired level of energy market integration with the EU27 after Brexit. Likewise, there remains considerable uncertainty as the UK’s role in the EU Emissions Trading Scheme going forward. If the UK is leaving this scheme, the timing of this will have a significant impact on the effect for participants. With phase 3 due to end in 2020, it may make sense to remain in the scheme at least until then. The government would have opportunities after exiting the EU to reform or abolish some of the less popular EU measures considered too bureaucratic or duplicative of other requirements, for example the Energy Savings Opportunity Scheme.

Maintaining Access to Skilled Labor

To be able to compete globally and grow, the UK chemical industry is fully aware of the need to invest not only in apprenticeships but also at the secondary education and undergraduate level (particularly in STEM subjects). In the meantime, however, the sector needs the certainty of knowing it will have continued access to the skills it needs once we leave the EU (or following a transition period, if free movement will continue for a limited period). In practice, post-Brexit immigration policy for EU nationals should allow for a system which is unencumbered by the cost and administrative hurdles of the current Tier 2 Points Based System for non-EU nationals (borne both by sponsor employers and individual applicants). Access to skilled non-EU nationals via Tier 2 should also be improved, for example, through the creation of a more dynamic and effective Shortage Occupation List to reflect the scarcity of certain skillsets now and post-Brexit (the current list was last properly reviewed in 2013).

Helping CIA Members Navigate Brexit

Reflecting on the guide’s launch, CIA Chief Executive Steve Elliott said: “With £50 billion of exports, the chemicals sector is the UK’s largest manufacturing exporter. With 60% of these exports going to the EU and 75% of the UK’s chemical imports coming from the EU, the terms of the UK’s exit are critical for the future success of the sector. This new guide, which we hope will be of interest to government and other stakeholders, makes clear the outcomes needed from Brexit negotiations in order to secure the long term success of our industry”.

Darren Warburton, lead partner of the Chemicals Industry Group in Europe at Squire Patton Boggs, commented: “The importance of the chemicals industry to the UK economy and the extent to which it is integrated into European markets, whether through trade, supply chains, regulation, or R&D, means that the UK government must deliver a Brexit that minimizes disruption and ensures the best possible solutions for the sector. There has to be clarity as early as possible over what the trading relationship with the EU27 will be, with the emphasis on tariff-free access to the single market and no customs barriers. In regulatory terms, we need continuity and consistency, and REACH in particular has to be a priority. And to continue to grow and compete globally, the sector must have access to skilled labour.”

With the EU being a rules-based organization and international trade being a highly technical, legalistic area, it will be important for the Public Policy positions advocated by CIA to be capable of implementation as a matter of law.

Authors

Darren Warburton, partner, Squire Patton Boggs, Manchester, UK

David Gordon, partner, Squire Patton Boggs, Birmingham, UK

Anita Lloyd, director, Squire Patton Boggs, Birmingham, UK

Ken Huestebeck, associate, Squire Patton Boggs, Brussels, Belgium

Annabel Mace, partner, Squire Patton Boggs, London, UK

Aline Doussin, partner, Squire Patton Boggs, London, UK