Political turbulence ahead

Political turbulence ahead

With both the UK and US having made sharp changes in political direction in the past year, Alan Dron visited Farnborough where experts came together last week to offer insights for UK aerospace companies considering how to cope with future uncertainties.

Political turbulence ahead

The UK’s forthcoming departure from the European Union (EU) poses major uncertainties for the country’s aerospace industry, according to senior economists and trade association specialists.

Speaking at an international trade seminar at Farnborough, the spiritual home of British aviation, they said the range of possible outcomes of the Brexit process could be either positive or extremely damaging to UK companies in the sector.

The seminar, organised by US-based supply chain solutions specialists Seko Logistics, focused both on Brexit and the unpredictable nature of the Trump administration in the US.

An example of that unpredictability arose during the course of the seminar; news broke that the administration had taken the first step toward overhauling the North American Free Trade Agreement by formally notifying Congress of its plans to renegotiate the pact with Canada and Mexico.

Four visions of the future

Setting the scene for the forthcoming Brexit negotiations Markus Kuger, senior economist with business services organisation Dun & Bradstreet, laid out four potential scenarios.

The worst possible outcome, he said, would be the breakdown of the ‘divorce’ negotiations between the UK and EU and the imposition of World Trade Organization tariffs. That would be damaging for both parties, but especially the UK. Such a situation had become more likely than previously due to the UK government’s insistence that a ‘bad deal was worse than no deal’.

The best possible outcome – and still the most likely, said Kuger – was an ‘amicable divorce’, with the UK leaving the EU in 2019.

However, it was highly unlikely that a free trade agreement between the parties could be agreed within the next two years. That would likely mean some form of transition agreement post-2019, during which the EU would insist on the continuation of EU rules and the legal supremacy of the European Court of Justice until the free trade agreement was settled, a process that was likely to take a further two to three years.

Prepare for impact

Kuger’s opinion was backed up by Jeegar Kakkad, chief economist and policy director of ADS Group, the UK’s aerospace, defence and security trade body, who set out the potential impact of Brexit on the aerospace and defence sector.

 

“Everything we’ve heard from government and industry suggests a three-year timetable – that is, we leave in 2019, but with three years of further negotiations.”

By Jeegar Kakkad, chief economist and policy director, ADS Group

The initial effect of the June 2016 vote to leave the EU had been a slump in the value of sterling. That had made UK companies’ prices more attractive to overseas buyers. However, “A weak pound isn’t the basis for global competitiveness. [UK companies] have won some short-term orders, but it’s not a basis for long-term competitiveness.”

The UK government wanted to be free of compulsory payments to the EU and wanted the freedom to negotiate its own international trade deals, but was willing to ‘pay to play’, to get access to specific aspects of the market, he said.

“Our approach as a trade association is that we didn’t want Brexit to happen,” he admitted, “but after the vote we took the very pragmatic view that we had to work with government to get the best outcome for our members.”

As one of the UK’s foremost industrial sectors – the others being motor vehicles and financial services – ADS wanted the UK government to see aerospace as a priority case.

Staffing

One factor that is helping ADS in putting across its case to the UK government is, ironically, a shortage of civil servants dealing with Brexit.

“The UK Civil Service has seen 40% cuts in its numbers. They don’t have the manpower to handle all this,” said Kakkad. With insufficient staff to cope with the myriad facets of Brexit negotiations, the government was therefore happy to accept specialist assistance.

“The government are taking our work and taking it as their position as they go into the negotiations.” That gave ADS the opportunity to get across its message to ministers: “We’re telling them at every possible opportunity that ‘No deal’ is the worst possible outcome.”

That would result in standard World Trade Organization tariffs being imposed, which would severely dent UK products’ competitiveness in the EU. If the UK was outside the single market, the administration required for every export would also grow massively.

 

“The government have said we will no longer be members of the single market or customs union. From our perspective, that’s the biggest risk. We have no idea what forms companies would have to fill in. SMEs [small and medium-sized enterprises] have no clue what compliance activity they’re going to have to go through when they leave the EU.”

By Jeegar Kakkad, chief economist and policy director, ADS Group

Obstacles

ADS was also trying to educate the government in what a bad deal would look like. Divergence in regulations governing trade would be one major obstacle.

Currently, companies sending shipments of aerospace products moving between, say, Bristol and Hamburg filled in the same level of documentation that a US company would complete when sending goods between Chicago and New York. The process was easy.  “If there’s no deal, what complex documentation does Airbus need to send a pair of wings from Broughton down to Toulouse or Hamburg? It’s not clear.”

That risk of new tariffs and operational complexity meant that some companies were already starting to repatriate their supply chains, rather than sourcing components or raw materials from Europe, said Tom Woodham, director, consulting, at PwC.

Although this was less of a problem in the aerospace sector than for other areas of industry, companies were facing increasing trade compliance and customs hurdles. With the final shape of the Brexit agreement still uncertain, “All we can say is, ‘Are you ready?’ for different sets of circumstances.

“It’s all about having plans, options and how to execute them.”

New systems

New systems would probably have to be put in place and new data requirements for dealing with the European Union in future would require those systems to hold greater complexity of information and deal with more frequent data submissions for customs declarations.

“If you want to have a European hub for logistics, you need to be looking for a suitable site now. If you don’t look at it now, suddenly everyone will decide they need a hub – in Frankfurt, for example – and if you don’t do your due diligence, you’ll be left behind.”

The UK aerospace industry also badly wants access to, and influence with, the European Aviation Safety Agency (EASA). The UK regulator, the Civil Aviation Authority, will not have the capacity to take on the task of certification of new types of aircraft, said Kakkar.

As for the US in the age of Trump, Kuger noted that the administration’s proposed increase of $54 billion in the nation’s defence budget – an increase greater than the total defence budgets of many European nations – was likely to lead to more defence spending globally.

The president’s proposals for deregulation and lower taxes would also be good for companies, he said.

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