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Analysis

Brexit red tape prompts rethink on cross-Channel trade

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While British importers and exporters wrestle with the UK’s new EU trade border this January, some businesses have taken a more radical approach to addressing the challenges posed by life after Brexit: give up on cross-Channel trade altogether.

One such company is Aston Chemicals in Aylesbury, a medium-sized business that imports and distributes specialist chemicals for some of the world’s leading cosmetics brands. It dispatched its last ever load to Europe on December 18.

“It was emotional after 30 years of trading, and we hoped it wouldn’t come to this,” said Dani Loughran, Aston Chemicals’ managing director, “but the duplication of EU chemical regulations, the risk of tariffs because of rules of origin, border delays and increased freight and administration costs left us no choice.”

It is difficult to predict how many small and medium-sized UK companies will take similar steps when confronted with significant additional costs and bureaucracy imposed by the UK’s new trading arrangement with the EU.

The agreement, secured on Christmas Eve and which came into force on January 1, will require an estimated 215m extra customs declarations every year.

Trade groups expect some companies will wait and see how the new rules bed down, while others — such as Aston Chemicals — have already taken pre-emptive action, either giving up trading altogether or rejigging operating models to serve two markets separately. 

Aston Chemicals has now set up a subsidiary in Poland to deal with EU customers directly, instead of exporting to the EU from the UK

Aston will no longer send weekly truckloads of chemicals to the EU from Britain, but instead import all the chemicals for its EU customers directly into a subsidiary in Poland, effectively separating its EU and UK supply lines.

Ms Loughran said that as a result of booking the business in the EU the company will pay more tax there and employ fewer people in the UK, having already cut its UK warehouse staff headcount by one-third. 

Industry sentiment surveys in sectors that are likely to be affected, such as chemicals, pharmaceuticals, food and drink and manufacturing in integrated supply chains, show a widespread expectation that Brexit will have a significant long-term impact. The expectation is that the effects will not be as immediately obvious as the short-term port disruptions that the government has warned of, but will eventually change the way many businesses trade.

Make UK, the manufacturing lobby group, for example, found that its “balance of export orders” index — the proportion of companies expecting worldwide exports to rise or fall — was forecast to drop sharply to minus 14 per cent this quarter, while the balance on investment intentions was minus 11 per cent. 

The motor vehicles sector is also downbeat, with a forecast export order balance of minus 33 per cent in the first quarter of 2021, compared with plus 20 per cent for the same quarter last year after Boris Johnson’s election victory led to a short-lived investment boom.

Stephen Phipson, head of Make UK, said that many manufacturers had been wary of exporting in the first few weeks of the year as they wanted to see the impact of Brexit. But he predicted that borders would be under more strain in the coming weeks as stockpiles built up in the transition period, which maintained previous trading arrangements with the EU, ran out.

Similarly, a third-quarter business confidence survey by the Food and Drink Federation found that 59 per cent of those members who responded predicted a decrease in exports to the EU during 2021.

The biggest factor for many smaller UK companies is the range of “non-tariff barriers” that confronts them as a result of the UK becoming a so-called “third country” operating outside the EU’s common regulatory umbrella.

Renee Watson, founder and head of The Curiosity Box, estimates she is facing a bill of about £20,000 to conform to new UK safety standards

For Renee Watson, founder and head of explosions at The Curiosity Box, which makes science kits for children in Eynsham village, Oxfordshire, it is the cost of certifying her products separately for regulators in the UK and EU that may tip the balance.

It will cost £500 a product to obtain the new “UKCA” safety marks, which indicate conformity with UK safety standards and which — for now at least — essentially duplicate the EU’s existing CE mark, which confirms a product meets the bloc’s safety, health or environmental requirements.

With about 36 products to register she estimates she is facing a bill of about £20,000. “I wish I had that sitting in the bank,” she said. “But we need to make sure we are compliant and can absorb the costs as schools will not be able to afford it if we passed them on.”

For now the company has paused exporting until it has worked out whether it can carry the costs of different certification marks, including in Northern Ireland where a separate “UKNI” mark is required. 

Ms Watson said she feared the company may never resume trading in Northern Ireland — but she remains hopeful that EU exports would continue even if “deprioritised while the dust settled”.

For others such as Shane Burnett, the founder of Premium Plus UK, a Bournemouth-based dental medical devices maker, the decision has already been made. Last year he hastily opened a new subsidiary in Poland to handle his EU customers, which make up 65 per cent of his client base.

He said that strict EU rules on importing medical devices simply made it unviable to use the UK as a distribution hub for the products he imports from China. He has let four staff go in the UK as the business shifts across the Channel.

“It would cost a fortune to do all that paperwork because now each EU customer becomes an ‘importer’ and that’s financially unviable,” Mr Burnett said. “It makes much more sense to ship the whole lot into Poland in one big hit, do the customs and then distribute round the EU.”



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Analysis

Sunak goes big and bold to try to repair the public finances

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Chancellor Rishi Sunak’s Budget was big, bold and broke many longstanding records for the public finances.

At an estimated £355bn, the level of UK government borrowing forecast for 2020-21 is due to be the highest since the second world war, reflecting the severity of the coronavirus crisis. It highlights the sheer scale of emergency state support for companies and households during the Covid-19 pandemic.

The tax rises announced on Wednesday by the Conservative chancellor for the middle of the decade — affecting businesses and individuals — will be the largest since 1993. The increases will raise the UK tax burden to its highest level since Roy Jenkins was the Labour party chancellor in the late 1960s.

Justifying his approach, Sunak told the House of Commons: “Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

As far as the public finances are concerned, the March 3 Budget will become known as a “give then take” affair that will reshape the relationship between the state and the private sector for many years ahead.

And the figures in the Budget documents confirm the coronavirus crisis has utterly transformed the public finances for the worse.

At the March 2020 Budget, when the UK had little clue about the enormity of the pandemic, the Office for Budget Responsibility thought the government would borrow £55bn in 2020-21.

Sunak, who unveiled a £12bn support plan for the economy in what was his first Budget, has since had to add huge amounts of public spending in 16 major announcements.

On Wednesday, he outlined another £40bn of support, bringing total spending to £344bn, according to the OBR: roughly 16 per cent of gross domestic product, and well above the average of 13.3 per cent among advanced economies.

Chart showing the 16 major announcements since the last Budget have increased coronavirus support

It is this spending, alongside a loss of £90bn of expected tax revenues, that is set to raise the level of government borrowing to the highest level in peacetime.

In 2021-22, the government is still planning to spend £93bn on virus related support, mostly going to the NHS, but with large sums also for continued support for companies and households.

Karen Ward, strategist at JPMorgan Asset Management and a former adviser to Philip Hammond when he was chancellor, said Sunak was wise to keep splashing the cash in the next financial year. “The chancellor has rightly erred on the side of an extension that is potentially too long, rather than one that is too short,” she added.

With the colossal borrowing, underlying UK public debt, excluding temporary Bank of England schemes, is set to jump from a pre-pandemic forecast of 73 per cent of GDP by the middle of this decade to 97 per cent in the latest OBR prediction.

The 24 percentage point rise in the core debt burden is the second large jump in a little over a decade following the fiscal shock associated with the 2007-08 financial crisis. At about 100 per cent of GDP, UK public debt is now at its highest level since the early 1960s, when it was gradually coming down following the second world war.

Chart showing that public debt is set to rise to levels not seen since the early 1960s

This Budget was not just about fiscal support in 2021-22, but also stimulus to power the recovery, according to Richard Hughes, OBR chair. He said Sunak’s £25bn “super-deduction” in corporation tax would “stoke the recovery” and “encourage businesses to bring forward future investment into the next two years”.

But after 2021-22, the giveaways stop, and Sunak becomes the revenue raising chancellor, with very large increases planned in corporation and income taxes.

The moves risk damaging the UK’s international standing. In 2018, the OECD said the UK taxed corporate profits below the rich country average. Britain collected 2.6 per cent of national income through the levy, compared with the OECD average of 3.1 per cent.

By 2025-26, the OBR projections suggest UK corporate taxes will generate revenues above the OECD average, although Hughes said this level was “one [the UK] seldom sustained for very long in the postwar period”.

Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said Sunak’s corporation tax rise was a significant risk. “For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high,” he added.

The tax rises will tackle the high level of borrowing, however, according to the OBR.

It projects the increases will lower the current budget deficit in 2025-26 from £37bn, had Sunak done nothing, to £1bn, almost balancing the government’s books excluding public investment. This is a core ambition of ministers.

Chart showing Rishi Sunak’s spend then tax Budget to balance the books

Some economists thought Sunak should have been more explicit in setting new targets for the public finances.

Hande Kucuk, deputy director of the National Institute of Economic and Social Research, a research organisation, said the Budget needed “a comprehensive fiscal framework to build confidence in a sustained recovery given the significant uncertainty regarding the long-term effects of Covid-19 and Brexit”.

Other economists were more forgiving since there are huge uncertainties hanging over the public finances. The path of the pandemic is perhaps the largest, but Sunak also has to worry about the possibility of increased debt servicing bills if interest rates rise, and whether he can cut spending as he plans when the virus subsides.

Torsten Bell, director of the Resolution Foundation, another think-tank, was sceptical the chancellor would be able to reduce departmental spending.

The Budget documents showed a stealthy £4bn a year cut in spending alongside the tax rises. “He’ll end up spending more than that,” said Bell, adding this would add to pressure to proceed with additional tax rises.

But Sunak is an optimist, and hopes the uncertainty will go in his favour. If the economic recovery is sufficiently rapid, the chancellor will be looking to the OBR to cut its estimate of a 3 per cent long term hit to the economy from coronavirus.

And if that happens in a future Budget, Sunak can look forward to the possibility of tax cuts before the next general election.



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A pivotal moment for Scotland’s independence champion

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Nicola Sturgeon, Scotland’s first minister, has credited her former mentor and predecessor Alex Salmond with making her career.

Sturgeon’s appearance on Wednesday morning before a parliamentary inquiry into her Scottish National party government’s handling of harassment complaints against Salmond will be a potentially pivotal moment for her, and her dream of leading Scotland to independence from the UK.

At an extraordinary appearance before the parliament committee on Friday lasting almost six hours, Salmond accused Sturgeon’s closest associates of maliciously colluding to drive him from public life and his former protégée of breaching the ministerial code by intentionally misleading parliament — potentially a resignation matter.

Sturgeon denies the allegations. But the televised session must have made difficult viewing for the formerly shy working-class girl from Ayrshire in south-west Scotland who has, in recent years, helped bring her nation closer to independence than at any time since the 1707 union with England that created Great Britain.

When Sturgeon succeeded Salmond as first minister in 2014 — in the aftermath of a referendum in which Scottish voters backed staying in the union by 55-45 per cent — she was fulsome in praise of her predecessor. “Without the guidance and support that Alex has given me over more than 20 years, it is unlikely that I would be standing here,” she told the Scottish parliament.

But Salmond was hardly the first figure in the SNP to spot Sturgeon’s talent. Aged just 16, Sturgeon in 1987 timidly rang the bell of then SNP general election candidate Kay Ullrich to offer her support. Four years later Sturgeon was a veteran student campaigner and, according to biographer David Torrance, Ullrich was presciently describing her to party comrades as the future “first female leader of the SNP”.

Sturgeon, who describes her nationalism as more “utilitarian” than “existentialist”, has said her early interest in politics was driven by anger at the social cost and deindustrialising impact of the policies of late UK prime minister Margaret Thatcher and the powerlessness of Scottish voters to resist them.

After studying law at Glasgow university, she became a community lawyer and a rising SNP star. In 1999, she was elected to the new devolved Scottish parliament and by 2004 she was a contender for the party leadership. But she accepted the junior place on a joint ticket after Salmond, who had already led the SNP from 1990 to 2000, entered the race.

Sturgeon, right, with Kay Ullrich in May 1999 © Mirrorpix/Alamy

Robert Johns, politics professor at Essex university and author of a book on the SNP’s rise, said Sturgeon was a big factor in the party’s fortunes as deputy leader from 2004 and as deputy first minister of Scotland after it won power in Edinburgh in 2007.

“She’s got better and better at being seen as a normal human being and becoming likeable, while at the same time not losing that reputation for competence,” Johns said.

After playing a central role in the 2014 referendum, which the pro-independence Yes campaign lost by a much smaller margin than expected, Sturgeon took over an SNP energised rather than dispirited by defeat.

Today, the first minister enjoys approval ratings unmatched by any other UK party leader despite 14 years in government and a patchy record on key policies.

Voting with her husband Peter Murrell in Glasgow in 2019 © Jeff J Mitchell/Getty Images

An international education survey in 2019 found Scotland’s progress in narrowing the attainment gap between advantaged and disadvantaged pupils had actually slowed since Sturgeon made the issue her top priority four years earlier. And the SNP’s reputation for governing competence has been dented by serious problems with construction and equipment at flagship hospitals in Edinburgh and Glasgow. 

Sturgeon’s instinctive caution and mastery of detail — on display at near-daily televised briefings — appears to have served her well during the coronavirus pandemic. Most voters think she has handled the crisis better than UK prime minister Boris Johnson. While Covid-19 deaths in Scotland are high by international standards, they have been somewhat lower than in England.

But Sturgeon’s determination to keep a tight rein on the SNP and her reliance on a small inner circle of confidants, which includes her husband and SNP chief executive Peter Murrell, has fuelled discontent among some party colleagues. Formidable self-discipline was an ingredient in the once anarchic SNP’s rise, Johns said, but now the party felt “over-professionalised”. “It’s more top-down than it ever used to be,” he added.

‘The Alex Salmond Show’ on RT © Russia Today

Some in the SNP also believe that Sturgeon has been too cautious to take full advantage of a rise in support for independence since the UK in 2016 voted for Brexit despite 62 per cent of Scottish voters backing staying in the EU. Tensions in the party have also grown over her plans to make it easier for trans people to receive official recognition for the gender they identify as.

But it is the rift with Salmond that now threatens Sturgeon’s hopes for a renewed push for a second independence poll.

Relations between the two had already been tested by Salmond’s decision to host a chat show on Kremlin-backed Russian broadcaster RT when in 2018 two civil servants made formal complaints against the former first minister dating to his time of office.

In 2019, the Scottish government accepted that its investigation into the complaints had been “tainted by apparent bias”. At a criminal trial last year, Salmond was acquitted of all of the 13 sexual offences charges against him.

Salmond has accused Murrell and Sturgeon’s chief of staff Liz Lloyd of involvement in a “concerted” effort to damage his reputation “to the extent of having me imprisoned”. They deny the allegations.

Salmond and Sturgeon present the white paper for Scottish independence in 2013 © Jeff J Mitchell/Getty Images

Salmond has also accused Sturgeon of breaching the ministerial code by misleading parliament about when she learned of the complaints against him and by failing to report meetings between the two. And he says she has presided over a broad failure of “national leadership”.

They are charges that, if proven, could prove politically fatal, but Sturgeon — a formidable debater — says she is “relishing” the opportunity to set the record straight on Wednesday.

With crucial elections for the Scottish parliament just nine weeks away, her committee appearance could have a major impact on the UK’s constitutional debate, said Mark Diffley, a consultant on Scottish public opinion.

Polls suggest the SNP has been on course to go from minority to majority government, removing its need to rely on the pro-independence Scottish Greens for support on constitutional matters and providing a strong mandate to demand UK approval for a second referendum.

But securing a majority in the proportionally representative Scottish parliament is a difficult feat that would be made harder if Sturgeon was not seen to effectively rebut Salmond’s allegations, Diffley said. “She can, with a good performance, recover some of the damage,” he added. “It’s a huge deal for her — and she knows it.”



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Can the lumbering US housing department become a force for change?

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One of Marcia Fudge’s first big battles as an elected official was over a shopping centre in Warrensville Heights, Ohio.

A developer wanted to build a hub for major retailers in the largely black Cleveland suburb, which has a population of 13,000. But Fudge would not have it. Warrensville Heights did not want “giant retail stores,” but office space and hotels, she said.

“We also control our own destiny and our own vision for the future,” Fudge, who was mayor of Warrensville Heights between 2000 and 2008, said at the time. “The days of plantation rule are over.”

Fudge won that battle and many others like it, and is widely credited for revitalising the area during her eight years as mayor.

Now she is being counted on by progressives to do the same in urban areas across the US as President Biden’s nominee to lead the Department of Housing and Urban Development (HUD). The $50bn agency manages 1m units of public housing and oversees a vast array of federally-funded housing programs — from insuring mortgage loans to voucher programs for low-income families.

Housing reform is expected to be a key part of Biden’s efforts to support the black voters who propelled him into office, many of whom still deal with the consequences of decades of segregation and discrimination in America’s housing market.

Malcolm Glenn, a fellow at the New America think-tank, called Fudge’s appointment to HUD “a real opportunity” to make tangible progress on an issue where race and economics are tightly bound.

“If this administration and Secretary Fudge make racial equity, not just a core, but sort of the singular core guiding force around everything that they do, I think we’ll be in a much much much better place than we’ve ever been,” Glenn says. “I don’t think any HUD secretary has ever done that.”
 
Ro Khanna, a Democratic Representative from California, believes Fudge is uniquely qualified for the job. “She understands deeply housing inequity, she understands racial exclusion,” Khanna said. “[She will] really focus on equity in housing and anti-racist zoning laws and anti-racist policies.”
 
But to deliver on those hopes, Fudge will have to grapple with a demoralised agency facing dual crises. An unprecedented number of Americans face the threat of eviction because of the Covid crisis. And inside HUD, a mass exodus of career staffers under previous Secretary Ben Carson has decimated the ranks.

Congress slashed the department’s operating budget by 15 per cent last year.

Carson, a black surgeon who grew up in public housing, did not believe that it was the government’s responsibility to rectify the effects of systemic racism on the American housing market.

HUD also has a long record of underdelivering, and has sometimes been regarded as a backwater of government. Rates of home ownership among blacks have been largely stagnant since the 1968 Fair Housing Act outlawed discriminatory policies that, among other ills, made it exceedingly difficult for blacks to take out mortgages.
 
Even Fudge acknowledged its shortcomings soon after her nomination. “I don’t know that anybody can even tell you what HUD has done,” she said. “So I really do think that HUD has not fulfilled its mission.”

Fudge, 68, has lived in the same tightly-knit neighbourhood for decades. Her personal phone number is listed in the local phone book, and she drives her 89-year-old mother to church every Sunday morning, stopping first at McDonald’s for a cup of coffee.
 
Her success in Warrensville Heights elevated her to Congress before the end of her second mayoral term. But her ascent was also tinged with tragedy: she was elected to fill the seat of her close friend and former boss, Congresswoman Stephanie Tubbs Jones when she died suddenly in August 2008.

“She’s tough as nails and I have to caution her sometimes about being too tough,” said Jim Clyburn, the House majority whip, adding that Fudge is the first person that fellow members of the Congressional Black Caucus members confide in during a crisis.

During her time in Congress, she worked closely with the Department of Agriculture, an agency not often thought to be at the forefront of the fight for racial justice. But Fudge prodded it to expand food voucher programs, development schemes in rural areas, and for clearer labelling on food products.
 
She was actually angling for the top agriculture job when Biden tapped her for HUD instead. Last year, she told Politico in November: “You know, it’s always ‘we want to put the black person in [the Department of] Labor or HUD.’”

At HUD, Fudge has proposed boosting spending on housing, establishing programs to help Americans save up for mortgage down payments, and transforming a voucher program for low-income renters from a lottery to a guarantee for everyone that meets the requirements.
 
“Her style is not combative. She prefers to get along, but she’s not a pushover,” said Cleveland mayor Frank Jackson, who worked closely with Fudge during her mayoral tenure. “That means just don’t piss her off.”

In response to a question at her confirmation hearing from Republican Arkansas Senator Tom Cotton on what he called a “long history of intemperate comments”, Fudge replied: “Sometimes I am a little passionate about things.”

She is almost certain to meet further opposition. During the confirmation hearing, Pennsylvania’s Republican Senator Patrick Toomey complained that Obama-era fair housing policies were too costly and time consuming for home builders — and Fudge wants to go much farther than the Obama administration did.

People who know Fudge do not expect her to back down. “I think President Biden and his team want to have a slugger in that position,” said Tami Jackson Buckner, a partner Michael Best Strategies and sorority sister of Fudge’s. “She is someone who knows that without a home, it’s hard to fulfil your American dream.”



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