Businesses brace for tariff chaos as trade war with Europe looms

By the time car parts arrive at The Classic Mechanic’s workshop in Hungary, some have travelled further than they ever will once assembled.

Fed up with the post-Brexit “minefield” of bureaucracy and admin costs on goods going from the UK to the EU, owner Simon Spurrell is now sending some via the US — in a workaround bordering on absurd.

“They don’t stop American parcels,” says the Cheshire-based entrepreneur, whose business restores vintage vehicles at a garage near Oroshaza in south-east Hungary.

“It works out cheaper. We can get a low cost shipment to America and then we just get it forwarded to Hungary.”

Spurrell is among the millions of business owners who have been forced to adapt to a new relationship with their closest trading partners, since Britain left the EU in January 2020.

Some, like Spurrell, complain of onerous bureaucracy adding costs and time. Others say early hiccups have smoothed.

Now, however, a new threat looms. The row over the Northern Ireland Protocol (NIP) threatens to bubble over into a trade war. Businesses are battening down the hatches and bracing for tariffs on top of the extra bureaucracy.

The Government has introduced a new bill to re-write the protocol, which it claims will overcome “practical problems” with the agreement for Northern Irish businesses including extra paperwork and costs. Boris Johnson has claimed the changes are trivial, but Brussels says they break international law, meaning the two sides are set for yet another showdown.

It would be a major blow for businesses just as rising prices for raw materials, staffing and energy push up costs following the stress of the pandemic and amid the war in Ukraine.

It would also threaten to worsen the worst cost of living squeeze in a generation, with households already stuck with a 54pc increase in energy bills and 4.5pc fall in real wages. Politicians on both sides of the Channel are under more pressure to find levers that don’t inflict higher costs on their own side.

“Given where the economy is at the moment [it’s important] to take off the table the risk of tariffs on UK goods,” says William Bain, head of trade policy at the British Chambers of Commerce. “That’s the last thing we need.”

Damage has already been done. Research published earlier this year by the LSE’s Centre for Economic Performance found trading relationships between the UK and EU fell by a third after the deal kicked in at the start of 2021, with many smaller interactions wiped out.

Uncertainty over the NIP is further weighing on businesses, warns Marco Forgione, director-general of the Institute of Export & International Trade. He says 40pc of the companies the body works with would be severely impacted if Brussels and London end up in a trade feud. Even the threat of tensions is “causing greater uncertainty”, he adds.

In Belfast, Alan Lowry has felt the brunt of some burdensome administration the Government says it is trying to remove with changes to the NIP.

He claims his company, Environmental Street Furniture, which imports parts from Britain for benches, cycle shelters and outdoor tables, faces extra costs of about £500,000 a year as a result.

“We have to pay our shipping companies additional money to do paperwork. And I now have someone employed pretty much full time to do supplementary declarations,” says Lowry.

“For a business with a turnover of around £2m, that’s a lot of money. It’s probably the difference between profit and loss.”

Roger Pollen, head of the Federation of Small Businesses in Northern Ireland, says "a significant minority of businesses are being badly impacted" by the way the protocol is operating. "That should cause everybody concern,” he adds.

Yet, at the same time, efforts to change the Protocol risk triggering a tit-for-tat escalation in trade barriers.

Proposals laid out by the UK last week were maximalist, including squashing the jurisdiction of the European Court of Justice in Northern Ireland. That is a red line for Brussels, which has launched a legal challenge and is likely to go further if Britain tries to unilaterally force changes.

In an interview with the Belfast Telegraph published last Thursday, Maroš Šefčovič, Brussels’ Brexit head, said Northern Irish companies were likely to lose access to the EU single market if Johnson’s legislation becomes law.

“There is no doubt that the European Union intends on making a very strong point, and is likely to rescind certain elements of the Trade and Cooperation Agreement (TCA) in the case of any change to the protocol,” says Emily Rees, a senior fellow at the European Centre for International Political Economy.

Brussels might initially try to introduce red tape and slow border checks to frustrate British businesses. But if tensions escalate, tariffs will be a key tool.

“If it does turn into a situation whereby there's the reintroduction of most favoured nation tariffs, that would be extremely costly to businesses on both sides,” says Rees.

During a spat over aeroplanes with the US, under former President Donald Trump, the EU placed tariffs on imports such as shellfish, gin, cotton and salmon.

“We pray, literally we pray, that sensible heads in the government will calm down the rhetoric and we’ll be able to continue to trade,” says Tavish Scott, the former Shetland Islands MSP who now heads the Salmon Scotland trade body.

The EU could aim for politically important sectors such as agriculture and automotive, particularly harming areas such as the north-east. About 43pc of cars made in the UK currently go to the EU market.

Paul Butler, chief executive of the North East Automotive Alliance, warns the sector is already facing a “tsunami” of challenges from rising costs and semi-conductor shortages.

Meanwhile, Westminster may swing back by locking Europe out of access to the City of London’s clearing houses and introducing counter-tariffs.

Energy is another major vulnerability. A growing web of cables imports and exports electricity between Britain and the continent every day.

While Britain currently has plenty to supply, the winter looks set to be more constrained as competition grows with countries ditching Russian gas.

Last year, France’s Europe minister, Clement Beaune, threatened to cut the UK off from energy supplies, in a row over Brexit. Ireland had to cut exports to the UK briefly last winter after its own supplies fell short.

“Everybody needs to keep it cool, because we’re going to need each other in winter,” says Phil Hewitt, director of electricity market specialists EnAppSys.

Threats to electricity exports would likely push up costs just as households already face a potential further 40pc bill increase in November.

For some businesses, the pain isn’t being felt yet. This is particularly true of Britain’s services sector where many companies have been shielded from the impacts of the TCA because of the pandemic travel shutdown.

“A lot of service providers who are gradually going back to travelling to Europe will run into a forest of paperwork,” says Anand Menon, director of the think tank UK in a Changing Europe.

“Many of them are as-yet blissfully unaware of that because many people aren't travelling.”

The Government may have been able to grit its teeth and push on so far, but could face a fierce showdown once Global Britain gets back on the road.

If that is enough to pull both sides back from the brink, both businesses and households are sure to be grateful.