Brexit: What if there is no deal?

The UK lacks a credible alternative to the oft-derided agreement with the EU. At the same time, there is little political will to accept the current one. The immanent chaos has driven the Labour Party to call for a second referendum, even though its current leader Jeremy Corbyn has never numbered among the ardent remainers, having campaigned rather half-heartedly to stay in during the 2016 referendum.

While no one honestly thinks that No Deal is a viable scenario and forecasters bet on accepting the Withdrawal Agreement or delaying Brexit, there is still a slight chance that it might happen. This would certainly usher in negative consequences for even the smallest or poorest Member States, such as Bulgaria.

The possible economic effects of No Deal on Bulgaria are not substantial but they are concentrated and would be noticeably felt by particular sectors of the economy. Only 1% of Bulgaria's trade is directed towards the UK but the Bulgarian economy is tightly linked to the European economy and Germany in particular, which means a slowdown might still occur if the UK leaves the EU in a disorderly fashion. The greatest risks will be concentrated in the pharmaceutical industry, as well as in particular exports such as furniture and textiles and the logistics sector servicing those exports.

Pharmaceuticals: potential for chaos

According to the ABPI (Association of the British Pharmaceutical Industry), over 45 million drug packages are exported by the UK to the EU, while 37 million get imported from the EU every single month. Bearing in mind how highly interconnected and inter-regulated the pharmaceutical industry is, No Deal represents a huge risk for the proper supply of medicines. This risk extends to Bulgaria as well.

Deyan Denev, head of the Association of Research-based Pharmaceutical Manufacturers in Bulgaria, says that the lack of a proper transition period might strand container loads of medicines, active substances and medical accessories at customs for months. Denev emphasizes that some of the most advanced types of treatment, such as gene therapies, have a short shelf life. Life-saving modern treatments, partially or fully produced in the UK, might become unavailable in the EU.

Another issue is regulatory risk. Since the UK would opt out of the European Medical Agency, which operates as a regulatory network, original drugs that are registered in the UK would become unusable until the license is migrated to an EU state. If the pharmaceutical industry is given a deal that includes a transition period, then that risk wouldn't be an issue as a lot of the big companies have already started generating manufacturing capacities in the EU and migrating licenses. No Deal runs the possibility of catching the pharmaceutical industry mid-process.

Finally, No Deal will inevitably introduce some tariffs into the equation, which will necessarily slow down the process even more. While under WTO rules pharmaceuticals should run 0% tariffs, that rule is based on a list of drugs that hasn't been updated since 2012. Therefore, according to AstraZeneca, the UK's second-biggest pharmaceutical company, over 1000 pharmaceutical products and 700 active substances would be subject to tariffs ranging from 4.0% to 6.5%. Due to the state of drug manufacturing in the EU, a drug might cross the borders between the UK and mainland EU several times before it is fully manufactured. In that scenario, certain drugs might incur tariff penalties multiple times.

For Bulgaria, this carries major risks. The Bulgarian market for pharmaceuticals is small and relatively poor, whereas certain government regulations make a lot of drugs economically non-viable. According to Evgeni Tasovski, CEO of the Bulgarian Generic Pharmaceutical Association, No Deal might drive costs up by as much as 25% over the next three to four years. The process would be too chaotic to predict properly, though.

Exports and Logistics

In addition to pharmaceuticals, one of Bulgaria's major exports to the UK is furniture. The biggest danger No Deal Brexit poses to that sector is tariffs, which would run at 6% under WTO rules. The even bigger risk for Bulgarian exports that runs from tariffs is a bureaucratic slowdown at customs.

According to Genoveva Hristova, managing director of Ligna Group - a Bulgarian-British company specialized in hotel furnishing, the biggest issue for the industry before Bulgaria's accession to the EU was releasing goods from customs. The 6% tariff was something one could plan around, but if inventory pieces were stuck in bureaucratic hell, a British client would be unlikely to do business with a Bulgarian company again. If No Deal Brexit happens, finalizing deals with British partners would only get harder.

Ms. Hristova recommends that Bulgarian companies seeking to avoid problems at customs after a possible No Deal Brexit should open British-registered subsidiaries to handle all exports and delivery to the British clients. This way, the process is smoother and all customs bureaucracy is handled by the company on both sides rather than the clients who might not wish to engage with customs. However, maintaining a British subsidiary is very rare for Bulgarian furniture manufacturers and it is not a move readily available to all.

The Bulgarian logistics sector would also feel the effects of No Deal - all goods exported to the UK would fall into the grip of new bureaucracy and tariffs. The new barriers would undermine businesses transporting the goods. According to Hristo Hristov, CEO of logistics firm Discordia, its clients have already made alternative plans and chosen to develop markets other than the UK (such as Germany) due to the disruption that Brexit continuously causes to deal-making and long-term business planning.

According to Hristov, the UK is not, however, a major market and losses from tariffs will be low. As long as the sector could get a clear warning on what the tariffs would actually be, businesses would be able to plan accordingly. Therefore, the uncertainty surrounding Brexit negotiations is a major issue for him. Long-term deals cannot be finalized when one doesn't know the strength of the pound in a week's time, let alone two or three years from now. Some deals have fallen through because the Bulgarian and British sides have been unable to agree on the currency to use.

Genoveva Hristova says that even though Ligna Group operates in the UK through a subsidiary, the currency in which all deals are being struck is the euro, not the pound. As long as no clear-cut decision is reached on Brexit in Westminster and Brussels, the pound will keep fluctuating, which makes Bulgarian business dealings with British partners far riskier.

Citizens

No Deal Brexit poses another major headache for Bulgarian and British citizens alike. May's deal envisages that EU citizens who have arrived by the end of the proposed transition period could apply for "settled" status if they've spent 5 years in the UK. Even if the EU citizens have not spent the required time, as long as they apply before the end of 2021, they would achieve "pre-settled" status, with the possibility of receiving full "settled" status after they reach 5 years of residence in the UK.

Under No Deal Brexit, this rule does not apply and only those who've arrived in the UK before March 29, 2019, would qualify for applying for "settled" status with the end-2020 application deadline. While documents released by the UK government claim that the UK would be looking for reasons to give people status rather than reasons to deny it, this is a much tighter deadline that might leave many EU citizens, among them Bulgarians, in limbo.

In case of No Deal, there would be no agreement with the EU on the status of British citizens residing in EU countries or what the UK government's policy would be towards EU citizens who arrive after March 29 or fail to achieve "settled" status. This necessitates a series of bilateral agreements between EU Member States and the UK based on reciprocity. Multiple countries in the EU, such as the Czech Republic, Poland, Austria, and others, have already guaranteed the rights of British citizens to reside and work on their territories in order to get good terms for their own citizens in the event of No Deal. The European Commission has also advised the Member States to seek such arrangements.

Bulgaria has a special interest in arranging a beneficial reciprocal relationship with the UK on its citizens. According to UK statistics, over 86 000 Bulgarians were registered as living in the UK in 2016 and that number might be as much as twice as high when counting Bulgarian students in British universities. Meanwhile, only around 7000 UK citizens residing in Bulgaria. According to diplomatic sources, the British embassy in Bulgaria is actively negotiating with the government for a provision protecting UK citizens' rights.

According to the Bulgarian government, there is a plan in place to deal with No Deal Brexit that includes amendments to the Law on Foreigners. Moreover, the government will work with the British embassy to hold information sessions for UK citizens in the event of No Deal Brexit. These measures still fall short of a clear statement regarding British citizens' rights but they at least demonstrate that the government is working on the issue, which is a positive development when set against the total lack of information on the matter at the beginning of January. However, as long as a concise declaration on British citizens' rights is lacking, the future of Bulgarian citizens in the UK remains somewhat at risk.