Once seen as an unlikely outcome, the prospect of the U.K. crashing out of the European Union early next year without an agreement spelling out the terms of its exit is now being considered as a plausible scenario inside boardrooms.
“We didn’t have many no-deal queries ’til about a month and a half ago,” said Allie Rennison, head of EU and trade policy at the Institute of Directors, a British organization that represents business leaders. With political uncertainty climbing, “people are becoming much more aware of it,” she said.
Britain is slated to leave the EU on March 29. It would represent the first departure of a major economy from a comprehensive free-trade bloc in decades. On Thursday, a preliminary deal Mrs. May struck with Brussels on the terms of the exit triggered cabinet resignations. That heightens uncertainty about whether she can get the agreement through Parliament, or even retain power amid a revolt over the deal from a bloc inside her Conservative Party.
The government still has options, and parliamentary approval of the current draft deal isn’t impossible. But with less than five months to go, the costs and logistical challenges for businesses of a no-deal Brexit are coming into sharper focus. The British pound, a sort of barometer for how Brexit talks have fared in recent months, fell sharply against the dollar on Thursday.
Under an extreme no-deal scenario, companies in the U.K. will suddenly no longer get seamless access to EU markets. Executives and government officials on both side of the English Channel have warned of huge backlogs if customs officials must start inspecting goods moving between the U.K. and Europe. The U.K. government has warned that without a deal, goods that now move duty free would be subject to default World Trade Organization tariffs.
The transport, manufacturing and pharmaceutical sectors would be the hardest hit by a disorderly Brexit, some analysts say. BMW AG , which makes its Mini in England, is stockpiling parts and scouring the U.K. and Europe for warehousing space and parking lots—in case trucks hauling cars or parts get stuck traveling between the two. Pharmaceutical firms have been ordered to stockpile drugs, and food companies are hoarding ingredients.
The British government has published dozens of technical papers outlining the different sectors affected once the U.K. exits the regulatory umbrella of the EU. They range from U.K. imports from Danish sperm banks to how London’s massive derivatives market could be affected if suddenly cut off from EU clients.
But given the uncertainty about how Brexit plays out, a large number of smaller businesses aren’t doing anything to prepare. A recent survey by the Confederation of British Industry found that 42% of British businesses had made no contingency plans for Brexit. Many can’t afford the cost of making detailed fallback plans for something that may never happen.
Many others are, though. James Flahavan, the seventh-generation owner of Edward Flahavan & Sons Ltd., an Irish maker of oatmeal, said his company is doubling stockpiles at warehouses in the U.K. ahead of the Brexit deadline.
Irish businesses are especially vulnerable. Britain is Ireland’s biggest export market after the U.S., but Irish businesses also move much of their non-U.K. destined orders through British ports. Multihog Ltd., an Irish tractor maker, has spent €5 million ($5.7 million), a third of the company’s annual revenue, on preordering parts and stockpiling them, just in case.
“We do not want to store parts,” said Jim McAdam, Multihog’s chief executive. But if a no-deal Brexit triggers new tariffs, or delays shipments at the border between Ireland and Northern Ireland, which is part of the U.K., “our whole business has to be turned off.”
In some instances, the possible business repercussions of a no-deal Brexit are rippling beyond Europe. Kevin Hopper, managing director of Brian Yeardley Continental Ltd., a trucking company that specializes in transporting musicians and their gear, is flying this week to meet music executives in New York. Huge waits at British ports could make it slower to bus rock stars between gigs in London and Paris if Brexit goes badly, he plans to warn them. The situation is “very difficult to explain to American production managers,” he said.
The U.K. government is drawing up its own contingency plans—moves that seemed far fetched a year ago. The transport ministry is looking at leasing ferries to help bring in food and medicine, should London and Brussels fail to agree on customs regulations that would ensure exports and imports continue uninterrupted. The British army says it will help if need be.
Some issues probably can’t be mitigated by businesses alone. Take the trucking industry, for example. Once outside the EU, British truckers will need special permits to drive in the bloc. There are around 1,000 such permits allocated to the U.K. but some 38,000 trucks that regularly cross the English Channel, said Rod McKenzie at the U.K.’s Road Haulage Association.
“There is a disgraceful lack of government guidance,” he said. “It has been left too late.” Resolving the issue would likely require a bilateral treaty with France and Belgium, something that could take a while to negotiate.