What Tech and Skincare Teach About No-Deal Brexit

Negotiations between the UK and EU on a post-Brexit trade agreement kick off next week, and both sides are already drawing their red lines. In a refreshing change of pace, most coverage points out that these tough statements are merely starting positions, with both sides likely to erase and redraw lines repeatedly in the name of compromise. Yet it all ends with the same underlying warning: Without a trade agreement that includes mutual recognition of regulatory standards, UK businesses selling goods into Europe are sure to suffer and may move production out of the UK. Trouble is, there is plenty of real-world evidence to the contrary, suggesting a no-deal Brexit on WTO terms wouldn’t be a disaster.

Those who fear a WTO Brexit acknowledge tariffs would be minimal. But they claim the real disadvantage would come from the lack of mutual regulatory recognition. If UK and EU standards differed, UK manufacturers allegedly wouldn’t be able to sell into the EU, cutting off their nearest and supposedly largest market. That seems logical enough on the surface, but there is a problem: The US and EU don’t have mutual regulatory recognition and still manage to trade a heck of a lot. America allows all sorts of things the EU frowns on, including chicken meat washed with chlorine and genetically modified agricultural products. Europe has much tougher data privacy regulations, and their standards for financial communication are so different that even basic educational articles require a good deal of revision for transatlantic use. Drug and medical device standards also differ.

Yet the EU still manages to be the US’s largest trading partner. Total goods and services trade was nearly $1.3 trillion in 2018, according to the Office of the US Trade Representative. $575 billion of that was exports. If this transatlantic trade relationship can be so robust without synchronized regulations, it strains credulity to think the UK’s trade with the EU will all but cease on New Year’s Day if they default to WTO terms—especially since they will be starting with zero barriers. Any regulatory divergence would take time to materialize.

Said divergence wouldn’t be an insurmountable obstacle. For example, in May 2018, Europe adopted sweeping new data protection rules under their General Data Protection Regulation (GDPR). This affected every American company doing business with EU citizens, giving them a choice: Make potentially sweeping internal changes to comply with the new rules, or leave the market and turn off an important revenue stream. Naturally, companies chose the former, opting for headaches over lost earnings. They adjusted their disclosures and business practices in Europe as needed and continued doing business there. Regulatory divergence was a change, but not a prohibition.

For a longer history of companies navigating dual regulatory systems, look to the skincare industry. The EU has much tougher restrictions on active ingredients than the US. But rather than balk at transatlantic trade, product formulators on both sides of the ocean have taken advantage. The EU banned phenol, a chemical exfoliant, from personal care products decades ago. This was problematic for a (privately held) French skincare company called Biologique Recherche, which included phenol in its much-loved exfoliating toner, P50. The solution? Reformulate P50 to exclude phenol … but repackage the old illicit version as P50 1970 and continue selling it in the US, where phenol is still allowed, alongside the new formula. Not only did that preserve the company’s reach, but it created a new cult product and endless which is better? skincare blog posts, driving publicity.

A more recent example concerns another chemical exfoliant, lactic acid. In 2018, the EU banned any topical treatment with a 10% concentration of lactic acid or pH below 5. Bad news for Houston’s Sunday Riley, whose Good Genes lactic acid treatment had a cult following as well as a 7% lactic acid concentration at a pH of 3, forcing the company to pull it from the EU. But instead of leaving the market full stop, the company reformulated a special European version blending in some glycolic acid to reduce the lactic acid concentration and raising the pH to 3.5. That got Good Genes back on the shelf across the Atlantic and gave the (also privately held) company an opportunity to market a snazzy new Good Genes Glycolic to US consumers—another publicity win.^[i]

These are all just anecdotal examples, but they illustrate how companies’ drive to preserve and boost profits is a darned good motivator to overcome regulatory obstacles. What is true for small skincare formulators and Tech behemoths should be true for factories and service providers all over the map. People who start and run businesses have a funny way of being people who don’t back down from a challenge—and who see opportunity and dollar signs where others see problems. Their ingenuity and chutzpah should be reason enough not to fear a WTO Brexit having a lasting impact on stocks.