Elections can sometimes have important consequences. After a bumpy 43-year relationship, a majority in United Kingdom voted to leave the European Union. The economic and trade implications will be significant—for the UK, for Europe and for the global economy.
What Brexit Means For UK Trade
The vote to leave has now triggered a complicated, uncertain and messy process of withdrawal. Negotiations will be needed at many levels—within the UK, within the European Union and within EU member states. Many political leaders in the UK and across Europe have suggested that little will change immediately as intense, fraught negotiations unfold across weeks, months and even years.
But businesses dislike two things most of all—risk and uncertainty. The Brexit vote has now delivered both in spades. While officials grind away at the interlocking issues of dissolving UK’s membership in the EU, companies that export goods and services will be sitting down on Monday morning to start implementing contingency plans or draw up options.
About half of UK’s exports go to the EU. At some point, UK-based companies will lose preferential access to European markets that they currently receive. The costs of doing business and engaging in trade with Europe and with key trading partners will increase.
Leave campaigners said that Britain would immediately negotiate a free trade area with the EU. This is—frankly speaking—wishful thinking. A new free trade agreement is unlikely to be under negotiation while dissolution is underway.
There are a whole range of issues to be addressed in contemplating new trade arrangements. Some of the more obvious include: 1) who will comprise the UK government negotiating such agreements? 2) when will these talks begin and how soon might new trade deals enter into force?, 3) to what extent one can have similar access as under EU rules without being de facto in the EU?; and 4) on a purely practical level, who is going to do all this work?
1. David Cameron will resign as party leader and Prime Minister by the end of summer, with many other senior pro-EU ministers likely to follow. The Conservative party will likely choose Boris Johnson, Theresa May or Michael Gove as leader. Leadership changes are likely to be accompanied by shifts in ministries that will make it harder to predict future policy directions.
2. Trade negotiations are painstaking, complicated and move at a glacial pace. Those that are concluded quickly are often political trophies rather than documents that offer genuine change in market access or economic impact. The EU-Korean FTA took around three and a half years to conclude, which is break-neck speed in the world of trade negotiations.
3. The UK already has aligned the majority of its standards and customs regulations to EU provisions, and there is a serious political imperative to having a potential trade agreement concluded quickly. Like many clubs, the EU has rules for its members. Norway and Switzerland, oft cited by Leave campaigners, do still pay a substantial contribution to the EU budget and accept free movement of people. They have no ability to influence the product, a labour or environmental standards that the EU sets for its goods or services, whether one regards each regulation as warranted or not.
4) The pool of officials within the UK available for negotiating all the needed trade and economic agreements is extremely limited. Each major agreement represents a substantial investment of time and energy and few countries have enough trained, capable warm bodies to handle more than one or two agreements simultaneously. The UK will have to be working on Brexit, plus a new trade agreement with the EU and presumably renegotiating existing bilateral investment treaties, new trade agreements of all sorts and putting as many of these into place as quickly as possible without making any major mistakes. All while managing a rapidly shifting economic picture with completely new constellations of business interests that are not in alignment with previous negotiating positions that may have been promoted in the past. Officials will have to do so under what is likely to be an unstable political situation domestically.
New Free Trade Agreements
Nowadays the most consequential (potential) trade regimes, be it the EU, TTIP, TPP or RCEP are defined by high-income countries or major markets trying to control product and service standards around the world. By leaving the world’s largest market, the UK will concede influence.
As America is discovering, trade deals require great political capital. The rest of the world will not be rushing to sign new agreements with a newly independent UK, given the political climate at the moment. Nor will the UK have the bandwidth to engage in trade negotiations with many partners while trying to sort out relationships with Europe.
Monetary Policy and Currency Impacts
A weaker pound will make British exports more attractive, but will raise input costs and prices for consumers. Given that much of Britain’s vehicle, machinery and chemical exports rely on foreign sourced raw-materials, the benefit of a weaker pound will depend on the amount of value added in the UK.
Many British and International firms are partly based in the UK for its tariff-free EU market access. Some may now decide it is preferable to be based inside the EU or in a lower-cost manufacturing area such as East Asia.
While service exports will become cheaper, many financial services--the main source of growth in Britain’s economy--will become less attractive. EU-wide ‘Mutual Recognition’ of financial supervising authorities has made London an attractive place for foreign banks to access the common market. The EU’s steady but successful move toward banking union would have allowed greater access for British banks, but this is opportunity now missed.
Tourism and Tertiary Education exports should prosper, if people are still able to enter the country – a question worth pondering given the tone of the Leave campaign.
Impact on Asian Economies
It remains to be seen how many financial firms will reduce staff strength in the UK and where they will move jobs—to Frankfurt, Paris, finance-friendly Dublin, or beyond Europe to New York, Singapore or Hong Kong? Hong Kong may be regarded as too unstable and overly exposed to China. Singapore, despite recent layoffs, is likely to expand at London’s expense in the long run.
The Filipino press has already warned that a weaker pound will lead to lower remittances. Over £1 billion is sent back by overseas Filipino workers each year, and thousands of other Asians working in the UK will see the foreign value of their remittances decrease.
Turbulence in the UK economy and a weaker pound will impact consumer confidence and import demand, which will affect all Asian economies, especially producers of discretionary goods such as consumer electronics and cars.
Some important manufacturers, such as autos, currently based in the UK to serve the European markets, may also shift production to the continent. Companies may not move jobs immediately, as the UK has not been shut out of the EU overnight, but firms will be responding to uncertainty, risk, higher costs and rising tariff levels by shifting investments elsewhere.
Britain’s main focus will rightly be on understanding all of the unprecedented steps involved, and negotiating the exit through invoking article 50. Some have argued this should be done quickly to quell the uncertainty. But Gus O Donnell, who headed the UK civil service between 2005 – 2011, said:
“If I were cabinet secretary I would be saying there is no great rush about that, because this is a two-year process – and believe me this is not a simple process. It was designed to make leaving very difficult for the leaving country … It took Greenland three years to sort out its exit and they only had one issue – fish.”
Greenland’s population is 1/1000th that of the UK and would fit inside a football stadium.
The European council president has talked of “wider reflection” on the future of the EU. Right-wing parties across Europe are going to be emboldened and demand their own referenda.
The Brexit vote will have substantial implications for companies. In the run up to the election, many firms chose not to speak up and argued that it was not their place to comment. But the costs of dissolution from the world's largest market will hit many of the UK’s biggest and most successful firms, as well as many foreign companies that have been based in the UK to service EU and global markets. These firms should spend some time pondering whether sitting on the fence was such a wise choice. The costs and consequences of silence are likely to be substantial.
***This Talking Trade blog post was written by a sad duo at the Asian Trade Centre, Dr. Deborah Elms and Jack Coleman***