Brexit on Trade – Market Commentary
As the UK scrambles to finalise a deal to leave the European Union, ahead of the European leaders Summit on the 25 November, stumbling blocks remain over the UK’s access to the EU single market and access to UK waters, all showing signs of having an impact on global trade.
The UK Prime Minister Theresa May is under pressure from MPs in her cabinet who are divided over the Brexit draft withdrawal agreement which the EU will consider at the summit, but it is yet to be approved by parliament. The 585-page document focuses on the terms of the UK’s departure.
At present, EU countries including the UK, fully benefit from the EU’s Single Market, which includes the absence of duties and quotas for EU Member States doing business and trading throughout the EU and simplified customs procedures.
So what would be the real impact on trade? A recent study by PWC shows that Belgium, the Netherlands and Germany are among trading nations most likely to be impacted by a Brexit deal.
Among the top-10 trading partners of the UK in 2015, seven countries are part of the EU. In the same year, about 44% of UK export was directed to EU Member States, while approximately 53% of total imports originated in EU countries. Among western European countries, Belgium, the Netherlands and Germany export significantly more to the UK than they import from the UK. Depending on the price elasticity of the export products, these countries might witness a deterioration of their terms of trade with the UK.
For the UK, the services sector will be most impacted post-Brexit. The services industry constitutes around 80% of the total UK economy, according to a recent HM Treasury analysis. London being a global financial centre and among the largest in Europe, has about a third of its insurance and financial services exported to the EU and the UK has a trade surplus with the EU of £19.8Bn.
Brexit will affect trade-based fiscal regulation as well. Companies transporting products and services to and from facilities in different EU countries need to pay taxes. Due to corrections to intercompany transactions, products are often double taxed by different tax authorities, which is currently avoided through the EU arbitration convention.
Supply chains are becoming ever more important for competitiveness. The UK’s financial and professional services industries; exports in mining and chemical products, transportation, telecoms, as well as the wholesale and retail sectors, are increasingly important to international supply chains. Companies making strategic capital investment decisions about warehouses, factories or logistic capabilities, would normally consider the UK as a location. But pending the uncertainty after the Brexit vote, these decisions may be postponed. If transaction costs of trade become too high, companies may reconsider their current or planned relocations in the UK.
Over the past twenty years, the EU has negotiated 36 free trade agreements with 58 non-EU countries. The UK would not benefit from agreements currently being negotiated or ratified with Brexit. The UK may choose to renegotiate trade deals with all these countries, but this will be a very time-consuming and costly process, impacting UK’s trade with the rest of the world.
According to research from the from the Netherlands Bureau for Economic Policy Analysis, in the case where trade between the EU and the UK would revert to WTO rules, the remaining 27 EU countries would experience a 0.8% GDP reduction in 2030. In a Free trade agreement scenario, the UK would face a 3.4% GDP decrease, versus a 0.6% decline for the EU’s 27 countries in 2030.
While Mrs May said she wanted Brexit to be “smooth and orderly”, its far more likely to be a bumpy road ahead. [November 2018, SPI Marine].