A look at the impact of UK severing ties with the EU on trade, foreign direct investment, various sectors of the British economy, and in general the future of British citizensThere was much anticipation and anxiety in the air as the Prime Minister of the United Kingdom (UK), Theresa May, triggered Article 50 on 29 March 2017. This meant that the UK has two years to complete formal...
A look at the impact of UK severing ties with the EU on trade, foreign direct investment, various sectors of the British economy, and in general the future of British citizens
There was much anticipation and anxiety in the air as the Prime Minister of the United Kingdom (UK), Theresa May, triggered Article 50 on 29 March 2017. This meant that the UK has two years to complete formal negotiations with the rest of the member states of the European Union (EU) and finally make preparations to depart from the 60-year-old collaboration.
The UK's exit from the EU has been far from a smooth journey. With Brexit causing major political divisions, the matter was finally taken to the Supreme Court and it was left to the Supreme Court to determine whether the UK government requires parliamentary approval to initiate Brexit. Following the Supreme Court's decision on 24 January 2017 that the government cannot trigger Article 50 without parliament's authorization, the Houses of Common and Lords finally voted in favor of the Brexit Bill, allowing May to trigger Article 50 of the European Union Treaty.
From the chain of events seen so far, it is evident that the UK's decision to leave the EU has resulted in political, economic and social upheaval. This article analyzes the potential implications of Brexit on future trade relations, various industry sectors, and the future of EU citizens currently residing in the UK. The article ultimately aims to explore the consequences of leaving behind a 60-year-old relationship which appears to be the biggest de-merger ever to have taken place globally.
Trade impact - worst or otherwise
Following the UK's decision to depart from the EU, one question has gripped the entire nation: what will become of EU-UK trade relations? Currently, the UK is part of the single market which allows UK-based firms to sell their goods to EU customers without having to pay additional taxes. Similarly, being part of the single market also ensures that UK companies are able to import from the EU tariff-free. Brexit brought about looming uncertainty in relation to the UK's position in the single market. May later clarified the position by stating that the UK will pull out of the single market. In light of this, the Government has to ensure that it creates a suitable deal which will cause minimal disruption across various industry sectors and continue to draw in foreign investment. Below are some of the trade options that the UK may have post-Brexit:
- UK-EU deal – a possibility
The EU is the largest export and import partner for the UK and hence one might think that the Government would want to ensure that this partnership continues post-Brexit. Although May has ruled out the single market, the UK may strive to strike a free trade agreement with the EU which will ensure that the UK is exempt from paying additional tariffs, taxes or quotas on goods and services, when trading with the EU. Free trade deals differ from the single market in the sense that there may be exceptions. For instance, certain industries may be exempt from this agreement and other goods may not be covered. Moreover, imported goods would have to comply with the law of the country they were being sold to.
However, the negotiations in this regard may be slow and complex. There is a level of animosity between the UK and EU given the circumstances in which the UK has exited from the Union. Immigration played a major role in the referendum with the free movement of people falling under negative scrutiny. Recently, the EU considered excluding the UK from talks regarding its trade policies following warnings that Britain will become a competitor for striking trade deals post-Brexit. This is a clear example of the animosity between the EU and the UK and hence striking a deal may be a slow and cumbersome process.- World Trade Organization – a friend or foe for Britain post-Brexit
Britain may face a tough time when it comes to negotiating a deal with the EU. In the absence of a deal between the UK and EU, the UK will be required to follow World Trade Organization (WTO) rules. Under WTO rules, each member must adhere to the 'most favored nation' principle which includes charging the same tariffs to all other WTO members. The only exceptions to this principle are that countries can choose to enter into free trade agreements such as the EU or EFTA and can choose to give favored market access to developing countries. The UK is a current member of WTO and does not need to reapply once it leaves the EU. However, presently the UK operates in the WTO under the EU's set of 'schedules'. These schedules comprise a list of commitments that set the terms of the EU's tariffs, its quotas and its limits on subsidies. Once the UK exits from the EU, it will need to agree its own set of schedules at the WTO. The UK would also face the EU Common External Tariff as EU exporters would simultaneously face tariffs adopted by the UK.
While many believe that cutting the cord from the EU will allow the UK to display so called ''Sovereignty'', the Government has displayed a desire to replicate the existing trade regime as far as possible. With regard to tariffs in particular, copying and pasting the current structure may be fairly straightforward. The EU's schedules contain 'ceiling' for tariffs on a range of goods, such as 10% on cars. Once the UK has copied across these tariff ceilings, it could apply lower (but not higher) tariff rates in the future. This approach could be seen as an approach which would ensure stability. Furthermore, under the WTO rules, the EU will be prevented from imposing unfair and punitive tariffs on UK exports and the UK may be able to secure access to the EU's markets in this regard.
However, the copying and pasting approach may not apply to all aspects of the schedule. For instance, there are some areas, notably on quotas and subsidy limits, where the UK must reach an agreement on what share of the EU figure it takes. Potentially this could lead to a three-way negotiation between the UK, the EU and other WTO members. While the talks may allow the Government to display autonomy and ensure that the best interest of its citizens are met, one has to take into account the difficult relationship between the UK and the EU, and the impact this may have during the course of the negotation as well as the prospect of negotiating with 164 other countries. - Looking elsewhere for investment – colonial past helps?
With the divorce from the EU fast becoming a reality, it is natural for the UK to be looking for other trade allies. The US would be top of the list as industry sectors such as the UK financial services are vast and well-known to American firms. Moreover, President Trump has been a strong advocate of Brexit and seems keen to continue "the special relationship." However, a UK-US focused trade agreement may not be as attractive for many, given Trump's unpredictable demeanor. Trump's motto of 'keeping America first' may threaten to undermine the UK's interest. For instance, there is fear that the US may demand greater access for cheap American farm product imports which would undercut farmers in Conservative held constituencies. There is further fear that any deal might require the UK to accept the US regulatory structure. There have also been suggestions of the NHS being open to US businesses which will no doubt be an unpopular incentive for many people. Thus when it comes to negotiating deals with the US, May may face a tough challenge in holding her ground and striking a deal in the best interest of the UK.
Recently, the Chancellor of the Exchequer, Philip Hammond, visited India along with Mark Carney, the Governor of the Bank of England, in an attempt to "bang the drum for British business". The UK prides itself for its historical links with India and hopes that this will ensure India becoming an important trading partner post-Brexit. Government officials were particularly keen to promote British financial technology abroad which has a growing consumptive market in India. There has been a notable collaboration between the UK and India. For instance, British firm Standard Chartered, which employs over 18,000 people in India, recently sponsored a new Chevening Scholarship program between the two countries which will feature eight top Indian leaders of the future attending an intensive course in financial services in London this year. Additionally, a move encouraging investment from the city of London into India's energy sector has also been set into motion through a UK-India sub-fund of India's National Investment and Infrastructure Fund. With a core investment of £120 million from each government, the objective is to raise £500 million for Indian infrastructure projects. While these examples highlight a start of a strong partnership between the two nations, immigration will continue to be an important factor when it comes to securing any future deals. Indian Prime Minister Narendra Modi had made it clear during May's last visit to India that the UK would have to relax its rules on immigration and make it easier for Indian nationals to work and study in the UK. It will be interesting to observe whether May will relax the rules, and the potential impact on UK-India relationship should May refuse to ease the rules.
Impact on foreign direct investment
With the position on post-Brexit trade deals still unclear, there is a certain cause for anxiety and apprehension among businesses. On top of that, the value of the pound has declined, hitting investor confidence. However, has Brexit caused as much damage as emphasized by "pro-remain with the EU" groups? Statistics show that following Brexit, the GDP increased by 0.7%, up from 0.6%. Moreover, investor confidence may not decline despite previous scaremongering. A reason for this could be put down to the weak value of the pound post-Brexit being a blessing to multinational companies as their profits are often calculated in dollars. Hence, these companies may experience higher profits should the strength of the pound continue to remain weak. It will be interesting to see if there is a rise in the number of foreign businesses operating in the UK as they strive to take advantage of the weak pound. However, as the talks between the UK and the EU progresses, businesses are likely to pay close attention to factors such as migration, customs and tariffs.
Business sentiments – positive or negative
It is not inaccurate to suggest that most businesses would ideally like to be part of the single market. After all, this type of trade deal eliminates tariffs, quotas or taxes on trade, and also encompasses free movement of goods, services, capital and people. Furthermore, the single market strives to ensure unified rules for packaging, health and safety standards, which makes it convenient for companies to conduct business throughout EU. Hence, it is hardly surprising that businesses that trade throughout the EU are alarmed at the Prime Minister's plans for the UK leaving the single market and potentially the customs union. Unless a new trade deal is put in place, UK companies face tariffs on imports and exports with the EU, tighter custom checks and restrictions in recruiting talent from different EU countries. In the event that the UK is no longer part of the EU's General Data Protection Regulation framework, companies who want access to both UK and the single market will be required to monitor standard setting. As the UK ceases to have access to the single market, there may be calls for the restructuring of contracts with compliance responsibilities facing changes as well. Investors may be reluctant to invest in the UK due to the uncertainty surrounding it which may increase the risk across all businesses and future business deals. After all, the UK was seen as a gateway for foreign companies to gain access to the single market which made it an attractive market for many investors.
It may be useful to briefly explore the impact of Brexit on various industry sectors which form the backbone of the British economy and assess any potential risks facing these industries.
- Automotive industry
This industry which has been identified as a "priority industry" by many is worth approximately £19 billion to the UK economy and employs nearly 800,000 workers. The EU is the largest trading partner of the automotive industry and hence, it ideally requires unrestricted access to the single market. The biggest concern for automotive production is how potential tariffs, custom charges, and other barriers between the UK and the EU single market could change the dynamics for an industry that relies on an integrated global supply chain and cross-border trade in both components and final products. New tariffs, customs charges, and other barriers between the UK and the EU single market may impact on costs and profitability. Moreover, modern car production is built around just-in-time manufacturing (JIT) which keeps inventory at low levels and brings in new parts at the precise point at which they are needed. However, border delays could jeopardize the operations which may occur once the UK leaves the single market. - Financial services
This industry is worth approximately £120 billion to the UK economy, and employs nearly 1.1 million workers. Similar to the automotive industry, the financial services industry would also like access to a free trade deal with the EU as EU legislations give fundamental underpinning to Capital Markets, Securitization and bank lending. UK-based firms may risk losing essential passporting rights when selling services to the EU. A widely quoted report suggested that up to 75,000 financial jobs could be lost in the event of the UK leaving the single market with HSBC, Goldman Sachs, and the UBS planning to move jobs out of the UK, although others have committed to new offices in London. Moreover, it could become more expensive and difficult for security issuers in the UK to offer securities around Europe. - Food, drink and farming
This industry is worth nearly £92 billion to the UK economy, and employs nearly 1 million workers. Food production is one the UK's largest manufacturing sector, with food and drink manufacturers claiming the industry to be bigger than the car and aerospace sectors combined. A recent survey from Morrisons showed that only 52% of food consumed in the UK derives from British farmers. Hence it is not in the interest of the manufacturers to pay any tariffs when UK produce is sold in the EU and on import of ingredients that cannot be grown in the UK.
If the UK loses access to the single market, agriculture as a sector stands to be effected to a great extent. More than 50% of farm income derives from EU subsidies. According to the Consultancy Agra Europe, nearly 90% of farmers may go out of business if the government is unable to find alternative sources to the EU subsidies. - Oil and gas
While the UK is in the EU, it is part of the Energy Union Strategy project whose aim is to integrate the energy market throughout the EU and coordinate energy supply between the different member states. With security of energy supply being a key concern, as the UK severs its ties with the EU, and with declining North Sea production, the UK Government may seek to promote the development of domestic shale oil and shale gas resources. The successful development of shale oil and shale gas reserves in the UK will largely rest on two key issues: economic viability and concerns of the public regarding its safety. The Government will have a tough job assuring citizens that this alternative energy source is a safe and sustainable option.
EU citizens post-Brexit?
A Dutch woman was recently informed by the Home Office to "prepare to leave" after 24 years of residing in the UK. This highlights the stress and anxiety felt by 3.5 million EU citizens currently living in the UK, with many others facing fears of their employment being terminated, bank accounts being closed, and rental agreements being revoked if their rights to reside in the UK are not guaranteed. Businesses also face fear as under the EU rules, they were able to hire overseas workers without much inconvenience.
Moreover, May's fierce anti-immigration reputation as Home Secretary may not provide much optimism for the EU citizens currently residing in the UK. It is essential that the Government provides a clear outline of the steps taken to ensure that the rights of the EU citizens are protected post- Brexit.
UK as a whole post-Brexit?
At present, it is difficult to ascertain the precise effect of Brexit on the future of the UK economy. The depreciating value of the pound may attract short-term investment; however, it is difficult to predict whether this will continue in the future. Once the talks between the Government and the EU commence, investors shall be in a better position to gain clarity with regards to the UK's position on trade deals as well as on the issue of immigration. Investors seek clarity and stability, and hence it should be the aim of the Government to provide a clear picture.
On top of the economic chaos created by Brexit, there is also much political instability. May's decision to call for a surprising snap General Election on 8 June 2017 is an example of the political turmoil caused by Brexit. Each of the political parties have their own views surrounding Brexit deals with the Conservatives favoring a tough negotiation (hard Brexit), Labour opting for middle ground (soft Brexit) and Liberal Democrats remaining anti-Brexit. Therefore, the outcome of the election will lead the direction of the talks.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.