Trade Trends: U.K. trade post-Brexit

   When the United Kingdom voted to leave the European Union on June 23, plenty of pundits suddenly became experts on British politics. However, a sober look at the economic and trade ramifications, particularly for the country’s production sector, were in the immediate aftermath more elusive.
   Broadly, the vote in favor of a “Brexit” seems to create numerous barriers: importers and exporters would face an increase in duty rates, consumers would experience higher prices, and local businesses would encounter changes in regulations to which they’ve grown accustomed. 
   More generally, the markets would face a period of prolonged uncertainty. No country has ever withdrawn from the European Union before, so there is no precedent on the true timeframe for withdrawal, nor for what economic benefits the withdrawing nation can salvage from the rest of the countries in the union.
   On the other hand, leaving the European Union would allow the United Kingdom to have full control over its trade policy, opening the door for the country to develop new commercial ties with those outside the European Union. 
   While free trade is a large part of the economic upside that EU membership provides, the United States is the United Kingdom’s largest export destination, and this linkage is not governed by any free trade agreement. Furthermore, the European Union is a much larger bureaucracy, and countries outside the union may well find it easier and quicker to negotiate with the United Kingdom directly than with Brussels. Regional business could in theory step up and fill the gaps left as imports grow more expensive. 
   This enhanced control, however, may not be worth the immediate and longer-term costs. 
   The European Union has 32 free trade agreements in force and another 24 in various stages of application or negotiation. The latter group includes the Transatlantic Trade and Investment Partnership, a historic trade proposal that would liberalize trade between the European Union and United States, which amounts to one-third of all world trade, according to Foreign Affairs. TTIP is at an advanced stage of negotiation—the United States considers it a companion agreement to the Trans-Pacific Partnership and has aggressively pursued both deals with the relevant domestic and international stakeholders—so liberalized EU-U.S. trade relations were likely to occur with or without the United Kingdom’s EU referendum. 
   If and when the United Kingdom does leave the European Union, British lawmakers have several options. They can vie for access to the union’s single market à la Norway, forge a series of new bilateral agreements à la Switzerland, or take a unilateral free-trade approach à la Singapore. They could also simply absorb the tariffs and trade restrictions as they apply to the rest of the world. 
   The numbers show that the United Kingdom is an import-dependent economy. Overall, it buys about $147 billion more from its European neighbors than it sells to them, and in total, trade with other European countries represents 58 percent of its exports and 63 percent of its imports.
   Looking closer, the United Kingdom does import substantially more from the rest of the European Union than it exports to it. The United Kingdom’s trade with the other five largest EU economies shows a trade deficit of more than $100 billion. Realistically, there is no obvious way to keep this trade free from duty while also reducing immigration and not sending payments to Brussels, the two primary things the “Leave” movement is understood to want.


Source: MIT Observatory of Economic Complexity

   Leaving the European Union would create logistical complexities for British importers and exporters. First, there will need to be jurisdictional changes in consumption taxes and new rules of origin to follow. Moreover, importers in EU countries may look for opportunities to source materials more efficiently—and they may well find them outside the United Kingdom, particularly if the pound recovers. The same holds true for non-EU countries that have a free trade agreement with the European Union. The United Kingdom will lose those important trade linkages. 
   The currency market is a big part of this story. The pound immediately lost value against the euro when the “Leave” vote was confirmed. Should markets continue to be bearish on the pound, consumers would face rising costs. This, combined with new duties, could be a double whammy for consumers because of the United Kingdom’s reliance on imports. 
   In this respect, the referendum has already impacted trade and commerce, regardless of whether or not the United Kingdom does end up actually exiting the European Union. And there are several scenarios that, despite the fact that “Leave” supporters won the referendum, would lead to the country remaining a part of the European Union moving forward. The referendum is non-binding, for instance, and it is possible that the British Parliament will simply never invoke Article 50, which permits withdrawal.
   For the currency markets to truly stabilize, markets will need more certainty, and there will probably be a high degree of uncertainty moving forward because of the unprecedented nature of withdrawal. Waffling on the invocation of Article 50 could on one hand make withdrawal seem less likely, but on the other exacerbate the uncertainty that can depress the pound and therefore make imports more expensive. 
   Is Britain’s economy too tightly integrated into EU regulation for a withdrawal to have anything other than a negative, material impact on trade? The markets reacted to the “Leave” vote accordingly, and companies that do business in or through the United Kingdom should look carefully at contingency plans for trading and operational management.