How & why will trade be effected?
Currently, EU countries (including the UK) fully benefit from the EU’s Single Market. These benefits include:
- Absence of duties and quotas from EU Member States doing business and trading throughout the EU.
- The principle of free movement of people, which facilitates access for workers and services.
- Simplified customs procedures, which reduces the administrative burden of countries trading within the EU.
While the UK is an EU member, all British companies can sell their products and services to any customers in the EU without having to pay any customs duties to import those goods.
Following the UK’s decision to exit, a new trade agreement will soon be reached, affecting two things:
- Exporting and importing goods.
- Continuing the trade in services (including legal advice on big company takeovers).
Negotiations will also have to cover customs procedures, business, travel, passport controls and issues around regulation on environmental and health and safety standards.
However, if you trade with countries outside of the EU, you may find that deals that benefit you are easier to win, as you’ll no longer need a consensus from 28 countries. We’ll be returning to a world market that may offer cheaper alternatives, especially when it comes to food products.
What will be the impact on my business be?
This depends entirely on the deal the UK decides to strike. There could be many changes, and there is nothing to stop the EU from imposing quotas, which limit the number of goods and services that can be sold in Europe. The EU also has the option to impose tariffs - meaning both businesses and consumers will suffer.
The two most likely scenarios for a Brexit deal are:
- A comprehensive Free Trade Agreement (FTA) (which looks like the most likely alternative).
- The UK falling back on World Trade Organisation (WTO) rules and tariffs.
According to best estimates, in both of the above cases the cost of trade between the UK and the EU will increase. In 2016, about 44% of Britain’s exports in goods and services – £220bn of a £510bn total – went to other EU nations, making the EU the UK’s largest trading partner.
Below, you can see the value of UK exports per country - something that is likely to change when the UK leaves the EU. Rollover each square to see the value of the exports tothe UK in £million. Explore the data by right clicking to go a layer deeper, and left click to see the previous layer.
It is expected that some industries may suffer more than others once a deal has been reached. The industries most likely to be affected are motor vehicles and parts, electronic equipment and processed foods. The service sector is also expected to be heavily impacted. The total UK trade (goods and services) deficit widened by £3.4 billion to £8.7 billion in the three months to January 2018; excluding erratic commodities, the deficit widened by £2.6 billion to £8.9 billion.
The US is the UK’s second largest trading partner, with 17% of its exports. Brexit is unlikely to affect any of the UK’s trade deals with the US, but it will no longer be part of the TTIP trade deal between the EU and US.
Some industries may find that the wider trading realms mean cheaper deals, and without the so called “red tape”, deals may go through for businesses quicker than they do now.
According to government analysis in a leaked Whitehall document in January 2018, under a comprehensive free trade agreement with the EU, UK growth would be 5% lower over the next 15 years compared to current forecasts.
The leaked document alleged that the "no deal" scenario, which would see the UK revert to World Trade Organization (WTO) rules, would reduce growth by 8% over that period. The document hypothesised that the softest Brexit option of continued single-market access through membership of the European Economic Area would, still lower growth by 2% in the longer term.
“We currently import from outside of the EU into the UK, so there is a risk that our customs practices here will change as a result of Brexit and that’s something we will have to adapt to. The financial uncertainty is the biggest threat at the moment and we have had customers mention the impact of Brexit to us. We are trying to do everything we can to ensure prices don’t have to rise, but that can’t be guaranteed with the current uncertainty and it’s something we will have to continually assess as time progresses.”Rob Williams - Director, Beaufort Leather
The graph below shows the predicted growth figures based on the three potential outcomes of Brexit (no deal, free trade agreement and soft Brexit).
The document stated that national growth would be 8% lower under a no-deal scenario, around 5% lower with a free trade agreement with the EU and about 2% lower with a soft Brexit option of single market membership over a 15-year period.
What if the UK doesn’t reach a trade agreement?
In 2015, the UK exported £133 billion worth of goods to the rest of the EU. It is predicted that the UK will experience a loss of at least £4.5 billion a year if it leaves the EU without negotiating a new trade agreement with it.
Without an agreement and with increased tariffs in place, UK businesses would see a sharp fall in exports as they become less competitive in both EU and global markets.
Even if the businesses choose to maintain a competitive edge by decreasing prices, it would mean lower profits for them. According to Oxford Economics, the long-term cost to the UK’s economy under the WTO trading guidelines, could be between 1.5 and 3.9% of GDP by 2030. They have also predicted that the UK’s exports would be lowered by 8.8%.
Although growth may suffer, and an article in The Spectator said that, ‘Our EU deficit also means, under WTO rules, that the UK pays less in export tariffs than it receives, creating several billion pounds in net revenues for the Exchequer each year. The surplus could be used to compensate sectors like cars and agriculture, where tariffs on UK exports are likely to be higher.’
What steps should I take now?
According to analysts from Open Europe, the best outcome now would be for the UK to strike an FTA with the EU to maintain as much access to the single market as possible.
As a business owner, now is the right time to take practical steps. There is a risk that the UK will lose the free trade agreement, meaning new tariffs and quotas could become a stark reality. As well as this, businesses could see a significant increase of red-tape administration complexities which may result in the slow movement of goods.
Companies with significant import and export activities need to put a plan in place to deal with this slow movement. You may consider moving part of your operation into the EU to minimise this risk.
Rahman Ravelli can answer any questions you have regarding the legal implications of EU trade, and can help you plan and prepare.