Tax & Accounting Blog

Analyzing UK trade post-Brexit

Blog, Global Trade, ONESOURCE July 12, 2016

After the United Kingdom voted to leave the European Union (EU) on June 23, there was enough material to fuel several news cycles.

“Brexit ‘shockwaves’ could derail TTIP trade deal,” The Independent led with. “US, EU resume trade talks despite doubts,” AFP reported. “Brexit was about politics and sovereignty, not trade zones,” was National Review’s reaction.

As the initial shock of this monumental decision wears off, we’re seeing more and more detailed analysis of what it means for global trade. Broadly, the vote in favor of a “Brexit” seems to create numerous barriers: importers and exporters will likely face an increase in duty rates, consumers will likely face higher prices, local businesses will likely face changes in regulation they’ve grown accustomed to.

More generally, the markets will likely face a period of prolonged uncertainty. No country has ever withdrawn from the EU before, so there is no precedent on the true timeframe for withdrawal nor for what economic benefits the withdrawing nation can salvage from the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 EU would allow the UK to have full control over its trade policy, opening the door for Britain to develop new commercial ties with countries outside the EU.

While free trade is a large part of the economic upside that EU membership provides, the United States is the UK’s largest export destination, and this linkage is not governed by any free trade agreement.

The EU has 32 free trade agreements in force and another 24 in various stages of application or negotiation. If and when the UK does leave the EU, UK lawmakers have several options. They can vie for access to the EU’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 UK is an import-dependent economy. Overall, it buys approximately $147b more from its European neighbors than it sells to them, and in total, trade with other European countries represents 58% of its exports and 63% of its imports.

Looking closer, the UK does import substantially more from the rest of the EU than it exports to it. The UK’s trade with the other five largest EU economies shows a trade deficit of more than $100b. 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.

 

UK Trade with European Union’s Largest Economies
Imports Exports
Germany $100b $46.5b
France $41.5b $27b
Italy $28.1b $13.4b
Spain $22b $14.5b
Netherlands $50.7b $34.2b
Total: $242.3b $135.6b

Source: MIT Observatory of Economic Complexity

The question is: 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 UK should look carefully at contingency plans for trading and operational management.

 

Note: A longer version of this article will be published in the August edition of American Shipper magazine.

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