Can future UK trade deals compensate for Brexit?

Industry News | | MIC Customs Solutions |

A new report has highlighted the need for careful choices and sensible decision-making when it comes to negotiating a new trade relationship between the UK and the European Union.

It is no exaggeration to describe the UK's decision to leave the European Union as one of the most significant developments in the international trade landscape of recent years.

The narrow vote in favour of Brexit that resulted from the nationwide referendum on June 23rd sent shockwaves across the global market, with the value of the pound tumbling in the weeks that followed and triggering a change in leadership at the head of the UK government, with Theresa May succeeding David Cameron.

Now the dust is settling, Mrs May's new-look government is facing the task of planning and negotiating the country's exit from the influential economic bloc, with the maintenance of strong trade links between the UK, Europe and the rest of the world representing one of the biggest challenges. How the new prime minister handles this task will have considerable repercussions for businesses in Britain, Europe and elsewhere.

The challenges to trade posed by Brexit

The biggest challenge to the UK's import and export-driven industries posed by Brexit is the fact that quitting the EU will take Britain out of the European single market, the system by which the EU functions as one territory in trade terms, with no internal borders or regulatory obstacles halting the free movement of goods and services.

If the UK leaves the single market, British businesses could potentially be subject to customs charges, licensing constraints and other regulatory barriers when dealing with customers or other companies in EU nations, which could have a severe financial impact on those organizations that depend on trans-European trade.

Moreover, as a current EU member, the UK has no independent free trade agreements (FTAs) in place to facilitate trade beyond EU borders, as the union operates as a single bloc in all trade negotiations. As such, Britain will need to put replacement deals in place with the rest of the world if it wishes to maintain the same sort of preferential terms it presently enjoys as an EU member state.

New trade deals can help - but may not make up all the difference

A recent report from the Institute of Financial Studies (IFS) analysed the potential impact of Brexit, and came to the conclusion that new UK-centric trade deals are unlikely to fully compensate for the loss of European trading rights that would occur as a result of leaving the single market.

It said: "The EU accounts for 44 per cent of our exports and 39 per cent of our service exports. If the UK were able to access the European Free Trade Association's existing deals, they would cover over ten per cent of UK exports, which is more than the EU's current third-country deals.

"Countries such as China and India together account for 4.6 per cent of all exports and 2.6 per cent of services. Even small proportionate losses in trade (or lost growth in trade) with the EU would require quite dramatic - and probably implausible - increases in trade with such countries."

Additionally, an analysis by the Independent suggested that leaving the EU without a new free trade deal in place to govern the UK's future dealings with the bloc would cost goods exporters at least £4.5 billion (€5.21 billion) a year, underlining the importance of getting this right.

Making the right decision about the European single market

According to the IFS, the British government's choice regarding whether or not to pursue continued membership of the single market will have a considerable impact on how importers and exporters will hold up post-Brexit.

It noted that a goal of merely retaining "access to" the single market will be of limited use, as all World Trade Organization (WTO) countries already have this status, without seeing any benefits in terms of tariff elimination or reduced bureaucracy. These advantages will continue to only be available to fully-fledged members - yet for the UK to pursue this, it may need to accept that it will be subject to future regulations designed in the EU without UK input, creating significant problems for the financial services sector in particular.

Overall, it was estimated that single market membership could be worth four per cent of the country's GDP relative to reliance on WTO terms, with an FTA in lieu of single market membership likely to have an economic impact somewhere short of this total.

Report author Ian Mitchell, research associate at the IFS, said: "From an economic point of view we still face some very big choices indeed in terms of our future relationship with the EU."