Brexit letter means end of “business as usual” for the UK

Economic growth

SHARE THIS STORY

UK exports Apr17The UK economy set off into the Great Unknown on Wednesday, when premier Theresa May officially notified the European Union of the UK’s intention to leave (Brexit) by the end of March 2019.  In response, the EU released its draft guidelines for the negotiations:

   “The first phase of the negotiations should aim to agree on a divorce settlement on the rights and obligations of the UK.  It would have the goal of providing as much clarity and legal certainty as possible to citizens, businesses, stakeholders and international partners on the future
   “Once that political criteria is met, the EU would be open to talk about a future framework”

Critically, the guidelines confirm that the details of a future relationship and trade deal will only be discussed once the UK has left.  They also suggest that the terms of trade could be very different from today:

The future relationship as such can only happen when the UK becomes a third country“:

“Any future trade deal cannot amount to being a member of the single market.  It must ensure a level playing field in terms of competition and state aid, and must encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping.”

“Any future agreement will need to be ratified by national parliaments, which could take up to two years.  Therefore, the guidelines foresee a transitional phase to “bridge” the time between the divorce settlement and when the UK leaves the bloc in 2019, and a future trade deal, which can only be negotiated in detail when the UK is already out.

“Any such transitional arrangements must be clearly defined, limited in time, and subject to effective enforcement mechanisms.”

As I discussed in September, this means that the UK’s trade options – given its “third country” status – are now very limited.  Theresa May has already ruled out continued membership of the Single Market and Customs Union, and refused to accept the jurisdiction of the European Court of Justice.  Therefore, the only 2 options available from March 2019 are a Canadian-type deal, or a fall-back to World Trade Organisation (WTO) rules.

Critically, these alternatives mean there is no “business as usual” option.

Optimists had hoped that nothing would really change post-Brexit.  But today it is clear that the EU, like any club, will not allow non-members to have the same benefits as members. Instead, companies and investors are going to have to learn to live with growing uncertainty as the clock ticks down to March 2019

   A new free trade agreement (FTA) for goods and services might be finalised quickly after Brexit, by 2020-2021
   But it might take much longer, say to 2025 – Canada’s own deal, after all, took 7 years to finalise
   Spain’s move to link a deal to agreement on a new status for Gibraltar might make it impossible to do a deal
   Other EU members might follow, making Brexit a Pandora’s Box with trade held hostage to political issues

We can all hope for the best, but hope is not a strategy.  It therefore seems prudent to assume, as a base case, that the UK will be operating on the basis of WTO rules from March 2019.  It certainly won’t have any FTA deals in place outside the EU by then, given that the UK can’t start to negotiate these until Brexit takes place.

This is not good news as the chart from the Financial Times confirms, given that 50% of all UK goods’ exports and nearly 45% of services’ exports go to the EU:

   The WTO has arbitrary tariffs such as 10% for cars, 7% for plastics, 16% for cereals and 36% for dairy products
   These will increase costs for UK consumers, and reduce the UK’s competitive position in EU and other markets
   In many industries such as chemicals, products move in and out of the UK as part of global supply chains
   Almost inevitably, therefore, companies will start planning to relocate back into the EU, to avoid the tariff

This is the Great Unknown in action, and it will create Winners and Losers.  Winners will plan for a very uncertain future, and create options which will enable them to profit from whatever developments take place.  Losers will bury their heads in the sand, and refuse to prepare for any change.

On Thursday, I will look in more detail at Brexit’s likely impact on the UK consumer, which adds further complications to an already uncertain outlook.

PREVIOUS POST

4.5 million tonnes of new US polyethylene exports on front-line as War of Words hits US-China trade

30/03/2017

“There isn’t anybody who knows what is going to happen in the next 12 ...

Learn more
NEXT POST

UK consumers face difficult times as Brexit unwinds the housing bubble, and financial services de-cluster out of London

06/04/2017

Brexit negotiations are likely to prove a very uncomfortable ride for UK consume...

Learn more
More posts
Financial markets head for (another) train crash as coronavirus starts to impact
17/02/2020

China’s industrial heartland of Hubei (pop 59m) and its capital Wuhan (pop 11m) have now been ...

Read
Coronavirus disruptions make global recession almost certain
11/02/2020

Last month, our Hong Kong-based pH Report colleague, Daniël de Blocq van Scheltinga, warned of the ...

Read
Your A to Z Guide to the Brexit trade negotiations
02/02/2020

A. Article 50 of the Lisbon Treaty set out the rules for leaving the European Union. As with most ne...

Read
Contingency planning is essential in 2020 as “synchronised slowdown” continues
12/01/2020

The IMF has now confirmed that the world economy has moved into the synchronised slowdown that I for...

Read
Boris Johnson will have to disappoint someone in 2020 as the UK finally leaves the EU
15/12/2019

Finally, after three and a half years, the UK has reached “the end of the beginning” wit...

Read
ACS Chemistry & the Economy webinar on Thursday
10/12/2019

Please join me for the next ACS Chemicals & Economy webinar on Thursday, at 2pm Eastern Standard...

Read
What’s next for Brexit and chemicals?
04/12/2019

The UK is about to go to the polls again to try and decide the Brexit issue.  Chemicals will be one...

Read
Global economy hits stall speed, whilst US S&P 500 sets new records
01/12/2019

Whisper it not to your friends in financial markets, but the global economy is moving into recession...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more