Brexit and the UK Economy
Effects on Imports and Exports
At first glance, the economy of the UK is dazzling the International Monetary Fund, with an economic growth of two percent for the year 2016, making the country one of the fastest growing European economies.
After the British public voted in the Brexit referendum in June 2016 with a narrow 51.98 percent for the withdrawal of the country from the European Union (EU) the exchange rate of the British pound fell abruptly. For the customer, this was bad news, travel was suddenly more expensive, imports cost more, and inflation increased.
The lower value of the British pound helped British exporters and improved the overall situation in the next few months, however, most experts believe exports will fall in the longer term.
When looking deeper into the UK and its economy, the bigger problems become visible. It could deteriorate for companies and citizens once the Brexit negotiations are over, depending on the outcome.
It could deal a serious blow to the British economy which imports more than half of its goods from EU member states and exports almost as much to it.
Relocation of businesses to the European Union
While Brexit’s supporters have made the preservation and creation of jobs for the UK one of the spearheads of their campaign, it’s likely that UK’s exit from the European Union will be accompanied by a relocation of many jobs, especially in the financial sector as many banks have already given hints at moving their business from the financial hub of London to Paris, Dublin or Frankfurt.
“Jamie Dimon, CEO of JPMorgan issued a statement saying the US bank which employs over 16,000 people in the UK in six sites, will lower its manpower strength by 4,000 gradually.” – The Telegraph
“Morgan Stanley also plans to transfer 1,000 out of the 6,000 positions in the UK to either Frankfurt or Dublin while Goldman Sachs is expected to transfer at least 1,600 jobs.” – The Guardian
These aren’t the only banks that are planning to move jobs out of the UK. Banks like UBS and HSBC are also planning on reducing their manpower in Great Britain, making Frankfurt and Paris emerge as the new financial centre.
Financial services play big role in development and growth of exports by mobilizing and allocating resources for investment in businesses through risk management and risk diversification. As they start to leave, investor confidence in the UK economy will decline which will ultimately lead to reduction in British exports to the EU. See the Brexit News on this site for more businesses planning their moves.
Many multinational companies from other sectors are also planning to transfer all or some part of their businesses to the EU.
– Drinks giant Diego is moving its vodka production out of Scotland to Italy and the US.
– 40% of games companies are considering relocating to EU countries after Brexit.
– Customer and fancy-dress supplier Skiff’s made an announcement of opening an office in the Netherlands as a result of Brexit.
These are just a few examples of the many companies which are considering moving their operations out of the UK to the EU. This number is expected to increase as the negotiations come to completion. The migration of businesses from the UK will lead to massive job losses in the coming years and further bring down the economy.
Impact of Brexit on UK exports and imports sectors
If Brexit negotiations lead to a hard Brexit, it’ll mean a complete break with the EU and thus a termination of all treaties with the European Union which also includes the Customs Union and single market. However, the customs union (free movement of goods) is only one of the four fundamental freedoms granted to European Union member countries.
The other three are:
– Free movement of people
– Free movement of capital
– Free movement of services
Even with the conclusion of a free trade agreement, the administrative burden of the exchange of goods is likely to rise considerably. For imports shipped to the UK, customs declarations would have to be made and guarantees provided, as well as checks carried out by the British authorities which will slow down the movement of goods and incur additional costs.
If the EU and the UK terminate the free trade agreement which exists under the current framework, new regulations would be applicable on the exchange of goods and services to and from the UK. In case of a “hard Brexit” without a comprehensive free trade agreement, EU tariffs for a “third country” would suddenly be applicable on UK products and services, which would have considerable effect on both the UK import and export sectors.
IMPACT ON UK EXPORT’S
With a hard Brexit, the free movement of goods and people between the participating countries of the European Union and the UK will be a thing of the past. Provided that no deal is signed, the rate of duty applicable on the third countries shall be applicable.
In addition, EU trade policy measures applicable on “third country” shall be applicable on UK exporters which can make British exports to EU more difficult, and in some cases put restrictions on export of some types of goods. Further, as EU importers in certain industries will have to get new authorisation for the importation of industrial goods, and a license for importing agricultural products from the UK, it’ll lead to a weakening of UK exports in these sector and loss of business.
The customs authorities require a customs declaration for imports from third countries and this must be submitted in electronic form. However, a customs declaration requires the importer to have a high degree of customs and foreign trade law knowledge. Freight forwarders as customs agents would not be happy at taking over this task. Up to now, shipments can be made without this trade barrier within the EU – and thus also to the UK.
Small and medium sized traders in particular might find it very difficult to bear the cost of exporting, since, unlike large companies it’ll will not be easy to establish strategic partnerships and engage in sales cooperation, and find the skilled staff.
Consequences for British e-Commerce companies
After Brexit, the UK will have to establish its own e-commerce regulation laws, which could lead to legal disagreements between the UK and the EU, making e-commerce difficult.
Brexit represents a step backwards for British e-commerce. The UK is one of the strongest markets in the EU. As soon as Brexit becomes a reality, UK will lose the common domestic market with EU countries. With the reintroduction of tariffs on the goods bought from British e-commerce stores, cross-border purchases would become much more expensive to customers. This applies to both sides but the UK will be the bigger loser as EU customers will still have many e-commerce store options from other EU members.
Longer delivery times
Since deliveries from a third country have to go through customs, this will lead to longer delivery times, and add to the cost of running a business. Which would be very painful to small online stores, who would have to hire additional staff just to handle the paperwork of exporting the goods to EU countries.
Data Protection Rules
With regard to the rules relevant to data protection, the UK would become a third country with regards to the data protection laws. Transfer of data to and from a third country faces more restrictions than transfer of data between member starts of EU. This could affect British e-commerce businesses in finding new customers, as they could face lots of restrictions on the data they can use for marketing and sending promotional emails and newsletters, which are very important for success.
In any event, the transfer of data to a third party is subject to higher hurdles than the transfer to another Member State. This applies, for example, to the use of UK service providers when sending newsletters. The UK Data Protect Act and the European General Data Protection Regulation will both apply.
Impact of Brexit on British imports
The provisions for intra-Community deliveries apply to deliveries of EU goods within the European Union. As proof that the goods are really in the UK, an entry certificate will be required. This proof serves the financial office in Germany as evidence that a commodity on which VAT is levied is consumed or consumed in another tax area, namely the United Kingdom. This is the only way for companies to receive the relevant VAT refund. This will put extra cost, as well as regulatory burden on EU exporters. Either the EU exporters will become less willing to send their goods to Britain or they will add the cost onto the product. In any case British consumers and importers will be paying more.
The introduction of customs duties would also mean that imports of third-country goods which are initially imported into the EU and then forwarded to the UK would be subjected to multiple customs duties.
Impact on British Transport industry
The consequences of Brexit on the transport sector will be felt due to diminishing economic activities between the UK and the EU. Declining trade volumes resulting from economic downturn and volatility in the financial sector will affect transport companies, making it harder to stay in business.
Short and medium-term impact
The economic impact of Brexit on the transport sector is expected to lead to a short-term reduction in transport volumes of passengers and freight. In the medium-term horizon, a significant slump in the passengers and freight volume is to be expected, as the decline in trade between EU and the UK will be accompanied by a sharp decline in the number of business travellers which will lead to a waning of wages and loss of jobs in the transport sector. A free trade deal with the USA will not help the transport sector.
Various macroeconomic causes will lead to these development, the fall in exchange rates and the associated significant depreciation of the British pound against the Euro and Dollar, is worsening the situation for British companies. The rising inflation and existing uncertainties with regard to the still to be negotiated exit, has led to slow growth of the domestic products in Britain.
Long Term impact
The depreciation of the British pound has already reduced the outbound traffic from the United Kingdom. It’s estimated that by 2020 UK air passenger market will be 3-5% lower. This is particularly bad news for UK based airline companies as they all operate on a low margin and every seat not booked on their planes could make or break the company.
As there will be no be a single market, or Customs Union, regulatory aspects such as safety regulations, passenger rights, market access, and take-off and landing rights need to be renegotiated.
However, regardless of whether the transport is being carried out by air, sea, rail or road, the forwarders based in the UK will not benefit from the unrestricted EU market access. Should EU cancel the free movement of goods with the UK, international freight forwarders will have to reckon with higher costs. The reintroduction of customs duties is accompanied by direct cost increases in the logistics sector, as well as indirect cost increases on activities such as longer waiting time for customs clearance and additional administrative tasks.
Crises are often the results of miscalculation. A referendum thought to be won “on the street” with the strength of political leadership, produced results opposite to those desired. Not only did the leadership crumbled, but it also started an economic and political crisis in UK.
Brexit will result in British businesses having to hire additional staff just for the export and import paperwork, the extra expenditure on non-core business tasks will hurt small businesses hard. This additional staff with experience does not exist.
The Universities will also be under pressure as they will need to create curriculum for the new tax, imports, and exports, hire teachers, and new administration staff to manage paperwork. This cannot start until the new regulations are in place. This will put more burden on our already stretched education system.
Brexit will have wide-ranging impacts on our economy and it will teach our future generations that isolation is a completely unrealistic option for shaping the future of a modern country. Now that damage has been done, our leaders should do whatever is necessary to limit further damage and do their best to get a deal which is the nearest to the free trade deal we currently enjoy with the European Union block. They need to seek sustainable win-win strategies to shape its relationship with the EU block countries to minimize the impact of businesses on the UK import and export sectors.
UK Government releases it’s plan
The long awaited UK plan for Brexit negotiations has been published, read it here.
A shorten version of this article is here.