The world needs thoughtful leadership

26 July 2019

The impact of Brexit won’t just affect trade between the UK and the EU – it will ripple out to affect our trading partners across the globe, says CIPS economist John Glen

Much of our focus over the last three years has been on bi-lateral trade flows between the UK and the EU and the impact that Brexit will have on that activity. What our analysis has tended to ignore is the impact of Brexit on countries outside the EU. The UK is the first port of call in the EU for a significant number of goods which are then distributed throughout the rest of the EU. 

The good news is that goods which transit in the UK on their way into Europe would not be subject to any additional tariffs, assuming that they were not subject to any additional value adding while in the UK. We will remain a member of a common transit convention, which means that any goods not fabricated in the UK will move into the EU in exactly the same way as they have done before.

A key issue, though, for US goods will be transit times into the EU. In the first instance, particularly if there is a ‘no deal’ Brexit, those goods will be delayed at the port. The danger is that non-EU trading partners will engage in ‘trade diversion’ which would involve their goods being landed directly into the EU, with the subsequent loss to the UK economy.

The next big issue is the impact of Brexit on the value of sterling. At the time of going to press sterling is trading just above €1.10 and $1.25. The value is hyper sensitive to ‘bad news’ regarding Brexit – interpreted as anything that increases the probability of a no deal. As we approach 31 October, if the probability of a no deal is increased, sterling will move to these lower levels; should a no deal occur, the value could move to parity with the Euro and $1.15-$1.20. For exporters into the EU this is likely to make their exports less competitive.

As far as trading relationships with non-EU countries post-Brexit, this is something that the UK will be very keen to expand. This is great news for non-EU countries, as the desire for the UK to ‘cut deals’ will strengthen their negotiating power. At the moment the UK has only negotiated 26 continuity deals with non-EU trading partners, which means that those who have not agreed terms post-Brexit would have to trade under World Trade Organization rates, which would have a negative impact. Research from the United Nations Conference on Trade and Development suggests the major winners would be China – as its goods will replace EU exports to the UK and UK exports to the EU – followed by the US and Japan.

Foreign Direct Investment (FDI) into the UK would be ‘in search of a rationale’. That is, much of the foreign investment in the UK in the last 40 years has been driven by the promise of access to EU consumers. The fear that access to the EU will be impeded has the potential to slow that investment down. At the moment the rationale is that assets are cheap due to the depreciation on sterling; this has maintained investment flows post the 2016 Brexit vote. It is difficult to assess what the long-term impact of Brexit on FDI will be.

Finally, while Brexit is consuming headspace in Europe, the trade war between China and the US has the potential to have a bigger impact on the global economy. Producers are now feeling the real cost of protectionism and the good news is they don’t like it. Hopefully a ‘short, sharp shock’ of protectionism will bring sense to both sides of the table and we can return to a global trading environment where the balance of protectionist policies returns to its long-run downward trajectory.

The world desperately needs thoughtful leadership at this time. Leaders need to set us on a course for prosperity based on global free trade where ‘a rising tide lifts all boats’. Unfortunately, a number of our senior global leaders seem to be obsessed with the next sound bite, poll or Vox pop. 

CIPS economist Dr John Glen will be providing his latest economic overview at the CIPS UK Conference on (Brexit deadline day) 31 October 2019. Click here to book

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