After 4 and a half years, the nature and terms of Britain’s new trading relationship with the EU finally came into sharp view on Christmas Eve. The transition period is now over. The United Kingdom now exists as a ‘third country’ in EU trading terms. But what does this mean for businesses in both the short and long term? Of course, much of this depends on the business sector, how much trade they are/were doing with the EU, and a myriad of other factors, but there are headlines that will affect all businesses. Here are just a few:
It’s now more difficult and more expensive to trade goods with the EU
Inevitably, there will be more red tape and busywork associated with trading with, or operating supply chains to and from, the EU. Whether it’s form-filling at the place of origin, haulage and shipping companies dealing with customs checks, or obtaining new safety certifications prior to export, it just takes more time and effort to trade now, cutting into productivity elsewhere in a given business. Marks and Spencer for example has temporarily stopped the sale of certain items in their Northern Ireland stores due to the fear of food being blocked, due to new rules surrounding shipments between Northern Ireland and Great Britain. Some businesses may choose to simply end trade with the EU, finding it prohibitively expensive to obtain new safety certifications or hire staff to complete the new admin, and instead focus their efforts locally.
Impacts to supply chains will be one of the slower aspects to reveal itself. Businesses may choose to alter their supply chains to avoid cross-channel trade, keeping certain elements ‘in-bloc’ so to speak, both with UK businesses moving certain operations to the EU, and EU businesses finding alternative suppliers. However, some UK businesses may see some growth from gaining trade that would have previously gone to EU businesses, even if there is an overall negative impact to business.
Services are largely not covered by the deal, with further memorandums and deals forthcoming to discuss the cross-border provision of services, including financial.
Money flows will change
One of the sectors most opposed to Brexit at the time of the referendum was the finance sector, speaking of how EU membership allowed UK based firms to operate bloc-wide, including in Euro denominated shares. While the expertise centred in London especially has meant that not many jobs have left the UK, the way in which they’re doing business has been impacted, now dealing with Euro-denominated trade through markets in Paris and Frankfurt rather than those in London, even if that is where they’re actually working. The first Monday of trading after the deal came into effect saw a €6billion transfer of business from London to EU financial centres.
The EU and the UK are expected to produce a memorandum that provides some cooperation on financial services by March, but regulators on both sides do not expect it to be particularly extensive. Of course, this will have impacts on FX markets too, affecting decisions on what currency will be required to fulfil certain obligations.
What could this mean for the Pound?
The initial announcement of a Brexit deal was undermined by the limited amount of the UK economy covered, ie 80% of GDP is services that are not yet included. Although the Pound rose it wasn’t as much as we’d have hoped for. As we embark on our Brexit adventure in 2021 the uncertainty of the new trading arrangements and logistics should dissipate over time. As the uncertainty lifts the Pound should also be able to drift upwards across the board but the impact may only start to become apparent in Q2 of 2020.
There are high hopes that the global economy will rebound this year as vaccinations are rolled out across the globe allowing easier travel and trade. There is of course no guarantee that the vaccines will be a silver bullet and therefore unexpected hiccups and lockdowns will negatively impact the Pound.
What does this mean for the future?
For businesses, it will be hard to tell the full extent of the impact of the trade agreement initially, at least until more time has elapsed and more data can be gathered. Even then, that data will also be impacted by COVID-19, making it even harder to tell what Brexit’s true impact has been or to predict what it will be long term.
Much will depend on what Britain does with its newfound regulatory freedom. While currently otherwise occupied with the COVID-19 pandemic, the UK Government can now look forward to delivering its’ ‘levelling up’ agenda set out in broad terms at the 2019 general election, such as an investment in ‘left-behind’ regions and towns and green industries and sectors.
Posted in Business Resources on Jan 18 2021