As you have heard by now, the British public voted in favor of a Brexit, or exit, from the European Union (EU). Of the British electorate, 17.4 million (51.9%) casted their votes in favor of Brexit compared to 16.1 million (48.1%) in favor of continued membership with an overall turnout of 72.2%, which is higher than most expected. So what does this mean for the future of the UK and global trade?
Who voted REMAIN and who voted LEAVE?
It is politically and economically relevant to understand that the “Leave” vote won in the British region of Wales and across most of rural England. However, the UK capital, London, voted to remain with 59.9% to 40.1%, as well as several other large cities. A particular focus will be placed in the next couple of weeks on Scotland and Ireland, whom both voted to remain by margins of roughly 24% and 12%, respectively. The 7 sq. km British enclave, Gibraltar, a British Overseas Territory on the south coast of Spain, also voted to continue membership with the EU by a whopping 96% to 4%.
Impact on Global Business
British Prime Minister, David Cameron, announced his resignation soon after the Brexit vote campaign which has caused even more concern. While Brexit is a historical moment, the main area of analysis and focus should be how an “EU in turmoil” affects global business and international trade. Predictably, first reactions were felt on the currency market. When the results were published, the British Pound reached lows of 1.2021 against the Euro and 1.3229 versus the US Dollar; a crash which was faster and further than anything seen since the free-floating system of exchange rates introduced in the early 1970s.
It is to no surprise that early commentators have tried to calm UK and global businesses as much as possible. Mark Carney, the Governor of the Bank of England, announced that the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities and provide substantial liquidity in foreign currency, if necessary. In a first ad-hoc reaction to the Brexit, UK’s Institute of Export, a close partner to Amber Road, urged UK businesses to “Stay Calm, tell your European customers they are important to you." They recalled, “In these uncertain times we need to remember the true nature of trade and its long term benefits."
Process & (Tentative) Timetable of Leaving the EU
Now that the vote is in, the UK government will soon trigger Article 50 of the Treaty on the European Union (TFEU) by notifying the European Council of their intentions to break away. This creates a two-year window where the EU and its member states will be required to negotiate a withdrawal agreement. However, it is widely expected that during these two years the UK will still follow EU laws. This gives them much needed time to prepare from the inevitable separation. The deal is only final once it is ratified by EU leaders through a qualified majority vote. With this in mind, it seems likely for this process to be on-going until mid-end 2018.
A Period of Uncertainty (2016 - ?)
As we stated in our previous blog, a stable political environment is important to most companies. Given the uncertainly around the trading condition with the UK, it is logical to expect investors to be more reluctant to make medium and long-term investment decisions involving the UK, whether it be establishing new enterprises, building supply chains involving the UK, or contemplating relocation. As such, some EU companies may begin to explore alternative supply chains not involving the UK. By the time the UK eventually “pulls the plug” on the EU, they could do the same – albeit the other way around.
If no exit agreement can be reached between the UK and the EU, the EU Treaty foresees an automatic exit of the UK. Following the exit, EU regulations, like the Union Customs Code (UCC) will no longer apply directly to the UK and the UK is no longer apart of the EU Customs Union. This means customs & border controls will have to be reintroduced and customs duty charged all over again. This creates a time and cost implication for global businesses, which have to adapt to UK-only customs and trade rules and a UK Trade Tariff no longer aligned to the EU tariff database, known as TARIC.
In addition, the UK’s post-EU trading relationship with the EU-27 needs to be developed and provisions for a life without free movement of people and services provided under EU law may have to be made. For example, EU dual-use export control regulation may no longer apply in the UK, so EU export control general licenses may not be accepted in the UK. Other restrictions and prohibitions, from anti-dumping duty to embargo and sanctions measures, will need to be independently established. Global business needs to be ready for this in a couple of years!
In a future UK without the EU, the UK would also not be prevented from increasing non-tariff barriers to EU or global goods and vice-versa through the imposition of new UK specific norms for its products. Having to meet new UK-only standards can have costly consequences for global businesses while greatly increasing non-tariff barriers.
Exit from Free Trade Agreements?
As a member of the EU, the UK benefited from the Free Trade Agreements (FTA) that the EU held with the rest of the world. Since these FTAs are made with the EU, once the UK has exited, it will also cease to be a party to these agreements. This will mean that the UK will also lose out on any benefits that it previously had because of these FTAs, such as tariff free trade. In the absence of any FTAs, third county partners would have no choice but to raise the tariffs on UK goods to the so-called “Most Favorite Nations” (MFN) levels. These MFN tariffs are much more unfavorable than any FTA negotiated by the EU and must apply to goods imported in the UK and exported out of the UK.
In the long-term, the UK may achieve a more favorable situation by negotiating its own free trade agreements; however, the time and resources to achieve such agreements will be significant, and will be dependent on the willingness of other countries to negotiate.
How can Amber Road help?
At Amber Road, we are following Brexit developments as they unfold and considering the implications of what Brexit might mean for our customers. We cover 147 countries and have a large staff of in-house trade specialists around the world updating these country-specific trade regulations on a daily basis. We will be working hard over the next two years; making internal adjustments to be sure our software is running smoothly for our valued customers.
Amber Road will continue to track any changes with regards to the UK's exit process and resulting changes to the UK trade and customs laws and customers will be notified accordingly.
Please also join us for our Amber Road Seminar in London on June 28, 2016 at Radisson Blu Edwardian Vanderbilt Hotel London to find out more about the implications of Brexit for companies conducting business in the UK and globally.
Please contact us to learn more about how our Global Trade Management solutions can help your company!
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This post was published on June 24, 2016 and updated on June 27, 2016.