3 Nov 2016 08:00am

How Brexit will change Britain's trading relations

The UK’s decision to leave the EU has called into question the nature of its trading relationships with its nearest neighbours. But it has also shone a spotlight on the opportunities other countries offer, says Nick Martindale

Caption: How Brexit has changed Britain's trading relations

One of the most surprising elements of the UK’s vote to leave the European Union is just how woefully underprepared anyone – in the UK or the EU – was for such an outcome.

As the dust begins to settle, the UK and other countries are looking at what Brexit, when it finally happens, means for them, and particularly the potential for trading arrangements. There are significant challenges around the practicalities but there are also opportunities, both at a country level and for businesses seeking new markets.

According to a survey by the Economist Intelligence Unit on behalf of American Express, 82% of British companies see the US as their main trading partner, with the same number expecting an increase in trade over the next five years.

Emanuel Adam, director of policy and trade at British American Business, believes the two countries are natural partners when it comes to trade. “The US is very sad to see the UK leave the EU, because it makes thinking a lot more complex, and trade is a very good example,” he says.

“But in the end it will think practically. The US is interested in its companies growing and exporting and attracting investment and will look at all the options in order to foster that.” Its preferred option is likely to be a trade agreement with the EU to which the UK also has access, he adds, although if this is not possible then a less formal UK-US deal may also be feasible.

At the moment, the biggest challenge is the uncertainty, says Rob Mulligan, senior vice president, policy and government affairs, at the United States Council for International Business. “Until they can actually separate, the UK can’t really go and negotiate new trade agreements,” he says.

“It looks like it will take quite a long time for the UK to officially come out of the EU, and then you go into a negotiation process, so you’re looking three or four years down the road. From a business standpoint that’s a bit long to know what it’s going to mean in terms of tariffs or regulatory co-ordination. It just makes it difficult to assess what the opportunities are going to be.”

In China, there is certainly a desire to trade more with the UK, and hopes of a trade agreement, says David Martin, director of the China Britain Business Council. “Some parallels can be drawn with China’s agreements with Switzerland, Iceland, Australia and New Zealand, but it will take some time,” he says. There’s a good match too, in that the areas at which the UK excels – such as financial and professional services, education, healthcare and advanced engineering manufacturing – are those in demand from China.

Smaller businesses in particular, though, need a degree of certainty before they commit to any new opportunities, says Martin. “Uncertainty in stock markets and equities are very headline-grabbing but small companies are wondering whether they need to adjust their prices or change their order for next year,” he says. “From our perspective we want to remove the China uncertainty around that, and get them to think about China now. If the EU is going to change direction around how it engages internationally then maybe it’s time to look at trade with China.”

Brexit could be good news for African countries too, believes David Smith, chairman of the British African Business Alliance, both in terms of UK businesses seeking new markets and African enterprises looking for new sources of supply. “The Chinese experience has left mixed feelings in Africa; everybody wants to buy at a good price but they don’t really want to compromise on quality,” he says. “I’m beginning to detect that people are starting to talk about not buying from China, if they can buy from the UK.”

Often the goods will be made in China anyway, he adds, but there is a growing recognition that the after-sales support and customer service that comes from a UK business is worth paying for.

Smith already sees examples of UK businesses seeking to enter African markets, particularly Nigeria, Ghana and Kenya. “We’re working with one business in Birmingham that makes a manually operated breeze block-making machine so you can build a two or three-storey house,” he says. “That machine costs £7,000, so that’s a relatively easy export decision given the need for houses in Africa. So there are pockets like that which we think could be much larger. It’s not without its challenges but Brexit very much opens the door.”

Not everyone is so positive, however. Australia’s economic relationships tend to be more weighted towards the Asian economies, says James Pearson, CEO of the Australian Chamber of Commerce and Industry, so the UK will need to work to re-establish itself as a key trading partner. “The hardest issue will be to identify what are British products and services,” he says. “Supply chains have become so entrenched with EU business that truly ‘British’ identification will be hard to do and could be pretty limited.

“It is up to the UK to decide how it wants to position itself after Brexit,” he warns. “The barriers it removes – or establishes – will be a signal to the world about how it wants to do business. Many businesses from abroad use the UK as the English-language base for Europe. This may now change and Ireland could be the beneficiary as the only English-speaking country in Europe.”

Mexico, too, is concerned. “When the UK leaves the EU and the Mexico-EU free trade agreement ceases to apply between Mexico and the UK, so preferential trade between both countries will stop and this could translate into a decrease in bilateral trade,” says Hugo Perezcano, president of the international trade and investment policy committee at ICC Mexico. But there are signs that both countries would be keen to create a formal trade agreement which could help reverse any impact, he says, and have obvious benefits for both sides.

“Both economies are attractive to each other given their size, their expected future growth and their role in the world economy,” he adds. “The UK was the fifth most important economy and Mexico the 15th in 2015.” The existing deal between Mexico and the EU would be an obvious form of reference for any arrangement, he adds, as could its model with Canada.

Perhaps unsurprisingly, things are also less rosy within the EU itself. According to a survey of EU businesses conducted by law firm King & Wood Mallesons, 62% are now less inclined to do business with the UK as a result of Brexit.

There are some real risks, says Tomasz Michalski, professor of economics at HEC Paris Business School. “Geography here is destiny,” he says. “For the UK, the EU is its largest and closest market so it would be silly not to prioritise continuing business with them. And, for the EU, the UK is still the fifth largest economy in the world and an attractive market where global businesses have been present for decades. It is in both of their best interests to cooperate closely.” The danger, though, comes from the extent to which the UK deviates from EU standards and business law, which could cause issues for those looking to sell into both markets.

Indeed, for small and medium-sized businesses in particular, the day-to-day issues are more important than the wider political and economic situation. “Free trade deals are a very important element for smaller companies in the long run, but right now they’re more concerned with fluctuation of currencies or the general economic environment,” says Adam.

“If both governments are able to address these concerns and increase the support because they see each other as a priority market, that will end up helping small companies over the next few months and years.”

Some small businesses are already looking to move into new markets following the referendum result. Joe Hepworth, CEO of British Centres for Business, based in Dubai, says his organisation has never been busier.

“We help particularly small and medium-sized companies access the UAE, and in July and August we had our busiest time ever,” he says. “Normally it’s quiet because it’s holiday time in both places. We feel this is a pragmatic response to Brexit, and the Middle East takes on greater relevance because it’s almost a hedge against what may or may not happen with European exports.”

The region has a number of advantages as an export destination, he says, including the predominance of the English language and the relative closeness of major population centres. “There are probably similar opportunities available in the UAE to those in India or China but they’re within a two-hour drive,” he says. There’s also a growing need for new infrastructure services and projects across the region, he adds, which has been made more prominent by the realisation that the Middle Eastern economy cannot rely on oil in the way it once did.

Yet while there may be opportunities for both trade agreements and business deals, there is also a dark cloud over Brexit, as seen in the recent intervention from the Japan government, warning its firms based in the UK could move away should business conditions not be favourable, including both the free movement of workers between the EU and UK and access to the single market.

Nigel Driffield, professor of international business at Warwick Business School, says there are four main reasons why businesses choose to base themselves in the UK: language and cultural similarities; a flexible labour market; a favourable tax regime; and, finally, as an entry point into the EU.

“If you take that away, the question becomes, what sort of trade deal will we have, and if there are going to be even 10% tariffs on car exports, that means a top-of-the-range Nissan which is £30,000 is now £33,000,” he says. “It’s quite a
big difference. Companies are not going to move overnight but they are saying they invest in the UK to be part of the single market. It will be a general drift away.”

But any such move may be countered by other organisations which could be attracted to a UK freed up from some of the bureaucracy that affects the EU, suggests Mulligan. “You may lose some of those companies which now have to
find somewhere else to be their EU base, but depending on how the regulations in the UK are shaped they might be able to provide some incentives they couldn’t provide before,” he says. “That might facilitate inward investment.”

Martin is equally buoyant, even in the face of rising tension between the US and China. “There will be some level of uncertainty,” he says. “But so much of the investment from China into the UK has been about investing strategically to help China’s companies move up the value chain. If you’re buying a 20% stake in a West Midlands engineering company because you want to sell the technology to the rest of the world, that shouldn’t necessarily change. If it was the right company on 22 June it should still be today.”

Accounting opportunities

Like a number of other industries, the UK’s accountancy skills and services are regularly exported to other countries, both in the UK and further afield. The decision to leave the EU is something of a double-edged sword, suggests Stephen Ibbotson, director, commercial and business at ICAEW.

“A lot of Brexiteers were saying they would reduce regulation and if that’s done in a smart way then that could help,” he says. “You could get the same governance and control but without the time-consuming bureaucracy and restriction.”

It could also shine a light on just what regulation is generated by the EU, and what comes from our own government, he adds, and potentially free up the UK to act more independently in developing markets such as China, Brazil, Turkey and Mexico.

“But there’s a counter argument the EU uses all the time, which is that the scale of 27 countries gives it benefits a country couldn’t get on its own,” he says. There’s also a risk the EU could put in place rules which would make it more difficult for UK firms to audit EU businesses, he adds.

In the short-term, at least, the UK will still be well positioned to serve its European neighbours. “The UK will have lots of advantages in terms of language, time zones, the rule of law, a good education and a strong profession,” says Ibbotson. “All those things will be unchanged.”

Illustration: Matt murphy