CEO Insights – Implications of Brexit in a Downturn Global Economy

The UK seems to be headed towards an unprecedented, irreversible crisis. After over three years of uncertainty, following the referendum on Brexit in June 2016, the UK appears no more advanced today in its negotiations with the EU than it was when it started. The UK seems to have no real plan and it is increasingly unlikely that any deal will be reached any time soon. While the new Prime Minister proposed to leave the EU without a deal, that alternative has been thwarted by Parliament, adding more uncertainty as to when and in what shape Brexit will happen. The only likelihood at this stage is that the UK will continue down a path of protracted negotiation agony.

Five reasons why the UK’s outlook for signing ‘great’ trade deals is shaky. A number of factors explain why the outlook for great trade deals appears gloomy. The first is that the UK cannot possibly improve its current trading arrangements with the EU, but instead is almost certainly going to sign a much worse deal with the EU, leading to the appearance of trade barriers that currently are not there. Secondly, the UK will remain in paralysis for years before any agreement is reached, leaving the country in a vacuous state until then. The third reason is that it is unlikely that the UK will get better trade deals with third parties than those negotiated by the EU already (and by extension, the UK) simply because the UK will have less leverage in its negotiations. Afterall, the EU, negotiating as a whole, is the second biggest economy in the World. Additionally, the UK alone, will be much less well-equipped until it builds up its own negotiating apparatus for trade.

The UK will also be engaging in negotiations with partners at a time when scepticism towards the value of free trade is creeping into the developed and developing world sentiment. The fourth reason is that the UK is currently replicating, not improving its trade deals, by extending the terms of the EU agreements over an interim period. It proposes to renegotiate these terms but this will take months, if not years to achieve. Fifthly, the UK’s model of negotiation is likely to be more US-based in approach, in contrast to the EU’s more regionalist style, which has not always worked so well in Asia and Africa. This fragmented approach will yield lower returns and complicate immensely the rules of origin, and different custom arrangements, as well as recognition of standards for every market.

What does it all mean for UK and non-UK based international businesses? Companies need to prepare for much less beneficial market entry possibilities in foreign markets than they enjoy currently. Together with lower growth in general in the UK economy, companies will need to re-reconsider their international operations, from supply chain management, to export markets. Moreover, as the case of decreasing growth will drag down consumer confidence and investment, the impact on the UK’s economy will create shockwaves, leading to additional macroeconomic, market, credit and systemic risks. The ability for monetary policy, quantitative easing in particular, to come to the rescue is unlikely in a period of near negative interest rates and against a weakening pound that is adding inflationary pressures. While there is room for fiscal expansion, companies both within and outside of the UK will need to reconsider their global strategy.

Paul Baker is the founder and CEO of International Economics Consulting Ltd., based in Mauritius. He is a consultant for various G20 governments and developing countries, an adviser on corporate global strategy to multinationals, and is Visiting Professor at the College of Europe.

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