BREXIT: The New Normal

Disruption, Risk or Opportunity?

Business growth or business decline? 

The last twelve months have not only forced the global business community to face new and growing business disruption due to new challenges within the business sector with digitalisation and a greater dependence on smart technology evolving into the new norm for global business. 

As if that was not enough, the business community is now also forced to face potentially devastating new trends in the political arena.  BREXIT will clearly be a political disruption that will inevitably now change the ease of free trade between the 28 EU States with fears of new trade barriers between the 27 remaining EU States and the United Kingdom with a weakened Europe as a global business powerhouse.

At the same time, with Donald Trump winning the US Presidential Election, TTIP (The Transatlantic Trade and Investment Partnership – an ambitious, comprehensive and very high standard trade and investment agreement between the US and the EU) is no longer a US priority with the UK seeking to go its own way in relation to new free trade agreements with large non-European trade partners.

How long will it take for Britain to leave the EU?

Once Article 50 was triggered on 29 March 2017, the UK has two years to negotiate its withdrawal. But no one really knows how the BREXITprocess will really work. It is worth remembering that Article 50 was only created in late 2009 and it has never been used.  Within the EU, we are all now sailing in unchartered waters. 

Former Foreign Secretary Philip Hammond, now Chancellor, wanted Britain to remain in the EU, and he has suggested it could take up to six years for the UK to complete exit negotiations – some say even longer.  The terms of Britain's exit will have to be agreed by 27 National Parliaments, a process which could well take some years, he has argued.

Although Article 50 has been triggered, EU law still stands in the UK until it ceases being a member. The UK will continue to abide by EU treaties and laws during the negotiation period, but it will not take part in any decision-making.

Unpicking 43 years of EU treaties and agreements covering thousands of different subjects will not be a straightforward task.  It is further complicated by the fact that this has never been done before and negotiators will, to some extent, be making it up as they go along.  The post-BREXITtrade deal is likely to be the most complex part of the negotiation because it needs the unanimous approval of more than 30 National and Regional Parliaments across Europe, some of whom may want to hold referendums.

Both the EU and the United Kingdom want trade to continue after BREXIT.  The UK will especially be seeking a positive outcome for those who wish to trade goods and services - such as those in the City of London.  The UK will be negotiating for a comprehensive free trade deal giving the UK the greatest possible access to the Single Market.

Teresa May says she wants the UK to reach a new customs union deal with the EU. In other words, she hopes to negotiate a customs union where the 27 EU States and the UK agree not to impose tariffs on each other’s goods and have a common tariff on goods coming in from elsewhere. The UK is currently part of the EU Customs Union, which stops the UK from negotiating its own trade deals with other countries.

For the UK to achieve the non-tariff goals with the EU sought by the British Government, this would require setting a new EU precedent. Turkey has a deal for Partial Membership of the EU Customs Union, so it is certainly possible, but the terms in this agreement are not favourable to Turkey. This is why the British Prime Minister has said that she does not want to replicate any of the existing special agreements.  However, it is generally felt that there is a limit to what the British Government will be able to achieve in the negotiations, if it is not at the same time prepared to impose the EU's tariffs on non-EU countries.

What happens if there is no deal with the EU?

Theresa May has publicly stated that leaving the EU with no deal whatsoever would be better than signing the UK up to a bad one.  These are very strong words that take a very closed position prior to negotiations.  After all, without an agreement on trade, the UK would have to operate under WTO (World Trade Organisation) rules, which could mean cumbersome customs checks and tariffs.

Some have argued that this would make little difference because the UK's trading partners in the EU would not want to start a trade war.  While others say that it would result in even greater costs for UK businesses seeking to buy and sell goods abroad.

Additionally, there are also questions being raised about what would happen to Britain's position as global Financial Centre - without access to the Single Market, and what will happen post BREXIT to the land border between the UK and Ireland?  

No deal could also threaten the rights of UK citizens living abroad in the EU.  They could all lose their residency rights and access to free emergency health care.

What about the Business Community?

If we go back to the BREXIT vote last year, big business (with very few exceptions) tended to be in favour of the UK staying in the EU because it makes it easier for them to move money, people and products around the world.

Given the crucial role that London plays as a Global Financial Centre, there is growing interest in how many jobs in this sector may be lost to other hubs in the EU, even though to date four of the biggest US banks have committed to helping maintain the City's position.  However, given the prospect of a hard BREXIT, HSBC has already announced its intention to move up to 1,000 jobs to Paris.

However, we need to balance this against some UK exporters who have reported increased orders or enquiries because of the fall in the value of the Pound.  For example, in the case of the pest control firm Rentokil Initial, the CEO says it could have made ￡15m extra last year thanks to a weaker currency.

Others are less optimistic.  Hilary Jones, a Director at UK cosmetics firm Lush is reported to have said that her company was "terrified" about the economic impact.  She added to this that while the firm's Dorset factory would continue to produce goods for the UK market, products for the European market may be made at its new plant in Germany.

The Official EU Position

British Prime Minister Teresa May has put immigration control at the forefront of talks in recent months and while today did not give any more detail on which one is being prioritised over the other - she has categorically stated that this is "not a binary issue".  

In response, the EU Parliament's Chief Brexit Negotiator, Guy Verhofstadt has stated that "The basic position of all the institutions in Europe is very clear: The four freedoms are bound to each other. The Internal Market is based on all four freedoms - not three, or two. Goods, services, capital, and the free movement of people. You cannot separate them. I think this is a perfectly firm and clear position for everybody".

More recently, Malta’s Prime Minister Joseph Muscat has said the EU is not "bluffing" when it says that it will push Britain into a "hard BREXIT" if the British Prime Minister Theresa May insists on the UK opting out of freedom of movement.

So, the official EU position is that the UK cannot have it all. Britain cannot realistically expect to have access to the Single Market like it does now while also having full control over immigration.  If that is what Teresa May's strategy is going into talks, then some EU experts are predicting that negotiations could be short.

Will BREXIT affect Danish Export?

Yes, it will. It seems likely that Danish export will be threatened after BREXIT.  After all, the UK is Denmark’s fourth largest trading partner, and BREXIT is likely to reduce Danish exports.  The hardest hit will be the Danish agriculture sector.  Denmark has a population of just over 5 million people, but is also home to 30 million pigs and 90% of the pork produced is exported—primarily to the UK. As the Pound falls and Danish goods become more expensive in the UK, these exports are forecast to decline.

BREXIT will also have implications for employment and immigration law.  Approx. 10.000 UK citizens currently live and work in Denmark, while 20.000 Danes reside in the UK.  Denmark’s current legal opt-outs mean that EU immigration rules for non-EU nationals do not apply in Denmark. Therefore, once BREXIT becomes a reality, the British workforce in Denmark will be subject to the strict Danish immigration rules (unless a special agreement is secured) involving the notorious Danish ‘Point System’ which has come under fire from international bodies for breaching human rights legislation. On the other hand, the many Danish students studying at UK universities may in future be subject to higher tuition fees and may lose access to European funding schemes.

Conclusion

With the disruption being experienced under the new US Presidency and a potentially weakened EU after the French Presidential elections, BREXIT will undoubtedly reshape the future of the UK as well as the future of the EU as we know it today.

While it is quite conceivable that British Prime Minister will strengthen her negotiating position as a result of the General Election that she has just called, it seems unlikely or at least uncertain whether a “hard BREXIT” will be in the long-term interest. Such a political strategy would be taking very high risks with the British economy for which the coming generations could end up paying a high price.

However, this is inevitably speculation as not even the economists seem able to agree and predict clear outcomes as there are so many variables to consider – political and economic.