In less than one year the UK is slated to leave the European Union, following through on the results of the 2016 referendum. Current talk is about transition periods and deals to continue access to the single market, but the risk that we will leave the EU, including the free trade area and customs union, without any type of trade deal in place remains. What would it actually mean for the UK from a financial and economic perspective if this were to happen?
Currently, the UK’s membership is bundled with that of the EU, so re-joining as a single trading entity would require some negotiation with regard to terms of trade, but if the UK leaves the EU without any form of trade deal then it can choose to automatically revert to rules for international trade set by the World Trade Organisation (WTO), of which it is a member.
The other option at this stage would be to abandon tariffs completely and forge bi-lateral trade deals with countries around the world. WTO rules only exist as a ‘fall-back’ position for countries that have no trade agreements in place. At least initially, it appears likely that the UK will opt for the WTO rules approach.
The UK economy is approximately £2 trillion in size and just over 7% of this is made up of exports to the EU. Imports are somewhat larger, equalling £235bn, or 11.75% of GDP. These may be large figures, but imports and exports will continue regardless of the status between the UK and its trading partners; after all, British people are not going to stop buying BMWs any more than businesses in France and Spain are going to stop buying British plane parts and pharmaceuticals.
If the UK falls back into a WTO regime then we can expect to have to pay tariffs on anything we export to the EU. And given that the average trade-weighted WTO tariff levied by the EU is 2.3% this would equate to a large amount of money. Another thing to consider is that the UK imports a lot of food from the EU, and EU agricultural tariffs are high, so we could expect to see food price rises.
Given that the UK is largely a services economy, it’s arguably more important to focus on services rather than physical goods; so what impact would there be? The UK handles a great deal of non-physical business for clients in the EU, including services such as legal utilities, architectural reports and capital market operations. Luckily for the UK, these services are classified as ‘wholesale’ and are exempt from tariffs. So, the answer to the question of whether WTO tariffs would impact the services industry is that there would not likely be much economic impact.
One thing seems certain, however, and that’s the fact that we can expect to see more swings in the value of Sterling as the date of leaving the EU approaches and passes. Bearing this in mind, it makes sense to hedge your bets if you need to transfer sums of money around that time and use a specialised currency broker to limit your exposure to exchange rate volatility. Because whatever else happens you’ll want to make sure that you’re not caught out by the currency markets as they react to the likelihood of a no-deal Brexit.