As the dust settles after the UK’s third general election in five years, the majority the Conservative party holds will now, for better or worse, provide it with the mandate to “get Brexit done” and shape the UK’s trade vision. GTR gathers the views of economists and trade experts to get an idea of what the future holds.
Brexit’s far from done
Prime Minister Boris Johnson has said that he plans to bring his Brexit deal back to parliament next week, with the party’s majority likely to clear the way to ratification of the withdrawal agreement, seeing the UK exit the EU on January 31.
However, Andrew Goodwin, chief UK economist at Oxford Economics, cautions that a trade deal is unlikely to be completed by end-2020, so it is likely that Johnson will “eventually accede to extend the transition period”.
“It would be highly unusual for a trade deal to be completed so quickly. The two sides start in the rather unique position of regulatory alignment, meaning negotiations will be aimed at constructing a system to manage divergence. In theory, this could make the process easier,” he says.
But unless the UK is willing to accept much tighter restrictions on access to the EU market, Goodwin thinks it will prove “more complicated” than expected. “Any deal struck also requires the unanimous agreement of the 27 remaining EU countries.”
“Should Johnson refuse to extend the transition, this would result in the imposition of tariffs and the erection of non-tariff barriers, with the UK experiencing much of the short-term disruption that we have previously outlined,” he says, adding: “While we think the risks of this outcome are sizeable, we expect the prime minister will take a pragmatic approach and, emboldened by his majority and the fact he won’t need to fight another election for four years, extend the transition period.”
Rebecca Harding, independent economist and CEO of Coriolis Technologies, points out: “The longer-term issue, after the hubris has died down, is that we are small in the world of global trade and, because we want to do everything quickly, we will have to make concessions, and if we don’t make concessions, then we will need more time. The Conservative majority is a good thing, in that it means that Johnson, if he genuinely wants to, can take as long as he likes to get the best deal.”
She cautions, however, that the UK still faces a generation-defining challenge as it charts a course through Brexit. “What we are about to embark on is a de-coupling from the trade, and indeed financial, infrastructures that have been built since the Thatcher era and which are more interwoven with global supply chains and the global financial system. There is no theory behind it and no precedent – it is a live experiment and we have to acknowledge that.”
New trade barriers on the horizon
Even in the event the UK were able to conjure up a trade deal in 11 months, Ross Denton, trade partner at Baker McKenzie, says that this would not cushion UK-EU trade from the impact of Brexit. “It is important to note that, even if a free trade agreement was to be negotiated with the EU27 in 11 months, that FTA would impose greater trade barriers than either remaining in the customs union or single market, and will impose new costs on UK trade with the EU27,” he says.
Having “taken back control” post-Brexit, the UK will, in theory, be able to negotiate other trading arrangements with third countries such as China, India and the US. And US President Donald Trump’s tweet this morning certainly demonstrates optimism in that respect: “Congratulations to Boris Johnson on his great win! Britain and the United States will now be free to strike a massive new trade deal after Brexit. This deal has the potential to be far bigger and more lucrative than any deal that could be made with the EU. Celebrate Boris!”
However, beyond the bombast, Denton cautions that in negotiating any new trade deal with third parties, the UK is unlikely to be able to move too far from EU standards and policies without losing many of the benefits of a comprehensive FTA with the EU27.
Exporters face continued uncertainty
Businesses are putting in place a variety of strategies to mitigate the impact of a no-deal Brexit on the UK economy, but recent data from the Santander Trade Barometer found that over a third of exporters were unprepared for a no-deal Brexit.
“This government needs to deliver a business-friendly Brexit. That means one that protects the three t’s: trade, talent and a proper transition. The third of those is absolutely critical. We have to avoid a scenario where we suddenly crash out of the EU with no time for small firms to prepare for what’s coming next,” says Mike Cherry, national chairman of the Federation of Small Businesses (FSB). “Small business owners will be hoping that today’s clear result helps to bring stability back to the economy.” Meanwhile, the Scottish arm of the FSB says that the new UK government “must deliver a Brexit deal with a transition period long enough for small businesses to prepare for a change in trading conditions.”
With confusion remaining on what a British trading environment outside of the EU might look like, the election results offer little comfort for exporters, who can only watch and wait.