The beginning of Brexit
Article 50 of the Treaty of Lisbon – better known simply as Article 50 – is the official trigger in the Brexit process. Once initiated, the withdrawing country has two years to make its exiting deal, unless an extension is agreed by both sides. After much anticipation, on 29 March 2017, Prime Minister Theresa May triggered Article 50. The question being asked is, what happens now?
No country has ever left the European Union (EU) before, so much remains up in the air. One of the most important areas to be determined is Britain’s trade deals.
Currently, as a member of the EU, UK companies can sell goods to EU customers without additional taxes being levied. Similarly, the country’s companies and consumers can also import goods from the EU without paying tariffs.
Many speculated that the UK may be able to remain part of the single market, despite leaving the EU, but this has been firmly ruled out by the Prime Minister. If the country also leaves the customs union, there are two obvious alternatives.
The trade alternatives
One option is to establish an independent trade deal with the EU, similar to the one the EU has with Canada, for example. In negotiating a new arrangement, the UK would seek to eliminate the majority of tariffs and additional trade barriers. However, some commentators think this option is unlikely to succeed, as the initial phases of the Brexit process have already given rise to political tensions.
The second option is to participate under the World Trade Organization (WTO) – an international agency comprising 164 member countries from around the world. The EU members are also part of WTO, but act together as a unit within it. Because a stipulation of WTO membership is that one mustn’t discriminate between other WTO members, the EU and UK would need to impose the same trading barriers to each other’s exports as they do to other members.
The trade tariffs imposed on British exporters by the EU would immediately make them less attractive to EU countries, which can trade amongst themselves without these tariffs.
Additional trade restrictions
Trade tariffs won’t be the only change. As the UK will no longer need to adhere to EU regulation, there will likely be new rules on product specifications, labelling, testing, and authorisation requirements, as the UK decides which regulations to uphold. If the UK chooses to remain harmonised with the majority of EU business regulations, it will be able to strike a quicker deal – even if more favourable terms could be achieved through a lengthier process. It is possible though, that other EU states could heighten competition by imposing non-tariff barriers, such as new regulations, to lower the success of UK services.
Achieving trade deals with more protectionist countries, such as China, the US and India, may be challenging for the UK to do alone. However, some Brexit campaigners believe the UK may have better bargaining power negotiating these deals from outside the EU.
Earlier this year, the UK lost its place as the fastest growing G7 economy, and it’s still very uncertain as to how Brexit will affect the UK’s businesses and economy. But with past precedents for other deals indicating that negotiations could span between four and ten years, it may be quite some time before we find out.
In uncertain economic times, it’s more important than ever to safeguard your business by accessing reliable risk management and credit monitoring insight. Get in touch to find out more about Graydon’s services.