Potential impact of no-deal Brexit

LONDON/BRUSSELS:

Britain and the European Union sought on Sunday to strike an elusive trade deal, with failure likely to end with trade in chaos, markets tumbling and a huge economic price to pay.

Here are some of the potential pressure points of a no-trade deal after five years of Brexit crisis.

Sterling

Investors and banks have predicted that a deal will eventually be done, so a no-deal would hit sterling, according to major foreign exchange traders.

The shock referendum result on June 24, 2016 sent the pound down 8% against the US dollar, its biggest one-day fall since the era of free-floating exchange rates began in the 1970s. That was nearly double the 4.3% drop on September 16, 1992, when financier George Soros “broke the Bank of England” after his bets against the pound were instrumental in the currency’s exit from the European Exchange Rate Mechanism.

Trade

Overnight Britain would lose zero-tariff and zero-quota access to the European Single Market of 450 million consumers. Britain would default to World Trade Organisation (WTO) terms in its trade with the 27-state bloc, making it in effect as distant to its biggest trading partner as Australia.

Britain would impose its new UK global tariff (UKGT) on EU imports while the EU would impose its common external tariff on UK imports. Non-tariff barriers could hinder trade, with prices predicted to rise for consumers and businesses. Borders risk disruption, especially the main crossing points, with shortages of certain foods possible as Britain imports 60% of its fresh food.

Any disruption would be felt most keenly by sectors that rely on just-in-time supply chains, including autos, food and beverages. Other sectors likely to be affected would include textiles, pharmaceuticals, and chemical and petroleum products.

The EU is Britain’s biggest trading partner, accounting for 47% of its trade in 2019. It had a trade deficit of 79 billion pounds ($106 billion) with the EU, a surplus of 18 billion in services outweighed by a deficit of 97 billion pounds in goods. Even with a deal, Britain’s reasonable worst-case scenario is that 7,000 trucks bound for the continent could stack up in the southern English county of Kent.

The economy

A no-trade deal would wipe an extra 2% off British economic output in 2021 while driving up inflation, unemployment and public borrowing, Britain’s Office for Budget Responsibility (OBR) has forecast.

The OBR said tariffs under WTO rules and border disruptions would hit parts of the economy such as manufacturing that were emerging relatively unscathed from the Covid-19 pandemic.

The long-term hit could be costly for both Britain and the 27 remaining EU members. Germany, Europe’s biggest economy, is Britain’s biggest EU trading partner. The shock would be felt unevenly across continental Europe, with those likely to be hit worst including Ireland, the Netherlands, Belgium, France, Luxembourg, Malta and Poland.

The Halle Institute for Economic Research has forecast that EU companies exporting to Britain could lose more than 700,000 jobs if no trade deal is agreed.

 

Published in The Express Tribune, December 7^th, 2020.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.