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Fate of a post-Brexit nation

Linda Yueh

How will leaving the EU affect the UK’s economy and trade? Linda Yueh explores some of the options facing the British government


Brexit Britain

The UK’s Prime Minister Theresa May has said that no deal with the EU is better than a bad one, which may force the UK to rely on the World Trade Organization (WTO)’s rules for trading. But what happens the day after Brexit is confirmed? British businesses don’t want the uncertainty of being outside the EU with potentially no trade deals. So what are the options? 

Until Brexit happens, the UK has to negotiate any trade deals as part of the European Union. That will obviously change following Brexit. But it also means that the UK can't negotiate trade deals with other nations formally until it leaves the EU. So the question is: can the UK just rely on the WTO rules to buy and sell goods in the absence of any other trade deals? 

In theory, it could but the UK and EU need to agree on how to divide up the shared WTO “schedules” – the list of tariffs and quotas that the EU applies to other countries. This is because the UK is a member of the WTO through the union. To become a fully independent member of the WTO, the UK would have to establish its own schedules. 

As a member of the EU Single Market, the UK can import cars without facing any tariffs, for instance. But there will be tariffs of 10% on cars after Brexit and smaller amounts on other goods, plus a few higher rates on agriculture. There may not be an immediate economic impact, but there could be longer term ramifications the longer term for, say, car production chains.      

Bureaucratic issues 

Becoming a full WTO member presents a major challenge as the UK would need to disentangle itself from all the tariffs and quotas it has signed up to through the EU. It could take years to sort everything out and that’s before we’ve even considered free trade agreements. But trade experts have told me that it can be done, as long as the negotiators are sensible. It’s in everyone’s interests for there to be no disruption, so the UK should be looking to get on good terms with the EU and WTO.    

America is a good example of how to negotiate. The US has around 200 trade negotiators, which doesn’t sound like it’s many but they are incredibly efficient as they only do one or two deals at a time. Britain can learn from this by looking to agree terms with a small number of countries first and then going from there. It’s really important for the UK to rack up a few trade deals. It can then use those deals to entice other nations to come to the table.   

Getting the US on board would be a major move. We know that Prime Minister May and US President Donald Trump have met to discuss Britain’s relationship with America. But Trump has made it very clear that he prefers bilateral trade deals to free trade agreements. It’s really difficult to imagine Trump giving Britain a very good deal while talking about putting America’s interests first. After all, “hire American, buy American” was the mantra throughout his presidential campaign. 

Brexit’s impact on the UK economy

Will London still be an international financial centre if there are no firm trade agreements in place after Brexit? I’ve spoken with officials in China and other emerging markets who say they’re really worried about this. But it’s really hard to dislodge a city with such financial expertise. London has been a global financial capital for a long time, even though Britain’s not the biggest economy in the world.

The British government is trying to prevent efforts to entice financial services firms from London to Paris, Frankfurt or Luxembourg. This is fuelled by international banks with European headquarters expressing concern about Britain leaving the single market. British financial services providers are also worried. To diversify, Lloyd’s of London is setting up operations in Europe, while HSBC will relocate some staff to Paris when the UK leaves the EU. 

Striking trade deals won’t happen overnight. In the meantime, the UK would need an implementation or transitional deal with the EU after finalising Brexit to help smooth the process and avoid any disruption. I think we will see one, but what will the UK transition to if it has no free-trade deal with the EU? This is the practical question that British businesses are asking.   

Whatever happens, we know the only certainty about Brexit is uncertainty. However, it’s important to recognise that as the fifth biggest economy in the world, the UK is resilient. The key to maintaining that position long-term is to open up new markets after leaving the EU.  

Linda Yueh is Adjunct Professor of Economics at London Business School. 

Comments

1 Comments

By Mark Penrose on 24-03-2017 08.37

It would be useful to look at this from a continantal European perspective. I imagine that continental companies will look to switch in any sector where the UK does not have striking competitive advantage. So the UK will have to take innovation extremely seriously and encourage financial institutions to take greater risks. In their leadersship endeavours, the British would do well to improve their self -awareness by reflecting with a little humility. Is terminology like the UK and Europe really helpful (the UK being part of the continent of Europe). It is very them and us. Is Theresa May right to crow about English being the business language without remembering that others have the choice whether to bother to speak to us in it. How do others react to London being' the greatest city on earth'?

About Linda Yueh

Linda Yueh is an Adjunct Professor of Economics at London Business School.


She teaches on the following programme: