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  July 29th, 2016 | Written by

Brexit: Bad News for UK Trade and Economy

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  • The short-term damage to the UK economy caused by Brexit could take years to repair.
  • 35 percent of all UK goods exports make their way to European Union countries.
  • The costs of importing to the UK will increase and the declining pound could exacerbate those costs.

While many are still grappling to understand the complexities of Brexit, its clearest message lies in the trail of political devastation that it has left since the EU referendum on June 23. Not only has it abruptly ended the careers and political machinations of remain campaigners such as Prime Minister David Cameron and Chancellor George Osborne, for example, but it has also forced prominent leave voters like Boris Johnson and Nigel Farage to the fringes of Westminster and beyond.

This underlines the difficulty of life after Brexit, with the referendum vote just the start of a long and arduous journey that could bring great austerity to the UK economy. It also suggests that the process of triggering Article 50 and negotiating amiable terms of separation with the EU may be an almost impossible challenge, a view that was reaffirmed when Giuliano Amato (who penned the article and drafted the Lisbon Treaty) claimed this document was never designed to be implemented or acted upon.

How will Trade be Impacted?

Despite this, we have little choice at the moment but to accept that Article 50 will be triggered some time in 2017 and that Britain will deign to leave the EU. In the meantime, we will also see considerable uncertainty grip the British economy, with pivotal export and import sectors likely to huge change and volatility. In fact, it is arguable that the period prior to the UK’s exit will be worse than what eventually follows, as Britain will continue to experience economic instability while also being unable to negotiate new trade deals with non-EU and Commonwealth countries.

But what about the future post-Brexit? Almost uncertainty, the aftermath of Britain leaving the EU would be fraught with disruption and volatility, which would impact on all sectors within the nation’s import and export markets. At present, it is estimated that 35 percent of all UK goods exports make their way to European Union countries, and these would instantly be subjected to inflated tariffs far in excess of the current four percent. This would include automobiles, which are pivotal to the growth of the UK’s economy and labor market.

The increased cost of exporting goods could hit some companies hard, from large-scale car manufacturers to the SMEs that are involved in the distribution of chemicals and commodities. For some the increased tariffs may cause them to downsize their operations, which could in turn impact on employment levels and the amount that is reinvested into the economy on an annual basis. Of course, Britain could offset these losses by aggressively negotiating more lucrative deals with less regulated nations outside of the EU, but this represents a great unknown while such agreements will take time to bloom.

In terms of imports, a similar trend could quickly develop in the wake of Brexit, as the cost of staple commodities such as food and drink rise and gradually inflate the cost of living. At present the UK only produces 60 percent of the food that it’s residents consume nationwide, and as self-sufficiency has fallen so too has the cost of importing. These costs will increase as Britain begins to trade as a non-EU country, while the declining value and power of the pound (which initially plummeted to a 31-year low after the referendum result) could exacerbate the soaring cost of imports.

These cumulative impact of these events may create a cycle of economic decline in the UK, as wages and labor market growth stagnate while the cost of living soars.

How will the Financial Services Sector Fare?

Arguably, the nation’s financial services sector would face an even steeper challenge. After all, the UK moved away from the manufacturing of goods during the premiership of former Conservative leader Margaret Thatcher, who instead prioritized financial services and laid the foundation for London to become the world’s commercial hub for everything from property investment to foreign exchange and financial market trading. Given this and the fact that London contributes an estimated 20 percent to the UK’s GDP, the impact of Brexit on the financial sector could prove significant.

It is also important to recognise that the UK currently runs a major surplus with the EU to the tune of $26.2 billion, which is entirely different in the commodities sector where a trade deficit exists. This instantly alters the level of incentive on the EU’s side, meaning that they will be less inclined to offer the UK favorable exit terms. Not only this, but it is the EU’s policy to ensure that firms in non-European Union countries are offered only limited crossborder access to markets according to strict guidelines, making it extremely difficult to see how the UK can continue to trade freely while also extraditing itself from all political obligations.

If the UK is serious about untangling itself from the EU’s bureaucratic web, it must accept that popular trade models such as European Economic Area membership (boasted by Norway) are entirely out of the question.

With the level of hostility between the EU and the UK reaching fever pitch, political leaders in Brussels may be inclined to create more stringent regulations for access to the single market. This would translate into the creation of significant barriers to entry for the export and import of financial services to and from the UK, which Britain would be unable to oppose after terminating its membership. This could have a devastating impact on fiscal investment into the UK, as nearly 50 percent of this is driven by the financial services sector and many firms may choose to commit their capital elsewhere once Britain’s exit has been confirmed.

The Bottom Line

In truth, nobody knows how the UK economy and its import and export markets will fare in the wake of Brexit. While it is accepted that there will be a sustained period of instability, it is also fair to say that the negotiation of lucrative trade deals outside of the EU could ultimately see the UK grow its GDP and re-establish itself in the world’s top five economies.

These cannot be relied upon, however, while the immediate impact of Brexit would manifest itself through rising export tariffs, increased import costs and the decline of the nation’s vast financial services sector. With the economy already precariously poised in terms of earnings and growth, the short-term damage caused by Brexit could take years to repair.

Ben Barlow is a freelance finance writer specialising in stocks and shares, forex and ISAs. After studying business at Lancaster University, Ben worked at a number of financial institutions in London and New York and is now following his passion for writing.