Possible impact of “BREXIT” on Britain’s economy and shipping

British Prime Minister David Cameron was not in favor of holding a vote on “Brexit” at all. In 2014 he faced mounting pressure from the populist right over the issue of migration and Britain’s EU membership. To pacify dissenters in his own party and arrest the rise of the far-right UK Independence Party, Cameron promised to hold a referendum on leaving the EU if his Conservative Party won the 2015 election.

Following the victory of Conservative Party in 2015 general election with outright majority in Parliament, Cameron had to fulfill his commitment. Accordingly the epoch-making event in the history of Britain’s parliamentary democracy i.e. the referendum was held on Thursday 23 June 2016 and “BREXIT” became a reality with 51.9 per cent UK voters supported leaving EU. Cameron vigorously campaigned for a “Remain” vote. Accepting his failure in the referendum, Cameron declared that he would resign in October with a view to allow new leadership to handle the post-Brexit situation.

Prime Minister David Cameron

The vote has forced British Prime Minister David Cameron to resign

The immediate key development of Brexit may be seen as under:

  • UK votes by 51.9 per cent to leave EU
  • David Cameron step down as PM
  • Scottish leader says new independence referendum likely
  • Sterling plunges to 30-year low
  • Global stock markets see big sell offs
  • Euro Stoxx bank index down 17 per cent
  • EU leaders tell UK to begin swift exit talks & invoke article 50 of the EU treaties, which sets a two-year deadline.
  • Eurosceptics call for referendums in France, the Netherlands and Denmark

It is very likely that the economy of Britain would encounter a big initial shock of uncertainty & challenge due to its exist from EU after a long 43 years of membership. So it is contemplated that  Brexit  would produce wide ranging impact on employment, international trade, foreign investment/foreign policy, migration &  other important sectors of the country. In this article we will confine our discussion on the possible impact of Brexit on the international trade and shipping of Britain.

Boris Johnson

Conservative politician & former London Mayor Boris Johnson – Brexit Supporter

Impact on International trade

Brexit will necessitate the new leadership of Britain to evolve a new trade deal with EU for handling the country’s exports and imports which so long enjoyed free movements between 28 member States. That means new trade policy has to consider and negotiate with the counterpart of EU regarding imposition of tariffs and quotas on goods to be moved to & from EU countries which will impact British business and international trade. These will a challenging task for Britain which will have to done within the deadline of two years as per article 50 of EU Treaties.

Under post-Brexit situation, the key issues to be addressed are as under:

New trades deal with European Union

First of all UK has to give formal notice to EU (European Council) under Article 50 of Lisbon Treaty that they want to leave EU. Then it will open up opportunity for starting formal negotiation to develop legal framework for Britain’s trade relationship with the EU within a deadline of two year. Of course there is a scope for further extension under said Article. These discussions will need to consider the framework for exporting and importing goods (consumers & manufacturing goods) and the basis for continuation of services trade (such as legal advice on big company takeovers) to and from the EU. In addition, negotiations will have to cover customs procedures, passport controls for business travelers and regulation on issues such as environmental, health and safety standards.

Imposition of tariffs on UK goods & services under new trade deal

The post-Brexit situation has to face the challenge that EU will impose tariff on the goods and services of UK which will increase the cost the exports to the consumers / users of EU countries. UK government needs to negotiate this tariff rate with prudence & professionalism so that flows of British exports & imports are not affected in the long run. For example at present approximately UK exports 40% of its products to EU countries. Imposition of tariffs would increase the cost of UK exports and thereby it would face competition with similar domestic products in the EU market. EU will have choice to import similar products from third countries if UK exports are considered expensive. Export of car is one of the leading items of UK export to EU (More than 8 out of 10 UK-made cars are sold in Euro-zone). If EU impose 5% tariff on UK car exports(which is normal), it would increase the sale price of car. As such it might have negative impact on the demand of UK car in EU market. If quotas are fixed by the EU on UK exports, it will restrict the amount of goods and services to EU market which would ultimately impact British international trade.

In the same way application of VAT and import duties on goods imported into British economy would increase the cost of imports resulting in suffering to the consumers. How to avoid this VAT & import duty? There is an optimistic option that Britain would make a Norway-style deal with EU. In that case it would be treated as part of the European Economic Area (EEA) and all UK imports would come under duty-free facility because free trade exists between EU & EEA members. But the importer would need to show documents to prove to the UK border authorities that the imports were actually produced in EU.

Effect on British Financial Service Industry

Britain’s financial and professional services industry includes Banks, Certified Accountants, Corporate lawyers and Investment Managers who sell their expertise services to EU member countries without any problem as they presently hold EU passport. This service industry makes significant contribution to GDP which is around 12% and it is more than manufacturing sector. If this lucrative ‘EU passport’ is not allowed now by EU after Brexit, it would create a great obstacle for the financial expert to render their services to the single market of EU. The new trade agreement has to look into the requirement of this Service industry so that they can operate in the EU countries under liberal regulatory environment & can continue to use their ‘EU passport’ as per present practice.

Whether British government & civil bureaucracy are competent enough to negotiate new EU trade deal? Will it affect trade with US & other countries outside EU?

After Brexit , the existing trade between US & Britain under current terms will not be affected and this has also been confirmed by US President Barak Obama. As regards trade with other countries, Britain will have more freedom to negotiate trade deal with any other countries of the world, in order to boost their exports & arrange imports at comparatively cheaper rate.

Impact on Shipping

The voting results in favor of Brexit have shown strong reaction from Britain’s shipping industry. The professional institute, Shipping lines and other stack holders of shipping whose main offices are located in Britain, have given their open reaction about the possible impact of Brexit on the shipping and maritime sector. The quick reactions shown by the shipping industry after the victory of Brexit, are outlined below:

International Chamber of Shipping

ICS holds the opinion that –“It takes no view on what is a political decision by the UK people. It is simply too early to know whether the overnight volatility in global stock markets  will be a short- or longer-term trend, or will have meaningful impacts on worldwide trade growth. But the global shipping industry, which is the servant of world trade, will clearly be watching developments with a very close and direct interest.”

The Baltic Exchange

The Baltic Exchange reaction in response to Brexit is that – the marketplace for shipping is global in nature, and the Baltic Exchange plays a leading role in service of this marketplace. The UK’s vote to leave the EU is not material to the potential SGX transaction, nor do we envisage it playing a major impact on the ability of UK maritime services sector to serve global trade.

Robert Keen, British International Freight Association

Robert Keen of BIFA expressed his optimism saying that – Today the UK is still a member of the EU and it is too soon to start speculation on the outcome of two years plus of negotiations regarding trade deals and movement of goods. He hoped that they would be able to make the new leadership of Britain to understand & recognize at the time of negotiation with EU, the fundamental role of freight forwarding services, including custom formalities undertaken by the Association members regarding movement of UK’s trade with Europe.

Dave Matcham, International Underwriting Association

Dave Matcham of IWA in his reaction says that – Clearly the UK’s decision to exit the European Union presents challenges for London Market companies and uncertainty surrounding the potentially prolonged nature of this process will be problematic for future planning. Our industry is, however, experienced in responding to change. He further upholds the opinion that the free trade benefits of EU membership have been vital in maintaining London’s position as a global insurance hub and are highly valued by IUA members. This is true both for insurers headquartered in the UK and those international firms that use London as their centre for European business. Considering the necessity of continued access to European markets, he reaffirms that the IUA will be working with the London Market Group to ensure our industry’s views are fully represented to new leadership during official negotiation of Brexit with EU.

UK Chamber of Shipping

UK Chamber of Shipping gives a very realistic statement about the impact of Brexit and says that – What we need now are cool heads. We’ve had the political debate, now it’s time for rational and strategic thinking.  Chamber focuses that the rest of the world beyond Europe has experienced significant economic growth, and a key argument by the Vote Leave campaign was that the UK would be able to quickly sign free-trade deals with trading partners around the world. Government now has to act quickly to ensure that happens.

Further it is stated that leaving the European Union is a process, not an event, and that process has to be managed carefully.  David Cameron’s decision not to immediately invoke Article 50 is a welcome one, and there should be no rush to do so for his successor. Chamber of Shipping also highlights that we believe Government should establish a new Free Trade Commission, working across the Department for Business and the Foreign Office, to train trade negotiators and begin the process of establishing new trading ties around the world and be ready for the negotiations with the remaining members of the EU.

Peter Karlsen, Norbulk Shipping

Peter Karlsen of Norbulk Shipping holds the view that the shipping industry in the UK will view the referendum result negatively as does most big business. It is a potential disruption to trade, movement of goods, and labour. We are facing years of complex negotiations to sever ourselves from the EU.   He strongly reacts that the UK, as a centre of excellence for shipping services, will continue.

Harry Theochari, global head of transport, Norton Rose

Harry Theochari, global head of transport – expressed his grave concern over the possible effect that Brexit would have on the United Kingdom’s maritime services. A recent report of the City of London confirmed the continued global pre-eminence of the United Kingdom’s maritime services sector. But the main concern is that the departure of major international banks and financial institutions from London, would have negative impact on the insurance, brokerage, legal, and accounting services which have been rendered   efficiently to the global maritime industry so far.

Greig Macpherson, Vantage Shipping Lines

Greig Macpherson– representative from this Greek shipping company in his reaction says that – Whilst the current leadership vacuum exists in the UK, we should all expect a degree of uncertainty and confusion over the coming weeks. However, we expect the shipping industry to ride the storm and carry on as normal. The real concern at this time is the continued freedom of Greek shipping companies to be able to open, staff and run representative offices in the UK without additional punitive or restrictive measures.

 

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