Well, the EU referendum is over, and we can now get on with our lives! Hang on a minute, our lives have changed forever, so we need to first understand what kind of a world we live in. Brexit has changed the paradigm of business in the UK, as well as anyone that does business with the EU via the UK, but it could have far reaching impacts beyond the British Isles.
We all need to consider the impact of the UK referendum on our businesses and rethink our approach regardless of where in the globe we are based. Although the initial stock market shock is over, we will have many ups and downs in this roller-coaster ride into the unknown.
With this background, all businesses need to reassess their approach, focus, target market, pricing, etc. There is no silver bullet for this question but you need to review and reconsider your individual circumstances, business sector, and target market.
Short-Term impact
The referendum fever in the UK meant many people were focused on the news and debate pre 23 June, and then the aftermath of the surprise result from 23 June onwards. This may have significant impact on non-essential services such as holidays, holiday properties, luxury goods, etc. We believe this will continue to have an impact and weigh heavily on all businesses, whilst the uncertainty continues in the global market.
Currency
Weakening GBP is impacting buying decisions from holidays outside of the UK to property purchases for main residence, second homes, holiday homes, and investment. The falling GBP will also make imported products more expensive in the UK, hence reducing disposable income which will reduce the money available for non-essential purchases such as holidays, second homes, luxury items, etc. However, currencies can go up as well as down.
The British currency ride is not over yet. The fall in value has shrunk the size of the economy (down to number 6 overnight), but also is increasing the value and cost of imports. UK imports more than it exports, so as a net importer the current account gap is widening. Barring a recession to depress consumer demand for imported goods, this trend is set to continue.
Current account deficits are balanced by inward investment, hence UK needs significant inward investment every month to balance its trade deficit. Uncertainty over the UK economy, and the unknown outcome of the EU trade deal, has already slowed down inward investment. Unless there are positive signals to reassure foreign investors, this trend is set to continue, and may even grow. This could depress the value of the Pound Sterling further, hence setting a perpetual circle of costlier imports, rising inflation, and growing trade deficit. This trade imbalance, the uncertainties of Trade Deal with the EU, and political upheaval in the UK are the reasons for Credit Agencies downgrading UK’s credit rating.
Reassessing Target Market
Whilst many aspects of your business’s macro environment are out of your control, the market you target is entirely under your control. If your business has been focused on wooing British buyers, you need to rethink. The falling GBP will make your product more expensive and depending on the final deal with the EU, the British buyer’s purchasing calculus will have shifted. For example holiday homes abroad may become less attractive, if there is restriction on residency, or rise in taxation such as rental income, inheritance tax, capital gains tax, or purchase tax.
However, if you are UK based company the lower value of the currency may help make your product and services more attractive, but remember currencies move quickly and without warning. Also, if you are relying on imported parts or raw materials, your costs will rise as Pound falls. Taking contracts based on your currency advantage could backfire if there is a sudden movement in the wrong direction. You need to pick your market carefully and have sufficient room for manoeuvre in your cost base and pricing to cope with the unexpected.
Standards Divergence
Whilst there are many EU legislations that may not effect your dealing with UK companies (and visa-verse), standards may well diverge in time. For example many of the 14,000 legislations that have to be amended in the UK include standardisation, such as Product Safety (from cars to washing machines), Type Approvals (from cars to telecom equipment), Data Protection, Cross Border VAT Accounting, etc. The main achievement of the EU was not simply opening up free trade with zero tariff, but to harmonise standards enabling companies to sell their products and services across the EU without legislative burdens or artificial regulatory barriers.
These may or may not be changed by the UK parliament or the Government immediately, as frankly there is not enough legislative time in any given parliament to address this in the short term. However, in the long term there may be divergence of standards, which may demand companies to create different products for the UK vs EU. This adds costs and logistics burden, so you may have to consider these issues, if you were thinking about addressing UK market from EU, or the other way around, beyond the completion of any deal between the EU and UK.
The days of type approving in one EU country, and passporting it into the UK, or from the UK into EU may be over. You need to be aware that the environment your business operates could change very quickly, and without much notice. You need to diversify your income stream and market presence, but the challenge is you have no idea what the next 2 years will look like and even less idea of what the medium term outlook will be.
To Free Trade or Not To Free Trade
There is a significant misunderstanding by commentators and the general public about free trade. Whilst there is no doubt that agreeing free trade deals may take a while to achieve, there are a number of challenges the UK government will be facing which the electorate and politicians conveniently have ignored:
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Resources
UK Government does not have enough experienced staff to negotiate trade deals, as for decades this has been done via EU. It is difficult enough for the UK to put together an experienced team to negotiate a deal with the EU, let alone the 50 other countries that it has to negotiate roll-over deals with.
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Tariffs Barriers
Many people, including self-proclaimed experts, argue about the merits of zero tariff in trading deals. The problem for trade between nations is not Tariff barriers, but non-tariff barriers. Any country can agree to zero rate import duties with a trade agreements, but they cannot change standards and Type Approval process overnight! Regulatory barriers are put in place for variety of reasons, including protection of local industry, social attitudes, unique environmental cases, political consideration, and many more. They are not easy to remove, or prevent new ones coming into force.
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Non Tariff Barriers
The EU is a unique trading block which has universal Harmonisation, Standardisation and Type Approval at it’s core. This allows a supplier to approve a product for sale in one EU country, which gives them automatic approval to sell their product across all EU countries. If UK agrees a Trade Deal on tariff basis alone, it means UK companies will still have to go through approval loops to get their products to EU markets. These are far costlier barriers than the miserly import duties allowed under WTO. Pre Maastricht treaty it could take up to 2 years to get type approvals for telecom equipment in individual EU countries. This has now become a paper shuffling process taking only weeks. Alternatively, UK can comply with EU regulations, which means it will still benefit from harmonisation. Although this course of action begs the question as to what the benefit of leaving is, if you have to comply with rules that you do not get a say on?!
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Passporting of Services
Just as Type Approvals for products, Services sectors such as Banking, Insurance, etc. enjoy the same freedom in offering their services across the EU by Passporting. Think of this as Type Approval for service industry. In order to achieve this, standards and legislations had to be harmonised across the EU. To retain this right, UK will have to comply with EU services regulations, as well as product Type Approvals for physical products, which once again brings up the question as to what UK gains from leaving the EU, if it has to comply with all it’s regulatory frame works.
Contingency
Businesses in general have contingency planning for many scenarios, however this time around we need to plan for the unexpected, the unforeseen. and the unknown. Whilst we all hope pragmatism will prevail, and a reasonable deal is struck, we must also be aware of the incompatible promises UK politicians have committed to on immigration, cost savings, trade, and the brave new world outside of the EU.
This may harden positions, and we may end up with no deal at all, forcing UK into WTO mode. Whilst this is not what any of us may want, this may be the only realistic option open. This means we need to think the unthinkable, and plan for the worst as well as the best scenario. Optimism is a human condition that entrepreneurs have in abundance, but we must not allow optimism alone leave us without options and contingency plans. Businesses need to plan for the worst but hope for the best.
Cognisant Associates have a great deal of experience in International Trade, including import and export of technology, cross border service delivery, and relocation, which means we can help you assess your options and help you navigate through these uncertain times. Contact us now.
About the Author:
Ali Zartash-Lloyd is Managing Partner at Cognisant Associates a business consulting partnership. He is a management graduate from the University of Leicester. He held Senior Management positions at a number of Multinationals for over a decade including Director of Global SME Products at Avaya Inc. and European Sales & Marketing Director at Samsung Telecom.
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