Brexit And The UK’s New Situation In International Trade

​By Jouko Ahvenainen, Chairman of GrowVC Group

The British voters indicated that they want the UK to leave the EU (called ‘Brexit’). The UK has been an integral part of the European Union since 1970’s and it is not a simple process to leave the EU. The UK and EU must agree on the future arrangement, including trade agreements, possible common regulation and movement of people. This has an impact on finance services, including digital finance and fintech.

The UK Prime Minister David Cameron decided to resign after the referendum. The new Prime Minister Theresa May starts on July 13, and it is then her duty to start to work with the resignation and EU relationship negotiation process. The referendum decision is not binding, although it is politically difficult for the Members of Parliament to ignore it. There is a lot of speculation whether Brexit really will happen. It is not an easy step to leave the single European market. Theresa May has said she is going to respect the will of the voters, but there is a lot of uncertainty on how the breakup will actually be implemented and on what the UK’s relationship with the EU will be going forward. 

Politically, the situation is even more complex. Scotland has had its own independency plans for a while now, and has said it would leave the UK if the UK leaves the EU. And there is also a threat that Brexit could shake the relatively new peace in Northern Ireland. People in Northern Ireland also have talked about an exploring an option to join Ireland. In Northern Ireland and Scotland, the majority of voters wanted to stay in the EU.

At this point it is impossible to give a detailed analysis when we have no information on what the EU - UK relationship will be in the future. We don’t even know the negotiation targets of the UK or the EU. In principle, we can say it can be anything from the models Norway and Switzerland have with the EU to the global WTO model. For example, Norway is a part of the single market, but it has to follow all EU rules, including free movement of people that is a big issue in the UK. Switzerland is not directly a part of the single market, but it has agreements to cover free trade and also free movement within certain limits, but its banks cannot operate in the EU single market (that’s why many Swiss banks have had EU business HQs in London).

The UK will need to negotiate trade agreements not only with the EU, but with many other countries in the world, because up till now, it has been able to trade based on EU’s deals with those countries. It takes a lot of time and resources to negotiate these agreements and already there have been comments that the UK does not have enough competence to handle this given that for 40 years they haven’t had a need to. So, they probably need to hire competent negotiators from other countries, including the US.

According to the EU rules, the resignation process takes two years. Officially the UK hasn’t yet triggered the resignation, and it is still unclear when they are going to do it. And it is also possible that it takes more than two years to agree to all terms and conditions of the resignation and agree on a new arrangement. For example, the EU is now finishing a trade agreement with Canada that has taken 7 years. The TTIP and TTP negotiations have also taken years.

It has been said that Brexit is the most complex and expensive divorce in the world. It will take years, and it is still unclear if it really changes things, or if is it will be more like an “almost a member” arrangement with a new name. But it has already created a lot of uncertainty for the UK economy and its trading partners, forcing many companies to consider what to do with their UK based operations. It would be important for companies and the economy to find a new arrangement or at least targets for the new arrangement as soon as possible.

Read the whole article and more details on TradeUp Blog.