Brexit Plus Two Months: Not As Bad As We Thought — Or Is It?

The fallout was astounding. Days after the British public voted to leave the European Union, the British pound fell to a 35-year low; the UK economy contracted; and Machiavellian maneuvering upended Britain’s political establishment. Within weeks, however, markets stabilized and new leaders took charge. The UK even posted encouraging job growth numbers this month.

Nevertheless, this seeming stability could just be the calm before an unwelcome economic storm. Once the Brexit negotiations begin, it’s difficult to predict the outcome. Across the globe, businesses engaged in international trade are watching nervously.

Public Confidence Rebounds

In July, a CBI report found that retail sales in the UK fell at a greater rate than in the past four years. A long-running market research poll by GfK found the “biggest slide in consumer confidence in 26 years,” and reported similar numbers for manufacturers.

However, recent numbers indicate that confidence may have stabilized. Economists are cautiously optimistic about August numbers that show public confidence rebounding, retail sales rising, and a partial recovery of the British pound. The FTSE 100 rallied also, as UK manufacturers expect that a weaker currency will make British exports more attractive.

UK Business Interests Could Clash With Voter Demands

When consumers saw that the world didn’t end after the Brexit vote, their anxiety lessened. Businesses however, remain concerned about the timing, costs, and new regulatory environment that Brexit will bring. Russ Bisping, a senior director at Flash Global, says that the company’s customers are very apprehensive.

“Additional regulations, tariffs, and other changes could make supply chain management much more difficult and expensive, particularly for small and medium-sized exporters.”

Their concerns are valid: many UK laws governing intellectual property, employment law, immigration, and financial markets were written to conform to EU requirements. As the UK negotiates its “divorce” from the EU, businesses naturally hope for a minimum of changes. The British public, however, may demand them. Much of the pro-Brexit vote was driven by a sense that England, in particular, was losing its national sovereignty and character.

If newly elected Prime Minister Theresa May’s government tries to negotiate a sort of “EU-lite” trade agreement that agrees to free movement of workers and adheres to other EU requirements, “Leave” voters could rebel.

Economists Warn of Trouble and Uncertainty Ahead

Nothing unnerves financial and commercial markets like uncertainty, and unfortunately, nothing is certain about how Brexit will play out. Currently, we don’t even know when negotiations will begin, much less the terms of the eventual agreement.

May doesn’t plan to invoke Article 50 (the formal notification to the EU of the UK’s intention to depart) until sometime next year. London Mayor Sadiq Kahn is urging a delay until the end of 2017, citing the potential of huge job losses: “I know for a fact there are people from Paris, Berlin, Dublin courting business leaders as we speak.” May says she won’t invoke Article 50 and sit down with EU negotiators until her government can develop a “UK approach” that wins Scotland’s approval.

Meanwhile, EU leaders have warned that the UK can’t have it both ways. If the UK wants the economic benefits of EU membership, it must be prepared to accept freedom of movement across borders.

Expect negotiations to be long and contentious, both with the EU and even within the UK itself.

Expected Flash Points During Brexit Negotiations

“Leave” voters chafed at what they perceived as burdensome EU regulations — with good reason. Indeed, even some “Remain” leaders agreed that parts of the EU had become an unresponsive bureaucracy. Their losing argument was for reform, not exit.

These issues are likely to be some of the most difficult to resolve once negotiations begin:

Trade compliance: Standard import/export regulations streamline trade with EU nations. Exporters know that the paperwork for Scotland is the same as paperwork for Germany. The situation becomes more complicated after the UK exits. Even inter-company transfers could require extra time, cost, and attention if the material will cross borders.

Migration and labor laws: The EU requires freedom of movement across borders — both of material and people. The UK would like to keep free movement of goods and services, but restrict immigration. EU leaders reject this.

Intellectual property and contracts: EU nations use common standards for trademarks and contracts. Post-Brexit, the UK will have to rewrite its intellectual property and contract laws. The UK could grant protection to pre-Brexit contracts, patents, and trademarks — or it may not.

Cybersecurity laws/protections: The EU General Data Protection Regulation (GDPR) is a major new cybersecurity law scheduled to go into effect in May 2018. Among other things, it requires companies to report data breaches within 72 hours and imposes stiff fines. If the UK doesn’t agree to the terms, it could adversely affect any UK companies hoping to do business with EU nations.

How will it all play out?

The outcome is impossible to predict because multiple rounds of negotiation that are required haven’t even started yet. Long-term uncertainty could be bad for business and for public confidence in the economy and political system. Companies engaged in international trade should pay close attention and take steps to minimize trade disruptions.

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