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Free Trade Templates and Brexit.

Remain or leave - is this argument really still going on? As with everything, we think its worth looking beneath the rhetoric, fear-mongering and blind belief to see how Brexit could affect various parts of the UK's trade and economy.

Joey Scully

15.02.2017

Remain or leave - is this argument really still going on? Ossifying positions on each side are resulting in some pretty stultifying prepositions. As with everything, we think its worth looking beneath the rhetoric, fear-mongering and blind belief to see how Brexit could affect various parts of the UK's trade and economy.

Common refrains are:

"We will be fine, they need us much more than we need them!"

Or,

"It will be an unmitigated disaster for our economy, we are heading for catastrophe."

These sorts of polarizing views are pretty useless in terms of our discourse, they certainly don't help us plan for what to do next or how to deal with any potential changes and fallout. Perhaps most importantly, they are also disturbingly absolutist - inferring its one of the other, and that the effect is either total annihilation or total validation. One thing we can all agree upon is that a 21st Century, developed economy like our own is highly complex and interrelated (the UK ECI[4] or economic complexity index is 1.6 or 11th most complex globally[1]) - and that any outcome will be highly varied, with *winners * and *losers * across different sectors of the economy.

Douglas Flint, Chairman of HSBC, recently said “The ecosystem in London is a bit like a Jenga tower [3]: you don’t know if you pull one small piece out whether nothing happens or whether it has a more dramatic impact.” This is likely true not just within the finance industry, but as an analogy for how sectors depend and rely upon each other. However, its equally important to understand that when a old regimen dies, we hope a new one and all the opportunities[10] that can represent, come with it. The ability to trade more broadly could bring vastly different and reduced price food goods to our country outside of todays EU provenance regulations. The shrewd importer is already looking at how a lower cost South American partner for example, could allow them to increase their margin on goods that the consumer continues to pay today's price for.

At Stowga[2] we believe in the power of data to predict and more accurately price logistics ad warehousing based on supply and demand for those services. We obsessively trawl through billions of data points on the UK's Trade in search of patterns and trends we can bring to our customers and improve their businesses.

We have completed a sector driven analysis based on set of assumptions about the potential outcome of a Brexit deal. We have avoided any prediction on the effect of a transitionary deal as this is likely to result in a situation similar to that which we have today. Nor does it take into account the amount of time FTAs may take to establish, possibly a decade or more. We are trying to predict the shape of trade assuming a certain number of trade deals in place and looking at the potential effects on our economy. Prompted by the recent signing, and with CETA[5] coming into effect in February 2017, we map some of our data to the new regimes that could be on the horizon.

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Possible Key Trade Deals

Within the EU, the UK is the single most important trading partner for Canada. We are the second-largest EU member state economy (and formerly the fifth-largest national economy in the world - now sixth or seventh depending on who you ask!), the destination for more than 40 percent of EU-bound Canadian merchandise exports, and accounts for more than 25 percent of two-way Canada-EU merchandise trade and roughly one-third of two-way services trade, including financial services. Why is CETA important?[11] Largely because its timely. What it encapsulates is the template for a FTA which has been ratified between Canada and the EU - on a 'mixed-agreement' basis. That means all EU member states have agreed to the terms. For the UK this could provide a much needed short-cut to both a quick Canadian-UK deal and a trade deal with the EU where we don't have a standing start, we already know they will accept the majority of the terms - and from an country with an economy about 2/3 the size of our own[6].

The result of this then, the UK secures almost tariff-free means of trading with the EU, always likely to be our biggest partner - and from the perspective of political capital, secured the first of the oft promised international trade deals.

TTIP is now well and truly dead on both sides of the Atlantic and it remains to be seen to what degree President Trump will implement the protectionist measures writ large in his campaign rhetoric. Based on the existing noise surrounding NAFTA re-negotiation, if any deal is to be struck it is likely to favor the US - as things stand the UK currently enjoys a trade surplus with the US, _'The Donald' _ is unlikely to allow significant concessions to an ally with a such a strong position, Sad!. This may allow better access for US exporters currently locked out by EU regulation such as GMO Agribusiness and Health and Pharma products.

A common statement from the DIT and FO is that we should be looking to increase our trade with Canada, NZ[7] and Australia, while this is of course a laudable aim as a continent AU-NZ still only represents a tiny fraction of our bi-lateral trade - less than 2% in either direction. We send a lot of automotive trade their way as they drive on the same side, but unless the UK is planning on drastically increasing its imports of Gold and Lamb we don't get a huge variety form either place.

BRICS and bigger emerging economies are likely to look favorably on bi-lateral deals but as they have smaller service sectors, they may wish to parlay on visa access[12] and immigration arrangement which seem to be a red line[8].

Predicted Winning Sectors

1) Products with Inherently 'British' Flourish.

A growing Chinese middle class with a big appetite for luxury European goods could see the biggest 'single country buyer' of British made cars increase its share. The weakness of the pound on big ticket motors, most notably from Jaguar, Bentley, Rolls Royce and Land Rover, could see them ahead in the coming years, possibly increasing the share of UK Car export to China up above 22% of the total.

Another of these unique appeal products, which arguably enjoys an even wider appeal is our commodity grouping 'Hard Liquor'. Making up ~2% of our annual exports distilleries are already eyeing better arrangement with 'cultural affinity' markets in the US and Canada and a stronger showing in Asia off the back of a more attractive tariff than European offerings. It is mostly Scotch Whiskey, in-fact because we import so little (no surprises there) the Scotch industry[9] is the UK's biggest net goods exporter with >£4bn of trade.

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2) Geopolitical Pressures Drive Defense and Aviation Successes

Rolls-Royce[13] is the Crown Jewel of British manufacturing, regularly sitting on an order book that runs close to £80bn. While last year it took a hit on the back of reduced defense spending and a slump in oil prices that all looks set to change. Increased tension globally, rejuvenated commitments to NATO and the opposite, an openly revanchist Russia all contribute to both increased defense spending and potentially supply shock in the oil and gas sector. Though civil aviation seems to be trimming its forecasts and thus its new aircraft orders, we think BAE and Rolls are looking at a couple of boom years in both domestic sales and sales to our allies in the ME and Asia.

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3) Gold

The UK's single biggest export commodity by value (at a HS6 classification level) is Unwrought, non-monetary Gold. The last few years have seen in excess of £30bn of the shiny yellow stuff leave our shores. This is likely to increase (supply permitting) as the pound weakens an global instability threatens the performance of advanced economies there is usually a steady uptick in flights from Heathrow to Zurich carrying this heavy cargo. Switzerland regularly makes up 85-90% of the UK gold export market. As a sidebar, it is worth noting that the export of Gold (unlike most other commodities) does not necessarily indicate that there has been any transaction - it may just be moved and stored in another jurisdiction.

Predicted Losing Sectors

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1) Muscle Car Mercantilism

Currently ~11% of our car exports go to the US, this was helped by the scaling back of US auto-manufacturing following the 2008 crash but now looks likely to swing the opposite way. Almost regardless of alterations to trade deals between our 2 nations, recent pressures from the incoming President to Build in America and Buy American are likely to see brands perceived as foreign suffer declining sales state side. Worse still, enforcing these ideals could see a tariff slapped on this prominent, _ 'blue-collar industry' _ commodity to ensure a perception that Trump is visibly delivering on his promises.

2) Pharma Triple-Threat

The UK's growing pharma and bio-tech industry is one of the success stories of recent years but things are looking less rosy as we hurtle towards Brexit. A potential change to the regulatory landscape[14] when we move out of the purview of the European Medicines Agency (EMA) and solely under a local regimen (MHRA), means domestic producers may be geared up to comply in ways they no longer need to. They may need to comply with additional requirements from the UK MHRA and face a manufacturing challenge with domestic requirements, EU requirements and a US requirements (the next biggest export destination). Second threat is the predicted cut in EU research and development funding at both the enterprise and university level these companies, it could translate to serious skill shortages and the movement of some of their operations to the continent. Third, could be pressure from the US, home of the biggest pharma and private health provider companies in the world like Pfizer, to adjust any FTA in their favor. For years they have been locked out by mercantilist EU regulatory landscape which prevents many US FDA approved products from gaining a foothold in over-the-counter or NHS procurement contexts. They currently only make up around 6% of our imported medicines, we expect this to increase dramatically following Brexit and hope that US drug companies are interested in making up a shortfall that may be left by European companies unwilling to work with a second licensing requirement.

What is clear in our research is that as much as historical data is an interesting starting point, and the shape of future trade deals will have a serious impact on the flow and direction of good and services in and out of the UK, two big factors keep cropping up.

1) That a transitionary and then CETA like deal with the EU (but outside the single market) does have the chance of preserving a good deal of the UK's current trade situation. This is important as more than 60% of our imports come from Europe and close to the same is exported there. Even just considering the business cost and effort involved in sourcing providers and buyers for close to £800bn in bilateral trade means its in everyone's interests that this continues in some form.

2) As much as trade deals will play a role in the future shape of British Trade, the snow globe of the existing global order is still being shaken. The real winners will be those shrewd and fast moving enough to capitalize on new opportunities when it settles. Whether that means exploiting a new regulatory landscape here and abroad or the opening of a new market which did not previously meet some obscure EU regulation. Visionary winners will be separated from losers by their capacity to adapt and be agile across their businesses.

Positioning yourself as a business to take advantage or simply to begin building concurrency & redundancy into your supply-chain configuration and negating negative impacts of Brexit will be tough on your own. Stowga is the only national partner connecting you to the warehousing and logistics sector. We are perfectly positioned to help you whether you are an optimist or a pessimist about our impending trade future.

Joey Scully - Runs Product Strategy & Experience Design at Stowga, is pretty obsessed with systems design, python and data science & making great customer experiences but makes time for IPA and being outside.