How will leaving the EU affect trading?

How will leaving the EU affect trading?

What next?

Pushing the button on Article 50 of the Lisbon Treaty sets a two year deadline for the UK to leave the EU. The deadline can only be extended by unanimous agreement from the other 27 countries. In the current political climate it is unrealistic to rely on getting this unanimous consent and so we must assume that two years is a hard time limit.

This gives the UK negotiators a big problem. Even setting aside the political turmoil, no significant international trade deal has ever been completed in anything like that timescale. The Canadians have been negotiating with the EU for more than seven years on a trade deal that is nowhere near as comprehensive as the deal the UK will need. To make matters worse, if the UK leaves the EU then we will also lose the benefit of the trade deals negotiated with 53 non-EU markets where current trade deals exist.

If the two years expire without a trade deal then there is nothing left other than to fall back on the World Trade Organisation rules. This would introduce tariffs and customs duties as well as more uncertainty. This is possibly the worst outcome for UK businesses.

The EU has made it clear that it will not start informal negotiations until the UK activates Article 50. This is a simple but powerful negotiating tactic. Will a future UK Prime Minister start the Article 50 process knowing that there is no prospect of completing a trade deal by the time the two years have expired?

What are the alternatives?

Broadly, the greater access we have to the free market, the more we will have to comply with EU laws. There are a range of existing models other countries use which the UK could adopt. These range from the Norwegian model with free movement of people, compliance with EU regulation and contribution to the EU budget through to the Canadian model with unfinished bilateral agreements.

Where does this leave UK businesses?

Nobody can think uncertainty is good for business. Deals are still completing but clients are nervous about the outlook. We are currently being asked to advise on ‘material adverse change’ and ‘force majeure’ clauses in contracts. Our trade and immigration lawyers are keeping close to events and developments to be ready to advise.

Overall, the wider political and economic uncertainty will reduce investment. We can expect businesses to conserve cash rather than invest and a tightening of credit from the banks. The most important issue following the vote to leave will be to have visibility on where we are going before invoking Article 50.