60% of UK trade is still exposed to a Brexit shock

Posted February 13, 2019 11:47 a.m. EST

— If nothing changes in the next 45 days, the United Kingdom will crash out of the European Union with as much as 60% of its trade at risk of disruption.

Leaving the European Union without a deal means losing preferential access to the bloc's vast market, putting nearly half of UK trade at risk from higher tariffs and other costs.

A messy divorce would also shut Britain out of 40 additional trade agreements the European Union has with its trading partners. The deals cover roughly 70 countries and account for 13% of UK trade.

The British government has been racing to replicate as many of these EU deals as possible before Brexit. It has so far managed to complete four, covering just 3% of the country's total trade.

The slow pace of progress means that up to $1 trillion in UK trade remains exposed to new potential trade barriers.

Following a disorderly Brexit, the United Kingdom would automatically revert to World Trade Organization rules that come with higher tariffs.

The country could unilaterally slash import tariffs on foreign goods to prevent price hikes. But many British exporters and service providers would likely face new barriers in key markets.

The United Kingdom also trades with countries that do not have EU trade deals, such as the United States. Most of this would not be affected by a chaotic Brexit, but some agreements that make trading easier might be void.

UK politicians could minimize the risk from a disorderly Brexit by agreeing the exit deal negotiated by Prime Minister Theresa May, but they have not yet done so. Britain leaves the European Union on March 29.

David Henig, director of the UK Trade Policy Project, said that replicating existing EU trade deals with countries like South Korea should be a top priority for the UK government.

"These are the ones we are about to lose, where businesses have existing market share," he said. "It should be the focus."

The clock is now a major factor: UK Business Secretary Greg Clark recently warned that exporters in distant markets need clarity as soon possible because of the time it takes to ship their products to Britain.

'Down to the wire'

The UK government had billed the process of replicating EU trade deals as relatively straightforward.

Liam Fox, the UK Secretary of State for International Trade, is widely reported to have said in 2017 that replacing the 40 deals would be easy. He said they would be ready "one second after Brexit."

But the four agreements that have been negotiated cover just seven trading partners: Switzerland, the Faroe Islands, Chile and a trading bloc that includes Madagascar, Mauritius, Seychelles and Zimbabwe.

Switzerland accounts for around 2.5% of Britain's total trade, according to data from the UK Department of International Trade. The other completed deals account for less than 0.3% of UK trade.

Fox acknowledged Wednesday that some of the agreements "will go down to the wire."

But Henig said that it was unlikely that Britain would be ready prior to the exit deadline.

"We are long way short of what we were hoping for," he said. "I don't imagine you are going to have 35 deals done in the next six weeks."

Tough negotiations ahead

The United Kingdom is likely to face tougher trade negotiations as a single country than it did as a member of the world's largest unified market. Demands will be higher, and the UK's leverage diminished.

"A deal with the United Kingdom alone is worth less than a deal with the European Union," said Peter Holmes, a trade expert who teaches economics at the University of Sussex.

Holmes said that South Korea and Japan have already indicated the United Kingdom might have to be more flexible in future negotiations, suggesting they will demand concessions on trade in return for a new deal.

"The Japanese in particular have suggested that their companies have come to the United Kingdom on the basis of free access to the European Union," he said. "They've made it very clear that if they were to lose that, they would want some compensation."

Ford, which also uses Britain as an entry point to the European Union, reportedly told May during a conference call on Tuesday that it may move some production out of Britain because of Brexit. The US carmaker told CNN in a statement that a disorderly Brexit would be "catastrophic" for its operations in the United Kingdom.

It could be a sign of things to come for the United Kingdom. Henig said that future negotiating partners, for example, will show no mercy.

"Trade negotiators will negotiate, they know the United Kingdom wants something ... and they feel they can get more concessions," he said.