Trading with the UK and EU post-Brexit
GET READY FOR MORE BUREAUCRACY, WARNS ASHLEY BALLS, AS THE UK MOVES SLOWLY CLOSER TO BREXIT.
WHILST THE UK has long since been replaced as a major trading partner with New Zealand by China and other countries, the volume of trade with the EU is still considerable at more than $5 billion.
At the risk of boring you, the EU has two inbuilt mechanisms that make trade with any of the bloc countries quite straightforward. These are the ‘Single Market’ and the Customs Union.
In basic terms the first treats all 28 members as the same. The rules are universal – if your goods comply with one member they comply with all. That’s quite helpful considering there’re more than 500 million customers.
The Customs Union is, in effect, an extension of this and goods can transfer between members with no additional paperwork, compliance costs or duties. For the Kiwi exporter this is a considerable advantage as there are no language barriers – you can assume any EU customer is UK and trade accordingly; no need to mug up on your best Romanian for official purposes.
So what happens when (if?) Britain leaves? And how will it impact Kiwi trading businesses? Two distinct customer groups will emerge; UK and the EU, each with its own rules, duties and compliance costs.
The present UK government has already stated its intention of withdrawing from a major international treaty – the European Convention on Human Rights (ECHR). This may make NZ/UK trade simpler as the withdrawal will remove health and safety, worker protection and other compliance barriers (i.e. there will be no need to comply with EU standards).
Trading with the EU will be another matter as their standards will not change and may continue on the present trajectory of increasing health and safety, food safety, worker protection and other elements that are, to some extent, included in all international trade agreements.
Using the UK as a convenient entry point to the EU will no longer apply unless the UK continues to apply EU standards.
So if you currently export to the UK and EU be prepared for your compliance costs to increase after Brexit.
In the UK since the June 2016 referendum the pound has fallen by around 20 percent – but this is not consistent across all currencies.
The UK media has touted this as an opportunity for UK exports – which became a lot cheaper. Conversely, imports have become increasingly expensive. Perversely, UK exports have not increased by volume, nor are order books looking any better.
On the domestic UK market inflation is now the fear, fuel prices are up and sales of clothing, for example, are down five percent since June.
Kiwi exporters to the UK and EU need to take advice on exchange rates and hedge where possible. This may buy time, but it is not a permanent solution.
If your margins on sales to the EU were already tight in early 2016, by now they may have disappeared altogether. Where does the Kiwi Dollar fit all this? In short, it appears to be historically overvalued – by a very large margin. At the time of writing NZ$1 buys €0.68 and £0.58. That’s 20 to 30 percent higher than two years ago.
What has changed in the interim? And perhaps most important for business is; will it continue?
Looking at New Zealand’s economy nothing of any significance has changed in two years except the price of dairy has fallen. GDP growth is up but it’s not real. If the cash brought in by migrants (mainly to buy houses) is removed, annual growth is running at 0.6 percent and barely above recession rates. Add in the level of debt New Zealand’s carrying (half a trillion dollars) and something has to give.
Unfettered immigration may help estate agents and builders, but it’s not the basis for running a modern economy. No real wealth is created.
By contrast, the UK and EU are not the basket cases many commentators suggest. Together they still represent the most sophisticated and wealthiest community anywhere.
If the UK leaves the EU, some 65 million customers leave but there’re more than 450 million left. For Kiwi businesses trading with both the UK and EU compliance costs, margins, transport costs, growth potential, currency risk and political risk must be considered.
If you’re using the UK as an EU portal there’re big risks ahead if the Customs Union and Single Market access is abandoned.
If your customers are primarily on the EU mainland nothing much changes – although currency and exchange rates are a significant factor.
Whoever said international trade was easy?!