Trad­ing with the UK and EU post-Brexit

GET READY FOR MORE BU­REAU­CRACY, WARNS ASH­LEY BALLS, AS THE UK MOVES SLOWLY CLOSER TO BREXIT.

NZ Business - - ISSUES WITH BALLS - ASH­LEY BALLS IS SE­NIOR PART­NER OF LE­GAL BEST PRAC­TICE. VISIT WWW.LEGALBESTPRACTICE.COM See: http://www.stats.govt.nz/browse_ for_ stats/in­dus­try_ sec­tors/im­ports_ and_ ex­ports/global-nz-jun-14/key-points. aspx#goods for NZ trade in goods.

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.

EX­CHANGE RATES

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?!

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