Stakes ratchet up on elusive Brexit trade deal

BRITAIN and the EU sought yesterday to strike an elusive trade deal, with failure likely to end with trade in chaos, markets tumbling and a huge economic price to pay.

Investors and banks have predicted that a deal will eventually be done, so a no-deal would hit sterling, according to major foreign exchange traders.

The shock referendum result on June 24, 2016, sent the pound down 8% against the US dollar, its biggest one-day fall since the era of free-floating exchange rates began in the 1970s.

Overnight Britain would lose zero-tariff and zero-quota access to the European Single Market of 450 million consumers. Britain would default to World Trade Organization (WTO) terms in its trade with the 27-state bloc, making it in effect as distant to its biggest trading partner as Australia.

Britain would impose its new UK global tariff (UKGT) on EU imports while the EU would impose its common external tariff on UK imports. Non-tariff barriers could hinder trade, with prices predicted to rise for consumers and businesses.

Borders risk disruption, especially the main crossing points, with shortages of certain foods possible as Britain imports 60% of its fresh food.Any disruption would be felt most keenly by sectors that rely on just-in-time supply chains, including autos, food and beverages. Other sectors likely to be affected would include textiles, pharmaceuticals and chemical and petroleum products.

The EU is Britain’s biggest trading partner, accounting for 47% of its trade in 2019. It had a trade deficit of £79 billion ($106bn) with the EU, a surplus of £18bn in services outweighed by a deficit of £97bn in goods.

Even with a deal, Britain’s reasonable worst-case scenario is that 7 000 trucks bound for the continent could stack up in the southern English county of Kent. A no-trade deal would wipe an extra 2% off British economic output in 2021 while driving up inflation, unemployment and public borrowing, Britain’s Office for Budget Responsibility (OBR) has forecast.

The long-term hit could be costly for both Britain and the 27 remaining EU members. Germany, Europe’s biggest economy, is Britain’s biggest EU trading partner. The shock would be felt unevenly across continental Europe, with those likely to be hit worst including Ireland, the Netherlands, Belgium, France, Luxembourg, Malta and Poland. The Halle Institute for Economic Research has forecast that EU companies exporting to Britain could lose more than 700 000 jobs if no trade deal is agreed.

Both sides want to avoid a hard border between the UK’s Northern Ireland and the Republic of Ireland in the EU. Implementing the Northern Ireland protocol of the 2020 Brexit Treaty will be complicated without a trade agreement. Brexit without a trade deal could allow Northern Ireland to become a back door into the EU’s single market, thus raising the spectre of a hard border on the island of Ireland for the first time since a 1998 peace deal.

London is the centre of the world’s $6.6 trillion a day foreign currency markets, accounting for 43% of global turnover. Its nearest EU competitor, Paris, accounts for about 2%.

London is also the global centre for euro trading, a potential headache for the European Central Bank.