The fallout from the United Kingdom's vote on European Union membership, in which the 'Leave' campaign won a narrow victory, will have a wide range of repercussions that are difficult to assess in terms of scope, duration and size. The initial impact of this result has been global, and uncertainty remains a part of the post-vote reality.
The merits of each position and the possibility of a reversal of the referendum verdict, or an unlikely choice by the UK parliament not to act on that verdict, are left for others to consider. What is clear is that a potentially transformational outcome has been unleashed by UK voters, and that a degree of disappointment, perhaps even resentment, could impact short-term discussions, particularly the two-year exit timeline laid out in the much-referenced Article 50. What is equally clear when considering the wider impact of this outcome is that the pursuit of clarity must be the immediate objective of everyone involved.
The popular vote in favour of Brexit has evolved in a wider political, economic and social context, and raises existential questions for the European Union, for the future of the UK, and for globalization, economic and trade-based integration, sovereignty and multilateralism. The answers to those questions have the potential to lead to a more robust set of political, economic and trade relationships globally, as nations and businesses pursue links that are mutually and equally desired.
It is too early to assess what a Brexit will look like in practical terms, or to what extent the UK and the EU will have the desire or the ability to maintain certain established links outside the framework of EU membership. It is unclear today whether this event signals a seismic shift that will reverberate regionally and globally for the next decade or longer, or whether negotiations will evolve in a manner that will materially reduce the impact of what was either a grave political miscalculation, or a strong expression of democracy in the United Kingdom.
Without a second referendum with a different outcome, or a refusal by UK parliamentarians to act on the result – legally possible but politically unlikely – it is clear that the result of the vote will have direct and near-immediate consequences in the area of trade, both regionally and globally.
This is in part due to the difficulty of separating trade and economic matters from political considerations in this situation: while there is some attempt to ‘soften’ the Brexit message, and to slow the pace related to the triggering of a Brexit process by the UK, there is also a certain political imperative and urgency on the EU side to take clear and decisive steps forward, perhaps even to make the exit punitively painful for the UK to discourage similar developments in other EU member states, while simultaneously championing the ongoing relevance and value of a strengthened European Union.
If the latter argument holds, and the EU wishes to continue to be seen as a valuable political, economic and social construct despite its acknowledged imperfections, one way to do this will be to ensure that EU membership continues to bring with it trade-based economic value creation, labour mobility, overall increases in quality and standards of living – all benefits that should be materially higher for members than non-members. Despite the importance of the UK as a standalone economy and trading nation, EU leadership will be compelled to take a firm stance and to draw sharper differentiation between member states and non-members, in order to reinvigorate the vision and the potential of the European Union, and in order to preserve the credibility of the EU as a counterbalancing power in global affairs.
The renegotiation of trade deals between the UK and EU member states on a bilateral basis, or at minimum, a material dilution of the UK’s position relative to EU member states, is one way to draw some clear distinctions between pre-Brexit and post-Brexit UK. Part of the very probable shift in trade flows will evolve organically, as firms that have established a presence in the UK to access the EU, and to benefit from the UK’s participation in EU-linked negotiations, begin to reconsider their strategy.
Additional shifts in trading relationships and trade corridors will arise from political decisions (there is already talk of greater UK engagement with Iran in the post-Brexit world), and from the commercial decisions of individual firms, multinationals and major supply chain anchors, as they re-assess the evolving “place” of the UK on the map of global trade.
The reshaping of trade flows, trading relationships and the terms on which trade is conducted may be further amplified if the financial markets are significantly redeployed around the world. Traditional hubs like London and New York have already been concerned for a decade or more about losing their leading positions as hubs of financial activity. It remains unclear whether the City and its more recent ‘annex’ in Canary Wharf will remain as attractive, or whether Brexit, coupled with the broader flow of events, could lend momentum to Singapore or other markets emerging as global financial centres.
Financing – specifically, a specialist branch of finance referred to as trade finance (and now increasingly, supply chain finance) is a core enabler of trade activity, sustaining perhaps as much as 80% of the $20 trillion in global merchandise trade activity annually. Could the departure of the UK from the European Union materially impact the availability and/or cost of trade finance, as a result of the possible fading of London as a global centre of finance?
Trade finance is a mature and long-established discipline with an extremely low default and loss history (by one measure, perhaps 400 times lower than domestic mortgage lending), despite its involvement in supporting trade activity in the most challenging markets. This remains true over a period of years, whether in relative stability or in the midst of economic crisis, civil unrest and outright war. Risk assessment and mitigation is fundamental to the skillset and competencies of trade financiers, with specialist flows involving commodity trade often handled by French, Dutch and Swiss banks among others.
The Asian Development Bank estimates a level of unmet demand for trade finance in the range of $1-1.4 trillion annually, most of it in emerging Asia. There is broad acknowledgment that private sector banks alone lack the balance sheet capacity to address this shortfall, and thus there is a need to attract significant amounts of non-bank capital to the space, and to enhance the propositions around trade finance and supply chain finance, for SMEs and for developing markets in particular.
This is a systemic issue which exists independently of the Brexit outcome, but one which could benefit from focused policy attention as questions related to the post-referendum evolution of trade flows are considered. Global capacity for trade financing will continue to be impacted more by regulatory issues and risk appetite in the banking sector, and recent disruptive propositions in the fintech space, rather than the post-Brexit dynamics.
Similarly, while the Brexit scenario will certainly impact trade terms between the UK and the EU, highlighting the importance of a rules-based global trading system and the role of the WTO, global supply chains and commercial activity will adapt to the new realities. Policymakers must determine what levers they are prepared to pull to mitigate the effects of this historic vote, and to influence the nature of the post-Brexit trade flows. And this must be carried out in the wider context of the Trade Facilitation Agreement, fast-growing South/South trade, the evolving “One Belt, One Road” strategy of the Chinese government, and the still important post-Brexit intra-EU trade flows.