LONDON – Walking the streets of
London nearly eight weeks after the Brexit vote, it’s difficult to spot any
immediate impact or change in sentiment.
Residents and tourists alike continue
to clink together sudsy mugs at area pubs, pose in front of Buckingham Palace,
and stroll down Fleet Street as they pop in and out of shops and restaurants.
The only traces of physical evidence the unprecedented vote even happened are
faded get-out-the-vote stamps at a bus stop not far from Big Ben’s clock tower
and the Houses of Parliament stationed along the Thames.
The
The only certainty is the uncertainty that will persist at least in the
short to medium term. What happens after that depends on the trade relationship
the U.K. hammers out with the EU.
“We don’t know how the U.K.’s preferential access will evolve with
respect to the EU, with respect to the EU’s trade partners, and with respect to
the rest of the world,” HSBC senior trade economist Doug Lippoldt tells
FOXBusiness.com. “So there’s uncertainty, and that can be costly in the short term
because businesses do not have the full set of information they normally would
have to make investment decisions or long-term trade decisions.”
Indeed, early data collected during the first half of July – just weeks
after the June 23 referendum – showed businesses became more worried about the
nation’s economic future. The U.K.’s service sector, as measured by Markit/CIPS
data, saw a drop in business activity as output and new business declined for
the first time in three-and-a-half years, putting the index below the 50 mark
separating expansion from contraction. What’s more, the nation’s factory sector
also slipped into contraction territory in July to its lowest level since early
2013.
By August, both manufacturing and services experienced a rebound from the
initial shock – a return to business as usual. Manufacturing rose to a
ten-month high as work that was postponed restarted, while services saw its
biggest month-on-month gain in the survey’s 20-year history as the gauge
returned to growth but remained weak by historical standards, according to the
survey’s sponsor.
While Britain still sees investment in the movement of physical goods
into and out of its borders, the services sector accounts for nearly 80% of the
U.K.’s overall gross domestic product. A big question post-Brexit vote is what
happens to Britain’s financial services industry, which operates in part
through a number of global firms like Goldman Sachs (GS),
KPMG, Citigroup (C),
Bank of America (BAC),
and a host of others, with headquarters in the U.K., exporting their services
all around the world.
“London is the No. 1 financial center of the world. Businesses [in the
EU] have access to financial services that they couldn’t otherwise get in such
a cost-competitive fashion. There will be stakeholders on the [European]
continent that wish to maintain access to the U.K. services market. Likewise,
the U.K. runs a merchandise trade deficit with the continent, so there are
sellers on the continent that have a keen interest in maintaining access to the
U.K. market,” Lippoldt explained.
In essence, stakeholders on both sides of the English Channel will want
to see preserved the openness of the current market – referred to as the
single-market. The problem is no one is certain to what degree that might
happen. Lippoldt suspects the benefits both sides enjoy will be enough to
guide future talks and tamp down any lingering anger over the outcome of the
vote.
Like many questions surrounding the post-Brexit vote world in which the
U.K. finds itself, exactly how a future trade deal is negotiated with its EU
counterparts, or what the top priorities for Prime Minister Theresa May
include, are unknown. The country has yet to trigger Article 50: A provision
within the Lisbon Treaty – the constitutional basis for the European Union –
that officially begins the process of the U.K. unwinding itself from the
EU.
May has said she does not plan to invoke Article 50 this year, but Miram
Gonzalez, a partner at Dechert who specializes in international trade and
government regulation having acted as the lead EU negotiator for the World
Trade Organization telecoms agreements, said May and her cohorts need to
swiftly outline a roadmap for how they’d like to see negotiations begin.
“What is very urgent is that the government gives at least some general
indication of the kind of model they would like to get...It is very difficult
for companies to navigate because there are a lot of possibilities and at some
point, they need to continue making investment decisions…everything we hear
from business is they are concerned about the lack of legal certainty now,”
Gonzalez said.
Indeed, as negotiations play out and the U.K. begins to understand
exactly the mechanics of how a separation from the EU would take place, trade
negotiations with other nations would not be far behind. The U.K. could adopt a
range of models, including one like Norway, which would essentially allow it
access to the European Economic Area as it would accept a majority of EU laws.
The hitch with that plan is in order to gain access to the single market, the
U.K. would likely have to accept the free movement of people, or visa-free
travel by EU citizens. It’s a requirement that motivated many British citizens
to cast their vote in favor of Brexit back in June. 
At issue for many U.K. citizens is a struggle for the EU to contain a
migrant crisis in the region caused by a flood of immigrants and refugees,
largely from Syria, Afghanistan, Kosovo, and Nigeria. The mass migration into
the region is the largest since 1945 and has worried many EU
residents concerned about the growing threat of global terrorism and an
open-border policy that prevents a rigorous checks-and-balance system for
immigration. 
“The key question is whether the EU is willing to compromise at all on
the free movement of people. If the EU as a whole decides that its approach to
that needs to change because of the migration crisis and other political
pressures in other countries, and they feel that whole concept needs to be
adjusted, that would make it easier because then it won’t be just giving special
treatment to the U.K.,” PricewaterhouseCoopers chief economist John Hawksworth
explained.
As evidenced by the Brexit referendum’s result, the EU isn’t keen to
budge on the free-movement issue. Therefore, if the U.K. wants access to the
single market, it more than likely must also accept an open-border
policy.
“Clearly it’s been a sticking point for negotiations. Before the
referendum, basically [former Prime Minister] David Cameron was not able to get
any meaningful concessions on that point. It will remain a tricky area,”
Hawksworth predicted, adding another tick to the uncertainty column for British
citizens and corporations alike.
In a statement last week, May said Britain would seek a unique
relationship with the EU involving both controls on immigration and a favorable
trade deal.
The focus then, for the U.K. becomes working out an amicable solution on
trade with not just the EU, but other nations of the world. The complexity
surrounding the legal logistical puzzle can almost be boiled down to the existential
question of: Which came first – the chicken or the egg. For the U.K., the
question becomes where can the nation trade, and under what rules?
“The U.K. does not really have the legal basis to [negotiate agreements]
because they can’t sign bilateral agreements until they’ve stopped being a
member of the European Union. I hope that if everything is kept on friendly
terms, we can agree that we can start some preliminary discussions with third
countries so this doesn’t lead to a 15-year process,” Gonzales said.
This is
the second piece in a three-part series exploring how Brexit will impact the
future of the United Kingdom’s overall economy, and its ability to trade with
the rest of the world.
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