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The dense fog over Brexit, which was hovering since June 2016 referendum, cleared its first hurdle after many hiccups, at the beginning of the year on January 31, 2020. But this is not all and there is still more to achieve in terms of business and economic relations with the EU block that UK was a part of, for the past 47 years. Presently, the two sides are enjoying a status-quo under the pre-determined transition period, which is about to end on December 31, 2020.
The negotiations around the future UK-EU relationship are going on, but the challenge of Covid-19 pandemic is making both the parties to go slow. However, despite of a slow progress on trade negotiations both sides have individually ruled out any extension to the transition period, which has less than six months to expire.
A ‘deal’ that businesses of both sides are eyeing for
Though virtually nothing has changed for the public or businesses as of now, but uncertainties are looming large over the economic policy & politics and all this hinges on the negotiations between the two sides. Whatever be the outcome, a ‘deal’ or a ‘no deal’, the businesses and stock markets are looking for some clarity to move on. Let us take the best-case scenario of both sides reaching to a deal before the end of the transition period. But if talks fail, the World Trade Organization (WTO) rules will get implemented, implying tariffs on both imports and exports from the EU and custom checks at the borders.
Both the sides have agreed that they want a free-trade agreement i.e. borders without tariffs, restrictions, or quotas. But the EU wants UK to sign an agreement with stricter rules to enable fair and open competition, that means UK cannot undercut their revivals by offering subsidies to businesses. Over and above the UK is also required to hold in-line with the EU’s environment policies and worker’s rights.
This is not what UK desires, and the UK prime minister Boris Johnson has clearly mentioned that "There is no need for a free-trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment or anything similar," highlighting the disconnect.
Investments (internal or FDI) are likely to be in focus with both sides negotiating a deal; lower investment is what is going to impact the Covid-19 ravaged UK economy the most. This could potentially damage the country’s chances of recovering from the deepest recession in almost a century.
Big businesses are already prepared for a no-deal Brexit
Brexit with some sort of deal with the EU is the most preferred outcome, but big businesses can’t afford to hold on their preparation until the last moment and getting caught up on the wrong side. Therefore, companies like Vodafone and Visa have strongly considered relocating offices (and jobs) to mainland Europe.
Tesla CEO, Elon Musk, has mentioned that Brexit uncertainty played a role in the company’s decision to choose Germany over the UK to set-up its new factory. Sony also went out to announce the transfer of its European HQ to the Netherlands. HSBC has decided not to move out of their London office, but is already prepared for business in a no-deal Brexit scenario.
Though Brexit has opened up doors for the UK to strike deals with other countries on its own terms, this should not be looked upon as a reason to break ties with its most important trading partner without a deal, as some of the smaller business in the UK might still be relying on a more favorable outcome and will suffer a big blow in case of a no-deal Brexit.
Stocks and the financial market may show a volatile trend
Undoubtedly there would be ripples in the financial markets; stock markets suffered a severe jolt after the Brexit vote and have been clearly depicting the mood whenever the uncertainty started to hover over the Brexit deal. Volatility in UK stock markets cannot be denied even in case of ‘deal’, while in case of ‘no-deal’ a strong shakeup could happen.
Similarly, the Pound may witness some recovery being undervalued and oversold, as the currency’s movement has remained volatile eyeing the Brexit trade negotiation.
But the flip side of the coin is that with limited time left to strike a deal, some small business who might be hoping for a favorable outcome would need to be prepared for the worst-case scenario of a ‘no-deal Brexit’, which is undoubtedly compounding their woes after the Covid-19 impact, as some of them have already exhausted their resources fighting an unexpected battle.
A potential no-deal departure could be a bigger blow which the country should avoid given the current state of the economy, which is already into a recession. A Brexit without a deal is not just a loss for the UK but to the Eurozone as well and should definitely be avoided.
