A No-Deal Brexit compounded by the COVID-19 pandemic could see UK GDP fall by 6% and lose £134 billion pounds annually according to The Outlook for Trade after Brexit report.
Thereport, from the leading legal global law firm Baker McKenzie and economic consultancy Oxford Economics, covers four sectors of the UK economy, automotive, consumer goods, healthcare and technology which make up around 40% of the UK’s manufacturing GDP and export 46% of their goods to the EU.
The report forecasts the combined economic costs of Brexit and the COVID-19 crisis on the UK economy as well as addressing particular issues relating to exports of four key industries: automotive; consumer goods; healthcare; and technology.
It also explores potential policy options for mitigating the resulting damage to business activity, including two specific Free Trade Agreements (FTAs); a trade deal with the US and membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) . Estimates based on data from Oxford Economics suggest that a US-UK deal would provide a boost of only around 0.2% to the UK’s GDP, while membership of the CPTPP would raise GDP by a marginal 0.05%.
The long-term economic impact of COVID-19 on the UK
The report forecasts that over the next decade the UK’s GDP will be 2% lower, the equivalent of £50 billion a year, because of the pandemic, when benchmarked to the level of GDP in 2019.
With the UK economy now gradually re-opening, many firms will remain operating well below normal capacity, limiting the pace of the recovery.
The report forecasts that in the long-term, the UK’s total exports will be about 2.5% below the levels anticipated before the outbreak.
Jenny Revis, partner in the EU, Competition and Trade practice at Baker McKenzie said, “It seems extraordinary that in the midst of the biggest economic shock to the global economy since the Second World War that the British government would consider compounding the impact on the economy of COVID-19 through consciously choosing a No Deal Brexit.
This would add enormous burdens to business at a time they are already facing genuinely unprecedented challenges. An 11th hour deal is still possible and would be in everyone’s interests – businesses in the most affected sectors should make a final lobbying push now to UK ministers while also finalising their no-deal planning.”
The long-term economic impact of Brexit on the UK
The report outlines that a free trade deal with the EU would see UK GDP fall by 3.1% in the next decade relative to a hypothetical scenario where the UK remained in the EU equating to an additional loss in GDP of £67 billion.
In the long-term, we estimate a 6.3% loss in annual exports from Brexit with a future trade deal equating to an additional annual reduction in revenues of £23bn when benchmarked to 2019 levels.
With a No-Deal Brexit, the report estimates that such an outcome would reduce the UK’s GDP by significantly more – by 3.9% over the same period equating to an additional annual loss in GDP of £84bn when benchmarked to 2019 levels.
Additionally, a No-Deal outcome would therefore have more serious consequences for the UK’s exports of goods, which is estimated would be reduced by around 11% in the long run (compared to 6.3% with an EU FTA).
Sunny Mann co-lead of Compliance and Investigations & International Commercial and Trade, London at Baker McKenzie said: “In a No-Deal scenario, businesses will face additional costs from trade tariffs and other non-tariff barriers.
Rising costs, coupled with reduced labour, will amplify output loss, which will further depress export revenues. A negative investment outlook will also put a strain on businesses seeking recovery in the post-COVID-19 landscape, especially those who need liquidity or to divest assets.”
The outlook for UK Trade/Industry
The report forecasts a significant loss in export revenue across the automotive, consumer goods, healthcare and technology sectors modelled. These losses equate to a reduction of £2.7 billion per annum in export revenues when benchmarked against the level of trade in 2019.
The technology (3.2% drop worth £0.9 billion) and automotive industries (2.4% drop worth £1.0 billion) are expected to suffer the sharpest medium-term declines in export revenues, in both percentage and monetary terms. Least affected in percentage terms is the consumer industry, reflecting shorter and less complex supply chains in the apparel and agro-food sectors.
Mitigating the damage of COVID-19 and Brexit in the UK
The report notes that in a No-Deal scenario, UK’s “Global Britain” policy will be dependent on how far it is able to enter into new trade agreements with non-EU countries. There remain significant challenges to simply replicating existing EU deals with non-EU countries.
The UK is currently a party to over 40 FTAs that the EU has signed, but unless it can reproduce these agreements, they will expire at the same time as the UK’s transition period ends.
Beyond “replicating” existing EU agreements, the UK has identified negotiation of a new trade deal with the US as a priority, as well as considering membership of the CPTPP. Together, the US and CPTPP member countries account for close to a quarter of the UK’s exports of goods.
What remains clear is that the potential economic benefits from these deals are likely to be relatively modest, especially when compared to the potential losses resulting from Brexit. Estimates based on data from Oxford Economics suggest that a US-UK deal would provide a boost of only around 0.2% to the UK’s GDP, while membership of the CPTPP would raise GDP by a marginal 0.05%.
Jenny Revis, partner in the EU, Competition and Trade practice at Baker McKenzie said, “In addition to working on their own Brexit-readiness plans, companies must actively engage with the UK government to ensure that it delivers on its commitments to boost UK growth and competitiveness, such as promptly negotiating and concluding FTAs with key trading partners. This is absolutely crucial to mitigate the dual impact of COVID-19 and Brexit and to accelerate the UK economic recovery.
Brexit and COVID-19 – the impact on trade in Africa
Virusha Subban, Partner specialising in Customs and Trade at Baker McKenzie in Johannesburg, noted that there was strong consensus that the years of deliberation around Brexit had added to the geopolitical and economic uncertainty of investing in Africa, especially when it came to finalising the terms under which African countries were going to trade with the UK after Brexit.
This uncertainty has been exacerbated by the impact of COVID-19 on trade in the region, which resulted in a twin supply-demand shock, mass production shutdowns and supply chain blockages across the continent.
“There have been positive developments, however, in that an Economic Partnership Agreement (EPA) with the UK was recently signed with the Southern African countries of Botswana, Eswatini, Lesotho, Mozambique, Namibia, South Africa and Mozambique, (SACUM), Given the timeframes, a Memorandum of Understanding was agreed which will allow SACUM to trade under the new EPA’s terms, if the ratification process is not complete by 1 January 2021,” says Subban.
According to the South African Department of Trade and Industry (DTI), the new agreement will ensure that cars assembled in South Africa will remain tariff-free to the UK. Further tariff-free imports of South African goods listed in the agreement apply to citrus products, grapes, plums and wine. The United Nations COMTRADE database on international trade shows that South Africa exported goods worth USD 4.7 billion to the UK in 2019.
The agreement also includes new tariff-free quotas for the SACUM region for sugar and canned fruits. Machinery, textiles and clothing, tea, beef, fresh fruit, fish and nuts are some of the numerous other products that are exported from the region to the UK.
The new EPA is also expected to benefit UK businesses that export cars, motor parts, machinery, and pharmaceutical products, among other products, to the SACUM region. The agreement further includes the UK’s preferential access to South Africa for component-products made in the EU and used in final British products.
The UK also signed an EPA with Africa’s Eastern and Southern States (ESA) which includes Mauritius, Seychelles, Zimbabwe and Madagascar. The agreement provide duty- free, quota-free access to goods exported from ESA countries to the UK and in return, the ESA countries have committed to the gradual tariff liberalisation of goods, with some domestically sensitive products in the ESA region excluded.
The East African Community (EAC), an intergovernmental organisation comprising Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda, has not yet secured an EPA with the UK, but it has been reported that Kenya and UK are working together to finalise an agreement before 1 January 2021. Reportedly, the agreement will incorporate EAC countries if they want to join at a later stage.
Kenya exported USD 397 million in goods to the UK in 2018, according to the UN COMTRADE database. Exports to the UK include coffee, tea, spices, agricultural products and cut flowers. An EPA will allow Kenya to continue trading with the UK on a duty-free, quota–free basis. Countries that do not have a trade agreement in place with the UK will have to trade with the UK on WTO terms.
Subban notes that African countries will also benefit from a strengthening partnership with Europe. Earlier this year, the European Commission, in its Comprehensive Strategy with Africa, said it wanted to position itself as a close ally of the region, including in terms of strengthening trade with African countries.
According to the International Trade Centre, the EU exported goods valued at USD 170 billion in Africa in 2018, the most of any region. The UK exported goods worth USD 12 billion to Africa in the same year. In 2018, the United State released its Africa strategy which also outlined a renewed focus on trade and investment between the two regions.
And notably, the African Continental Free Trade Agreement, which entered into force on 30 May 2019, is expected to streamline intra-African trade across the continent and reduce the continent’s dependence on foreign investors. The first commercial deal of the world’s biggest free-trade pact will be taking off on 1 January 2021.
“Notwithstanding future trade relationships and the agreements already in place, a No-Deal scenario will have a negative effect on trade in Africa and will lead to further uncertainty in a region already facing severe humanitarian challenges, reduced demand across most sectors, constrained domestic economic activity, weaker currencies and supply chain blockages.
For some African countries, the move to trading with the UK on WTO terms will mean substantially increased tariffs, compounded by expected disruption at the borders and trade bottlenecks, if customs and trade procedures are not in place by 1 January 2021,” Subban added.