What Does No-Deal Brexit Really Mean for Businesses?

Brexit, a termed coined to denote the exit of Britain from the European Union, is scheduled for March 29, 2019. The decision to leave the EU was made with the meagre majority of merely 51.9% voting in favor of this move. And now, thanks to the clash of egos, there’s a high probability of UK exiting without a deal with the EU.

The prospects of no-deal Brexit already spell significant uncertainty. Leading economists have stressed the ill-effects of uncertainty for businesses and the importance of stability in encouraging investment and spending. But uncertainty is not the only factor that UK businesses should be worried about. Theresa May’s Brexit negotiations have done some long-lasting damage to UK’s relations with its closest neighbors.

No-Deal Brexit Implications for UK Businesses

Right now, Britain is part of the EU, which acts as a unified market. This means there is free movement of goods, capital and people. This free access will be replaced with regulations, licenses, checks, tariffs and other requirements for businesses with cross-border operations or customers.

Let’s have a look at the implications of a no-deal Brexit and how it can be rather menacing for UK businesses.

End of Free Trade

At present, there’s seamless trade between Britain and the other countries that are part of the EU. There are no tariffs, no regulations and no checks at the borders. So, UK businesses can purchase raw materials and components from suppliers anywhere in the EU without any restrictions. This will no longer be the case after March 2019. UK manufacturers may need to pay duties on supplies from other countries, resulting in an increase in their operating costs. Moreover, checks at the borders and the fulfilment of import formalities will cause delays. Businesses will need to consider the cost implications of this too.

Let’s assume that eventually Britain succeeds in signing free trade deals with the EU. That still doesn’t solve it. As Foreign Policy Magazine points out, these free trade agreements “would not cover services, which constitute approximately 45 percent of British exports, and would be hit hard by the loss of access to the EU market.”

As a nation, Britain will need to invest in infrastructure. Ports and airports will need huge storage facilities and manpower to safely accommodate goods that are waiting for customs checks. So, either the UK will need to increase taxes to build these facilities and employ enough personnel or risk trade delays and disruption. Neither of these scenarios are favorable for business.

Transfer Costs

Following Brexit, GBP/EUR transactions will become slower and more expensive. So, goods sold and services provided by UK businesses will become more expensive for the rest of the EU. Cross-border transactions using debit and credit cards will also begin attracting surcharges. This means that all UK businesses that sell their products online will be impacted.

Financial Markets

Apart from an increase in funds transfer costs, UK-based financial firms will no longer be able to sell their services across the EU. This would hit the financial markets. According to estimates published by the Bank of England, ~£29 trillion worth of derivatives contracts (including futures, options and swaps) will be adversely impacted by a no-deal Brexit.

Regulatory Hurdles

All contracts that are currently valid will need to be revised after Brexit. New procedures will need to be set up for settling cross-border disputes.

Currently UK businesses enjoy unitary compliance. Despite having gone through the effort of compliance with EU regulations, companies will also need to comply with Britain’s regulations to service domestic customers. The cost of protection of Intellectual Property rights will also increase following Brexit.

End to Free Movement of People

Britain wanted to prevent “outsiders” from residing in their country. Brexit will make it more challenging for businesses to access the right talent pool. Immigration rules and the requirement of work permits will make it more expensive to hire people from outside the UK.

Conclusion

With this multidimensional increase in costs, businesses will either need to raise prices or curtain expenses, maybe via salary and wage cuts. With inflation and lower wages, consumption is hit. A decline in consumption results in lower investment.

The British Pound is already suffering a thrashing. Post Brexit, a slowdown in the UK economy is an undeniable threat.