The United Kingdom appears anything but right now. A Prime Minister falling on his sword, Scotland renewing calls to leave, a united Ireland being mooted and a country divided in the way it sees itself and the world. While many in Europe are urging a quick divorce, others are seeking a more cautious approach, trying to make sense of the economic, strategic and political consequences.
Once Article 50 of the Lisbon Treaty is activated, it allows two years for the terms of withdrawal to be completed. Still it could take the best part of a decade for the UK to develop new relationships with the EU and the rest of the world.
As the Director-General of the World Trade Organisation, Roberto Azevêdo, recently noted with respect to trade: “The UK currently has preferential trade relationships with the EU and with the 58 countries with which the EU currently has free trade agreements. In the event of a British exit, all of these relationships would need to be re-established to maintain the same preferential access the UK currently enjoys via the EU.”
Nobody quite knows how the withdrawal terms will be structured and that amounts to one thing: continued economic uncertainty which will last many years. Already we’ve seen the volatility in off-shore indices having a large impact on Australian markets; uncertainty increases and a ‘risk-off’ tendency prevails among investors.
A key driver of our recent GDP growth has been exports and a global slowdown will hit Australia hard. One thing seems sure, the upcoming Australia-EU Free-Trade agreement talks – due to get underway next year – are likely to be delayed while the EU gets its house in order.
There has been a tendency to forget just how important a role the UK plays in Australia’s trade and investment relationship with the EU. When Australia agreed to begin negotiations on a free-trade deal in 2015, the EU was its third largest trading partner and a third of our total EU exports were directed to the UK. When you consider services, more than half of our EU trade is via Britain.
While, in time, there may be opportunities for increased bilateral trade between Australia and the UK, its unlikely to take on the same significance as the last trade agreement between the countries. These are different times and very different economies.
The major impact on withdrawal is likely to be felt in the area of trade in services, given the close linkage between services and the movement of people. This will be an area of particular concern for Australian firms with services capabilities in Europe.
Consider, for example, the position of Australian financial services firms that run their European operations from London. At present, they can take advantage of EU ‘passporting’ arrangements allowing financial institutions in one EU country to operate in the others, without having to meet the requirements of all of their respective individual regulatory regimes. These passporting rights are clearly at risk, with implications for Australian, and indeed all, financial services businesses based in London.
From the Reserve Bank to the Treasury, officials here are keeping a close eye on developments. Australian business will be minded to do the very same.