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Brexit is small beer to Australia

David Bassanese
29 June 2016

By David Bassanese

In these tumultuous times, it’s worth placing the “Brexit” crisis in some perspective.

For starters, although we have long historical ties with the United Kingdom, it’s really small (warm and flat) beer in terms of Australia’s current trading relationship. After all, the UK now takes only around 2% of the value of goods and services that we export each year. Of this, tourism is probably the most important export – and one clear consequence of the Brexit is that we’ll likely see a lot fewer British tourists over the next year or so.  

Almost 700,000 British visited Australian last year, or just under 10% of the 7.4 million in visitor arrivals.  

Of course, Europe overall is a lot more important to us than the UK. But the direct effects of a UK downturn on the EU (and hence the indirect effect on us) don’t seem likely to be that large. 

The UK accounts for 15% of the EU economy to be sure, but the value of EU exports sent to the UK each year accounts for only around 3% of EU GDP.  

The biggest risk for the EU is not a downturn in the UK economy per se, but rather any possible “contagion” effects should other member countries start clamouring for their own exit vote. Some argue the Brexit is likely to boost support for right wing nationalist parties in Spain, the Netherlands, Italy and even France.

But there’s also a chance Brexit could have the opposite effect – especially if the UK suffers a severe recession over the coming year, which is a distinct possibility. The UK's pain will serve as a reminder just how important maintenance of close trading relationships really are!

Of course, while many commentators have noted the Brexit vote does not immediately change the UK’s relationship with the EU – the UK Government still needs to formally request a divorce and then has up to two years to negotiate its exit – the reality is that UK businesses now face a very uncertain outlook in which to invest and employ staff.

Note exports account for 30% of UK GDP, of which around half go to other EU countries, and just over 10% more to other countries with free-trade agreements with the EU. All up, almost one fifth of the UK economy is accounted for by exports to countries whose trade access could change dramatically in the next year or so.

The best case scenario is that the UK manages to retain relatively free access to the EU market, such as enjoyed by non-EU members Norway and Switzerland. But these countries have agreed to the free flow of labour, contributions to the EU budget, and large scale compliance with EU regulations – something the UK seems loath to do.

The worst case – and effectively default – scenario is that the UK fails to reach an agreement at the end of two years and the EU simply bestows on the UK the same trading arrangements it has with other non-EU countries that are part of the World Trade Organisation (such as the United States).

At face value, this does not seem so grave – as the average EU tariff on non-EU countries is only around 2%. But the problem with the WTO option is that this agreement fails to cover services as well as it covers goods, nor does it cover troublesome non-tariff trade barriers as extra red-tape. And tariffs on some key UK sectors like cars and manufactured food and beverages are also higher, at around 5 to 10%.

Most ominously, the WTO option would not provide for the so-called “passport” right, which allows companies to virtually operate across the EU from a single registered head office in London – which has been particularly important for global financial institutions. Unless specific provisions are allowed for, London could easily lose its role as a European financial hub.

What’s worse is that the UK Government seems in no hurry to clarify what a post-EU business environment would look like. While some politicians may think the delay will smooth the UK’s transition, the reality is that it will only prolong business uncertainty and likely drive the economy further into recession.

If there’s a silver lining from the Brexit debacle, it's that the sight of the UK slipping into a deep recession due to a spike in business uncertainty might contain the forces for wider EU disintegration. Indeed, those countries also in the Eurozone face an even tougher task because they would also need to try and re-institute a new national currency. 

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