Advocates of Brexit say it will free the UK from the shackles of EU control and allow it to strike out on its own as a new ‘Global Britain’ trading nation.
Yet the EU remains by far the UK’s largest trading partner. Official figures show that 44% of all UK exports went to the EU in 2017, while 53% of all UK imports came from the EU – meaning any post-Brexit future is likely to have serious consequences, both good and bad, for businesses.
What does a weak pound mean for SMEs?
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A currency’s value is partly a reflection of the general consensus on its economic future and most experts warn Brexit will mean a slowing economy. True to this prediction, the pound has lost between 15-20% of its value against the euro and dollar since the UK voted to leave the EU three-and-half-years ago. For businesses that rely on imported goods and raw materials from outside the UK, this translates into an increase in the cost of doing business.
Conversely, businesses that earn revenue in the UK but face competition from overseas could find themselves enjoying a competitive boost, as customers in the UK will have to choose between expensive imports and potentially cheaper domestically produced goods.
Small businesses based in the UK could also take advantage of the weaker pound by doing more business with the EU and further afield, although the former hinges somewhat on keeping the cost and paperwork involved in exporting goods to a minimum post-Brexit.
What about the customs union?
While it is a member of the European Union, Britain is part of what is called the customs union, meaning it enjoys the benefits of trade liberalisation – namely, the easy transit of goods across national borders. Under the terms of Boris Johnson’s new Brexit withdrawal deal Britain will leave the customs union and with it the benefits of free trade, meaning it will instantly become much more difficult for goods to travel.
Trading will likely involve a great deal more paperwork. This is a particularly nasty outcome for SMEs with complex supply chains, for whom business could become almost impossible.
What could potential tariffs or protectionism mean to companies?
Whatever hopes owners of small businesses may cling to about a Brexit business boom resulting from more competitive export prices, the reality is that making the most of the weaker pound requires being able to do business internationally with a minimum of meddling. As it stands, people and goods can move across the EU without problems. But unless we can work out a quick trade agreement once the UK leaves the EU, small businesses could see any potential benefits of international trade eaten up by a tangle of red tape.
Any extra tariff imposed by the EU on imports from the UK could push up the sale price of those goods, devouring any competitive advantage.
What will happen to European workers?
About 20% of SMEs report employ staff from the EU. As evidenced by recent figures which show the number of EU nationals coming to the UK has dropped significantly since the Brexit vote, if European citizens feel their jobs are no longer as secure as they were pre-Brexit, they are likely to move somewhere where they feel their employment prospects are safer. This could result in SMEs facing increased difficulty finding the staff they need.
It could prove particularly hard to recruit unskilled labour for roles that have usually gone to workers from the EU. These are jobs that generally don’t attract school leavers in the UK, such as posts in the food processing or care home industries.
Because SMEs currently tend to pay lower wages than their larger cousins, they might also find themselves having to up their staffing costs in order to keep bringing in the employees they need.
What about other markets?
The other obvious big markets include the US, China and India. As previously said, a weak pound could mean exported goods are more competitive and many small and medium-sized businesses hope Brexit will afford an opportunity for more lucrative trade deals with these players. However, a great part of profitable trade lies in geographical proximity, a factor we simply cannot get around. Not only that, but with US President Donald Trump advocating trade protectionism, small businesses could face additional headwinds abroad.
How can a small business save money in its supply chain?
Speaking to many OFX clients regarding their supply chain issues, they often break these issues down into the following; costs, projections and risks. It seems obvious, but it helps to look at reducing costs across the board, making sure your 30, 60 and 90 day projections are in place. When it comes to foreign currency strategies, it’s always wise to reduce the risk of adverse market fluctuations.
Managing risk generated by an unpredictable market can be done by utilising 30-90 day short dated forward contracts, which locks in today’s rate for delivery later. It’s particularly handy if businesses know they’ll be facing invoices in the next few months.
How long will it take to work out trade deals with non-EU markets?
With regards to trade deals internationally, it is very difficult to place a timeline on these. Taking the Trans-Pacific Partnership (TPP) as an example, initial discussions started in 2005 but the deal was not ratified until last year. Similarly, the EU’s draft trade agreement with South America, known as Mercosur, has been in the works for nearly two decades, yet is still a long way from being finalised. Past experience, therefore, means it’s difficult to predict how long negotiations will continue given the breadth and depth of what is entailed.
How much more will imports cost if we leave with no deal?
Euronews says “the consequences of a ‘no-deal Brexit’ – particularly on trade – have been the subject of fierce and increasingly acrimonious debate in the UK. Opponents have predicted cross-border disruption, higher prices and a shortage of essential goods”.
Under no deal, some 40 existing trade agreements fully or partly in place between the EU and dozens of countries would no longer apply to the UK and despite claims by some Brexit supporters that many of these can be rolled over, by late July the British government had secured only a dozen such deals.
The Confederation of British Industry (CBI) estimates that with no deal, 90% of the UK’s goods exports to the EU by value would face tariffs. The average external tariff imposed by the EU is calculated to be just over 4% so if the UK imposes any tariffs of its own on imported goods, this could hit SMEs directly in the wallet.
Tariffs in some sectors – for example in agriculture and food, the car industry and textiles – would be “significantly higher”, it added.
Should I move my business abroad?
While some large financial institutions and firms have moved parts of their operation to the continent, this is often not an option for smaller business. Perhaps more relevant would be for UK SMEs to remain in a dynamic position in order to respond to any costs or opportunities falling out from Brexit. This could mean looking at different supplier routes as well as new global exporting markets. Smart UK businesses will flex their strategy accordingly and leverage the increase in export demand to offset any cost hikes.
For more advice from OFX on imports, exports and supply chain payment matters, please click here
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