The World Trade Outlook Indicator (WTOI) of the World Trade Organisation which is designed to provide "real time" information on the trajectory of world trade recently recorded a reading of 96.3, the lowest reading since March 2010. This not only signaled a below trend trade expansion for Q1 2019 but also highlighted key risk factors that are likely to weigh on trade growth in 2019. As we draw close the end of the first quarter of 2019, let’s take a close look at BREXIT which is one of these risk factors that is likely to impact the global trade outlook for the remainder of 2019, with possible significant trade implications for Sri Lanka.
Brexit in simple terms implies the United Kingdom’s (UK) decision to exit from the EU. Brexit became a hot topic of discussion with the Brexit referendum that took place on 23 June 2016 where a majority (51.9%) of UK citizens voted in favour for UK to leave the EU. The Brexit developments that took place since then such as the invocation of the Article 50 of the Lisbon treaty triggered the Brexit process putting forth a scheduled time and date of Friday, 29 March 2019 for UK to leave the EU.
There are many uncertainties surrounding the terms under which the Brexit would take place and when it would commence. The UK parliament has not yet made a solid decision on the way forward. There were two main possible outcomes expected in the lead up to an exit. The possibility of going for a Brexit with a deal or a no-deal Brexit.
The main idea of having a Brexit deal was to ensure a smooth exit process for both the EU and UK. A Brexit deal negotiated by the UK Prime Minister with the EU requires a majority approval from the UK parliament. The initial deal proposed a transition period of 21 months (commencing from the day the UK leaves EU) providing sufficient time for UK and EU to work out a permanent trade deal. The proposed deal was taken up for vote in the UK parliament at two instances (January 15 and 12 March 2019) and were defeated by a large majority. The defeated deal (which also had the consent of other 27 EU member states) covered terms such as how much money the UK owes the EU (an estimated £39bn), what would happen to UK/EU expats living in the EU/UK, how to avoid a possible return of a physical Northern Ireland border etc.
A no deal Brexit scenario implies that a withdrawal agreement has not been agreed upon. As such, a hard Brexit could take place with immediate severing of ties between the UK and the EU.
With the Prime Minister’s Brexit deal being rejected twice, the UK parliament had a vote on a ’no-deal Brexit’ on 13 March 2019 which was also defeated. Then in a subsequent voting that took place on 14 March 2019 the UK parliament voted in favour for an extension to the Brexit day.
The UK has now entered yet another crucial time period where the UK Prime Minister has requested for an extension of Brexit date and the EU has agreed for a short conditional extension. At the time of writing, it has been reported that the UK will be offered a delay until 22 May 2019, if MPs of the UK parliament approve the withdrawal deal that is negotiated with the EU next week. In case if that deal is rejected, the EU is likely to provide a shorter delay until 12 April 2019, which allows the UK to pass the deal or to decide on a way forward.
Exhibit 01: Different scenarios expected at present
(at the time of publishing article on 22/03/2019)
However, voting to delay Brexit does not imply that the possibility of leaving the EU without a deal has not been ruled out. Apart from the scenario of a possible extension, there are plenty of other outcomes also discussed at this stage such as; no deal at a later date, possibility of referendum, UK parliament elections, vote of no confidence against the UK prime minister etc.
Brexit remains a major concern for Sri Lanka as UK is one of Sri Lanka’s major trading partners. UK is ranked Sri Lanka’s 2nd largest export destination with an export value of USD 1.04 Bn in 2017 and Sri Lanka also maintains a positive trade balance with UK (refer exhibit 02 for top 05 exports from Sri Lanka to UK in 2017). Currently Sri Lanka enjoys duty free access to the UK for more than 6,000 products under the EU Generalized System of Preferences (GSP+) scheme.
Source: EIU calculations based on ITC statistics
Regaining of the EU GSP+ scheme in 2017 provided much-needed breathing space for Sri Lankan exporters that were facing a challenging external environment. For example, the Apparel sector which constitutes 82% of Sri Lanka’s exports to UK (in 2017) has positively benefitted with the regaining of the GSP+ facility. During the first 12 months following the regaining of the GSP+ facility (June 2017 to May 2018), apparel exports to the EU recorded a robust 9% Y-o-Y growth, surpassing an export mark of USD 2 Bn to EU. This was also marked by a reversal of the negative export growth trend recorded since the 2014-15 period.
The UK Department for International Trade has published important details of the UK’s temporary tariff regime if a no-deal Brexit scenario is to take place. Under the temporary scheme that has been proposed, 87% of imports to UK (by value) would be eligible for zero duty access to EU (up from 80% at present). The UK government would set temporary rates which will apply for a period of 12 months from 11pm on 29 March 2019. The UK Government has also announced that the preferential tariff rate would apply if the country has a Free Trade Agreement with the UK or is part of the EU GSP schemes. However, this is only going to be a temporary measure that will continue for a year and will require secondary legislation to be put in place.
Beyond the potential tariff regime in a Brexit deal, the continued Brexit uncertainty could lead to a weaker outlook for the UK economy, trade and consumer sentiment. These secondary demand side impacts would be as important for sectors such as exports and tourism (UK was Sri Lanka’s 3rd largest source market in 2017). Therefore, Brexit developments need to carefully monitored and proactive actions need to be taken in order to strategize the way forward to minimize possible negative implications of Brexit for Sri Lanka.
Shiran Fernando is the Chief Economist and Jayani Ratnayake is an economist with the Economic Intelligence Unit of the Ceylon Chamber of Commerce. This is the first article of Intelligence for the Private Sector’ (TIPS) initiative, where we bring fresh insights into global and national trade policy issues. Write to firstname.lastname@example.org to engage. Visit www.economy.lk a series of research that will be published on implications of Brexit under Chamber’s ‘Trade