Brexit a boost or burden for emerging markets?

Brexit contingency plans helped some companies and sectors fall on their feet when the COVID-19 pandemic hit, even though the government struggled.

Brexit-related headwinds are already putting downward pressure on emerging market exports to the UK, however the hope for new free trade agreements and the possibility of securing highly favourable terms makes Brexit’s impact on emerging markets ambiguous, according to the Agility Mid-Year Emerging Markets Review.

The report, prepared by Transport Intelligence in partnership with Agility, provides an update on the state of emerging markets midway through 2017, and digs deeper into two topical issues concerning emerging markets logistics: the impact of India’s economic reforms (GST and demonetisation) and Brexit’s impact on emerging markets.

With the value of the pound lower and Brexit expected to result in the UK economy being smaller than if it never took place, emerging markets trade with the UK is expected to be adversely affected.

In addition, the UK’s role as a gateway to the EU for emerging markets is under threat. If the UK does not have any kind of customs union with the EU post-Brexit, or if it fails to establish an appropriate regulatory agreement in the event of departure from the single market, frictionless trade is at risk. Rules of origin checks will be required in the absence of a customs union, while border documentation and product sample tests may arise if the UK fails to adhere to EU rules for the production, labelling, movement and storage of certain goods.

In the immediate aftermath of Brexit, the UK is seeking to mitigate disruption by attempting to “copy-and-paste” EU tariff schedules, but the devil is in the detail. Such a move could provide welcome stability for many emerging markets, though trade disputes may crop up over duties on certain products (most likely agricultural goods, where tariff rates are higher on average), while tariff rate quota arrangements will necessitate three-way negotiation between the UK, EU and third parties.

Another complicating factor is that the closer the EU and UK’s post-Brexit trading relationship, the more difficult it may be for the UK to sign trade deals with third parties. For example, the EU may stipulate that the UK must maintain particular tariffs on certain non-EU goods in order to protect EU suppliers in return for closer trade ties.

All in all, the situation is fluid and uncertain. Emerging markets should keep a close eye on how events unfold. Down the line, it may be that even relatively small emerging economies may be able to punch above their economic weight and sign highly favourable trade deals with the UK if British politicians are desperate to make Brexit appear a success.

Ti Economist, David Buckby, commented: “Brexit is fiendishly complex to predict with many possible outcomes, though there appears to be a trade-off in play for emerging markets. The ‘harder’ the Brexit, the more adversely hit emerging market export volumes will be by the weakening pound and UK economy. This is offset by a higher likelihood of free trade deals in future, though many emerging markets already export freely to the UK.

“If rules of origin or other border checks come into play, I expect many emerging market suppliers using the UK as a gateway to the EU to cut the middleman out of the supply chain,” he added.

The report also takes a deep dive into India’s recent economic reforms; most notably the Goods and Services Tax (GST) and its surprise demonetisation initiative.

Uniform taxation, through GST, was rolled out on July 1, and is expected to see supply chains revamp as they become operationally rather than tax optimised. The report concludes that GST will be a game changer in the long run as it stimulates a vast increase in internal and external trade, with organised logistics possibly benefitting more than any other economic sector as India moves towards a single market.

Conversely, demonetisation appears to have negatively affected the economy, but its effects have largely died out. The move to withdraw and replace 86% of the country’s cash disrupted informal logistics providers which relied on notes heavily, while for many in the organised sector which mainly conduct business through electronic transfers, it was largely business as usual.

Many formal logistics providers approve of the Modi administration’s reforms as a means of cracking down on corruption, which particularly impedes logistics efficiency.

“While demonetisation appears to be largely a case of short-term pain, its impact on the logistics sector will be dwarfed by GST, which Federal Reserve analysts estimate will increase internal and external trade in the long run by 29% and 32% respectively. Moreover, these should be seen as lower bounds as they do not fully account for the positive effect GST will have on supply chain efficiency,” Buckby concluded.

The Agility Mid-Year Emerging Markets Review, prepared by Transport Intelligence in partnership with Agility, provides an update on the state of emerging markets midway through 2017, and digs deeper into two topical issues concerning emerging markets logistics: the impact of India’s economic reforms (GST and demonetisation) and Brexit’s impact on emerging markets. For a free copy of the report please click here.

 

Source: Transport Intelligence, July 18, 2017