13/05/2020

International payments: don’t forget Brexit


Do you remember Brexit? Cast your mind back to 11pm on 31 January this year: the exact moment Britain finally left the EU, over three and half years after the referendum had set the Brexit wheels in motion – parties and protests were held in equal measure and a clock counting down to the momentous occasion was projected onto Downing Street. Such was the significance of this historic event – and the protracted negotiation process leading up to it – that many people described it as the nation’s biggest challenge in the post-war era. Ring any bells?

Fast-forward to the beginning of March, however, and another even bigger story was beginning to absorb all the energy of the news cycle and bump Brexit down the political agenda: the rapid spread of Covid-19. Understandably, the economic blow dealt by the global health crisis is the focus for small and medium-sized enterprises (SMEs) at present; but this doesn’t mean the ongoing Brexit process should be brushed under the carpet.

Post-Brexit talks

Brexit wasn’t done and dusted the moment everyone woke up on 1 February. The UK entered an 11-month transition period until 31 December, during which it remains in the customs union and the single market. This deadline was provided to allow the UK government and EU officials time to work out their future relationship on key issues like trade – a major consideration for businesses that operate across international borders.

Unfortunately, the rapid escalation of the Covid-19 pandemic in Europe meant these talks were postponed for six weeks – further truncating an already tight timeline. They have since reconvened via video sessions amid the enforcement of lockdown restrictions across the continent.

The government can request an extension to the transition period for one or two years, provided they do so before 1 July. However, armed with a powerful Brexit mandate following his landslide election victory, Boris Johnson amended the Brexit bill to make it illegal to do so. This bold move is seen as an attempt to force the EU into agreeing a comprehensive free trade deal by 31 December. While it would be relatively simple to repeal the ban, the door will be locked if the government makes a U-turn and requests an extension after 1 July.

Despite the depth of the Covid-19 crisis, it appears that the UK isn’t budging on the issue of an extension after its chief negotiator David Frost opened the first video session by “reiterating the government wish not to extend the transition period and that the job could be done by the end of the year”.

What matters to businesses when it comes to Brexit?

A survey of SMEs during the Brexit negotiations highlighted the importance of trade to this significant segment of British business:

  • 66% (two thirds) believed the government should focus on agreeing continued access to the single market.
  • 62% wanted trade deals to provide access to non-EU markets.
  • Maintaining access to the single market was a priority for SMEs in Manufacturing (68%), Retail (62%) IT (74%) and Media (69%).

Key dates remaining in the trade talks timeline

Here are the key events remaining along the trade talks timeline between now and the end of the year?

  • June – an EU-UK political declaration – agreed as part of the Brexit deal – says a summit should take place. At this point, both sides will have to decide whether they can finalise their new trade relationship by the end of 2020.
  • 26 November – EU officials say their meeting in late November is the last possible moment for them to sign off on an agreement if the transition period is to end by 2020.
  • 31 December – if a trade deal is not agreed – which would effectively be the same as a no-deal Brexit – then Britain will be forced to adopt World Trade Organisation terms, meaning tariffs on goods and enforced border checks.

What does this all mean for the pound?

The “Leave” vote triggered a stream of major political events – from negotiations and parliamentary votes to general elections and party leadership contests – and a wave of economic uncertainty, which combined to devalue pound.

Then came the post-election optimism inspired by the Conservatives strong mandate to “get Brexit done”, which gave the pound a much-needed boost. These gains soon evaporated, however, when Boris Johnson outlined his intention to outlaw an extension of the transition period, raising fears that Britain won’t have enough time to agree a workable trade deal by the December deadline.

If the government fails to thrash out a deal with the EU by the end of the year, the UK will wave goodbye to the bloc without one. This unwelcome scenario will give rise to a fresh bout of Brexit-fuelled political and economic uncertainty that could weigh on the pound – and drive up the cost of international payments. On the other hand, if both parties agree a deal before the year is out, the pound is likely to prosper from the clarity this would provide.

RationalFX

Rather than waiting for the outcome of the trade talks, you should take action now by adopting a proactive approach to your business’s currency risk exposure. RationalFX will work in partnership with you to develop a bespoke currency strategy that considers your risks and requirements. From efficient online payment facilities and accurate market insight to assistance deploying agile solutions that protect your payments from rate fluctuations, we can help you plan for every eventuality.

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