Drawn-out post-Brexit trade talks pose threat to Hong Kong exporters

As if the prospect of lengthy UK-EU negotiations was not bad enough, the collapse in the pound, likely rise in interest rates and higher oil prices will all provide problems to overcome

PUBLISHED : Monday, 16 January, 2017, 4:31pm
UPDATED : Monday, 16 January, 2017, 9:59pm

Since the UK referendum result on June 23 there has been uncertainty about the terms of the UK’s exit from, and the precise shape of its future relationship with, the European Union.

The UK formally starts its exit process by serving a notice under Article 50 of the Lisbon Treaty. This notice has yet to be served and the current indications from the UK government are that it is unlikely to do so before the end of March 2017.

The question of how the UK government can serve notice under Article 50 is disputed. The government view is that it has power, through the crown prerogative, to serve notice under Article 50 without needing prior Parliamentary approval. That view was successfully challenged before the High Court in England.

In early December the Supreme Court held hearings on the government’s attempt to overturn the High Court decision, with judgment likely to emerge in January.

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In the meantime, Theresa May, the prime minister, held a vote in the UK parliament, asking MPs to make a commitment on whether they would vote in favour of invoking Article 50 in March. The motion was being approved by a vote of 461 to 89.

This does not however negate the need for a Supreme Court decision, and the issue is important because needing approval from Parliament raises a question as to whether and when it will be forthcoming. If Parliamentary approval is needed, this may have endangered the March timetable. Conversely, if the Supreme Court decides that the crown prerogative does cover exercising Article 50 then the March deadline looks very feasible.

Triggering Article 50 is however just one of several moving parts. A much bigger one is the negotiation of the UK’s new trading arrangement with the EU, and what if any transitional arrangement should apply. The EU has to date refused negotiations with the UK until after Article 50 has been triggered.

This effectively means that there will be a huge amount needing to be done once Article 50 is triggered, leading some observers to argue that the most pressing task will be to negotiate a transitional arrangement, to avoid a “cliff’s edge” scenario where the two sides are unable to agree all of the necessary terms before the negotiation deadline expires.

Currently, however, the European Commission intends to take a linear stance towards negotiations and address first the terms of the UK’s exit and subsequently the detail of its new trading arrangement with the EU. For its part, the UK is seeking to negotiate concurrently the exit terms and the details of its new trading arrangement with the EU, and then with other countries.

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An EU/UK failure to agree new trading terms quickly risks exposing Hong Kong exports to the UK to the possibility of tariffs and administrative import obstacles.

Economically, Hong Kong’s exporters already face an uphill battle for 2017 when it comes to trading with Britain. While exporters have enjoyed low interest rates and the benefits of mainland China’s booming economy over the past few years, the sudden collapse in the pound, the expected raising of interest rates and a strengthening oil prices will all provide problems to overcome.

While the obstacles mentioned earlier are certainly worth considering, the nature of Hong Kong’s trading relationship is unlikely to change for at least the next 18 months, as Article 50 has yet to be triggered.

The prevailing approach among the UK business community and government is best summarised as, “keep calm and carry on”. The UK is working hard to ensure that it continues to appear as open for business and an attractive destination for foreign investment.

This explains the government’s reassurances (the minutiae of which remain undisclosed) to Nissan, which were sufficiently soothing for the company to announce its decision to build a new range of cars within the UK, and recent government messages about maintaining low UK corporate tax rates.

Guy Lougher is a partner and head of EU & Competition at Pinsent and Masons