In this blog post we explore the impact of Brexit on Chinese imports into the UK. Does it really affect business?
Over the past few months, there has been some anxiety within the China sourcing community over how Brexit will have an impact on Chinese imports into the UK.
The continuing uncertainty over Brexit hasn’t helped. We are already in October, for instance, but it is still unclear whether Britain will be able to exit the European Union by the October 31 deadline.
In this blog we will attempt to discuss the possible impact of Brexit (whenever it happens) on imports from the EU and non-EU countries (including China).
The European Union is currently the UK’s largest trading partner. In 2018, the EU accounted for 54% of UK imports and 46% of its exports.
At the moment, with the UK still a member of the EU, goods between the UK and member states of the EU move freely across the border with limited or no tariffs or customs restrictions. All this is good for business and the end customer.
Despite the uncertainty over Brexit, experts are clear about one thing: That Brexit will disrupt supply chains across industries in the UK. Management consulting firm McKinsey & Company, in a report published May, warned that UK businesses should brace for supply chain disruptions that can last for a decade or more. This is because following Brexit, customs checks will come into place with regard to imports from the EU and tariffs will be imposed. This will slow down the free movement of goods because of the additional paperwork needed for customs inspections and regulatory requirements. This is bad for businesses as it will subsequently lead to an increase in costs for importers/exporters and ultimately the end customer.
Post Brexit, though the UK can negotiate a free trade deal with the EU, that will take some time if one looks at past cases. The EU has been notoriously slow with signing similar deals with other countries such as Canada and Switzerland, which the McKinsey report also points to. The report said:
“Switzerland’s negotiations with the EU continued for more than a decade, from 1992 to 2004, and resulted in about 20 separate treaties. In the case of Canada’s Comprehensive Economic and Trade Agreement with the EU, negotiations began in 2009 and were concluded only in 2014 – and the agreement has yet to be ratified by all EU national legislatures. That is a stark reminder that, even if a firm decision is taken on Brexit in the next few months, uncertainty about the UK’s trade regime could persist for a decade or more.”
In the event of a no-deal Brexit, some have claimed that the UK can immediately start trading with the EU (and non-EU countries that it hasn’t signed separate trade deals with) under World Trade Organisation terms. That is definitely an option, but it’s not as easy as it sounds.
The World Trade Organisation is an intergovernmental organisation that governs international trade. When its 164 member states do not have free trade agreements with each other, they trade under rules laid down by the WTO.
Under WTO rules, each member state can impose tariffs (or taxes) and quotas (or restrictions) on imports of goods and services from other countries. These are known as WTO schedules. Other restrictions called non-tariff barriers are also imposed. They include things like product safety standards, labelling, complex rules regarding origin, sanitary inspections for animals and so on.
The UK is a member of the WTO as is the EU and its other member states. Over the years, however, the EU has been negotiating with the WTO on behalf of its member states. Once the UK exits the EU, it will need to need to negotiate its own “schedules” or commitments (separate from EU ones) with every WTO nation on tariffs and quotas. Experts warn this will take a considerable amount of time. Several WTO countries have already objected to Britain’s bid to fast-track a deal with the WTO to ensure its post-Brexit terms of trade transition is seamless. (Yes, it is complicated.)
China is a major trading partner of the UK. In 2018, China was the UK's fourth largest source of imports, accounting for 7% of its imported goods and services, according to official figures. China is also the UK's sixth largest export market.
With regard to only goods, the single largest import into the UK from China was telecom equipment, representing 15% of all goods imports from China. Other goods imports included miscellaneous manufactured articles such as plastic articles, toys, games and sporting goods (11% of all goods imports), office machinery, (10% of all goods imports) and electrical machinery and equipment (9% of all goods imports).
The question here is whether the UK and China will be able to strike a free trade deal swiftly. China indicated last year that it is open to such a deal after Brexit happens.
But it may be instructive to look at the EU and China case. The EU and China are among the world’s biggest trading partners. But they still do not have a free trade deal.
Till a free trade deal between the UK and China materialises, imports into the UK from China will be governed by WTO terms (that the UK will still have to negotiate with China separately as mentioned earlier).
While it is difficult to say for sure given the general confusion over Brexit, it is possible that imports from China may become equally competitive or more competitive than imports from the EU because once the UK leaves the EU, imports from the EU will lose the cost competitiveness they had enjoyed earlier because of limited or no import duties and free movements of goods across the border.
Britain’s announcement in March 2019 that most of its imports will be tariff free in the event of a no-deal exit is interesting in this context. If this happens, it is likely to benefit non-European countries, said the BBC. “It would mean 82% of imports from the EU would be tariff-free, down from 100% now,” the BBC said in a March 2019 report. “92% percent of imports from the rest of the world would pay no border duty, up from 56%.”
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