At a recent FT|IE Corporate Learning Alliance breakfast meeting, FT editors and PwC partners discussed the changing global trade environment and what this means for business. Here are eight key learning insights from the meeting:
1) There is growing pushback against anti-trade positions. Despite the more protectionist outlook following Brexit and President Donald Trump’s ‘US first’ agenda, other major economies are re-affirming their commitment to open trade, which might hasten trade negotiations, such as between the EU and Japan.
2) Trump will struggle to get his protectionist policies adopted. Few Republicans in Congress have experience dealing with a Republican President, so it remains unclear how they will respond to Donald Trump’s policies. However, given his struggle to pass healthcare reforms, he is likely to face even greater Congressional resistance to his protectionist agenda. Equity and bond markets appear to be pricing in a failure to enact any substantial trade restrictions. The biggest trade risk, therefore, lies in President Trump proving to be more politically competent than expected.
3) China is not a serious free trade champion. Despite some hope to the contrary, China is not going to champion global free trade. Beijing has never taken a serious lead on the issue, seeing trade more as a means to achieving political ends in Asia-Pacific. Ironically, the TPP trade deal that the nationalist Trump administration rejected might in fact have helped sideline China’s influence in Asia.
4) France’s Marine Le Pen is now the EU’s biggest trade threat. Although polling suggests ultimate defeat for the Front National leader, her victory cannot be entirely discounted. Although she would still need to muster a parliamentary majority in June parliamentary elections to be truly effective, the FT believes that the upcoming vote is an all-or-nothing business risk that could trigger the end of the EU as we’ve known it.
5) Two years is insufficient time to reach a Brexit deal. Brexit remains the trade threat of greatest practical relevance for companies. Despite Article 50 being triggered on March 29th, negotiating positions are far from settled. Spain and Poland appear keen on a smooth process—though the latter wants its UK-based citizens to be protected—but the UK may have to fall back on the WTO’s unfavourable ‘most-favoured-nation’ trade terms. This would mean instant tariffs on agriculture, cars and more. The eventual Brexit outcome is one concern; but the transition costs in getting there is equally troubling. Moreover, popular sentiments might suddenly shift in response to unforeseen ‘events’. It would therefore seem impossible to nail a comprehensive trade agreement in what realistically will be a mere 15 months of negotiations.
6) Temporary EEA membership might provide a transition solution. Given Brexit’s tight timeframe, one idea unofficially mooted is for the UK to join the European Economic Area (retaining most EU obligations) as an interim or transition solution while final Brexit terms are hammered out over subsequent years. This would allow the UK government to fulfil the requirement for Brexit, while continuing negotiations for a better deal. Such an arrangement would provide much-need transparency and stability for business. However, it would require domestic political support including from Brexit negotiators themselves.
7) Banks are acting now on Brexit rather than deciding to ‘wait and see’. Businesses are generally adopting a ‘wait and see’ approach to Brexit talks on issues of investment, pricing, foreign trade and supply chains. However, despite having imperfect information, companies in sectors such as finance or agriculture that could face an ‘existential threat’ from a hard Brexit are making best-guess decisions based on worst-case scenarios. Some companies have created an internal task force to monitor possible tax and regulatory changes. Financial groups are already acting to reduce the threat to their ‘passporting’ rights that allows them to sell financial services across the EU. Many are exploring additional EU locations—especially Berlin, Dublin and Amsterdam— based on their regulatory efficiency and attractiveness to key talent, as the financial registration process could take months if not years to complete.
8) EU talent remains the big issue. By far the biggest corporate worry, directly affected by trade negotiations, is migration. PwC’s own research suggests London would need some 230,000 construction workers in the next five years, with similar labour pressures in food processing. Companies say that it will be impossible to compensate for the loss of EU language skills, and therefore can only impress upon government negotiators the potentially catastrophic consequences of losing EU staff.
