Brexit - Outside or In?

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Andrew McClelland International Specialist

Author: Andrew McClelland

 

On the 23rd June, 2016, the population of the UK will be asked, via a referendum, whether the country should leave or remain in the European Union (EU).

 

The UK joined the EU, then known as the European Economic Community (EEC) on 1 January 1973. Further expansion of the EEC over the following years saw the community grow to 28 members and become known as the EU. Enlargement has also seen a number of treaty changes including the free movement of people, goods and services and ever closer political union.

 

To facilitate trade amongst the members, the EU develops legislation that should bring a level of harmonisation across the EU28, helping both businesses and consumers understand their rights and responsibilities. There are ‘degrees’ of harmonisation in these rules. Directives set a core ‘objective’ but leaves member state governments to enact it in a way that suits the local market. For example, the Consumer Rights Directive. Regulations produced by the EU are enacted straight into national law with no room for localisation. An example of a regulation impacting online merchants is data protection. This alignment of legal frameworks makes it easier for trade to take place within the EU but the ‘loss’ of sovereignty is one factor influencing the political group looking to encourage an ‘out’ vote.

 

EU membership represents easy access to 500 million consumers and the associated business opportunties. As a trading partner, UK’s exports to the EU totaled £230bn in 2014 whilst imports were valued at £289bn.

 

UK trade with EU and non-EU Countries

 

Easy access to this market is core to the argument for those wanting to stay in the EU. At the same time though, Exports from the UK to non-EU businesses total £283bn whilst imports are £259bn; a positive trade balance of £24bn. This represents the main benefit for those advocating leaving; the UK does trade outside of the EU and operating alone would allow the country to negotiate its own trade deals, rather than rely on those done by the EU. The downside however, is that the UK has 60 million consumers, not 500 million, so the deals it would get might not be as beneficial as those negotiated as part of the EU.

 

In the digital retailing context, UK online consumers are already avid cross-border shoppers and interestingly the main destinations are outside of the EU, with the top three being US, Australian and Chinese websites. The main EU members that UK consumers shop with are Germany and France, who come in at 4th and 5th. In theory, the similarity of the rules governing B2C business within the EU should encourage more inter-EU cross-border shopping. For the UK consumer however, language, culture and price trump geography.

 

The European Commission have a major project running called the Digital Single Market. Digital-enabled commerce exposed many of the fault lines present in the ‘single-market’ and the Digital Agenda is the EU’s effort to ensure that the opportunities within the EU for cross-border trade are maximised.

 

For international merchant’s trading into the UK, its EU membership status will have little impact on digital operations. For merchants within the EU who trade with UK consumers, the short term implications of the UK leaving are unknown. It is likely that consumer legislation will remain, as will taxation reporting requirements, thereby minimising near-term changes. An ‘out’ vote will require trade negotiations between the UK and the EU and it is likely that the baseline for this will be adoption of key EU legislation, as in the case of Norway.

 

The biggest impact is likely to be changes to consumer confidence overall should the UK leave. Uncertainty will be a factor as the UK negotiates new trade agreements with former EU colleagues and other markets; the political fallout from an ‘out’ decision and a global realignment of relations with the UK. An ‘out’ vote would also likely trigger a new referendum campaign for Scotland to leave the union and perhaps pursue its own membership of the EU.

 

Global merchants trading into the UK may have to adopt to new trading conditions but there is unlikely to be any major changes in the consumer space. One exception could be where a merchant has a physical presence in one EU state and trades into the UK; it is likely that UK sales will have to be accounted for in the UK.

 

UK merchants trading into the EU and their continental colleagues trading into the UK could see major changes to the way they run their businesses. For example, the consumer proposition will likely remain fairly similar but duties and taxation will take on a different meaning. New tariffs could make a merchant uncompetitive against other EU retailers and will remove some of the competitive edge against other global merchants.

 

An ‘in’ decision will see little change in the trading environment, except for political machinations with a governing party coming to terms with some of its members voting against the Government position.

 

Whatever the result on the 23 June, the UK online retail market is an attractive one. Worth over £114bn in 2015, growing at circa 10% every year and with an increasingly connected population, UK consumers are already trading on a global basis and this is only set to increase.

 

So what does the UK’s EU referendum process mean to international digital merchants? With a few tweaks, it could be business as usual.

 

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