Newspapers are full of stories about early trade agreement talks between the UK and China. What should business do in the meantime?
The British vote to leave the European Union on the 23rd July, 2016, stunned the world. No-one really believed that the nation would choose Brexit. But it did just that.
In the campaign before the referendum, the Remain side made great play of the belief of many economists that Brexit would cost British jobs. However, not so much attention was paid to what it would mean for jobs and businesses in other countries.
Britain is big. Really, really big. It’s the world’s fifth-largest economy. If hundreds of thousands of British jobs are dependent on Europe, then millions of jobs around the world rely on a healthy British economy.
We’re nearly a month in. The sky hasn’t fallen down and World War 3 hasn’t started (yet). But what’s it really like out there?
Boom over for British imports from China?
China’s currency is the Renminbi (literally, the “people’s currency”). Unlike most currencies, it’s not used very much in international trade for lots of different reasons.
Instead of transacting in renminbi, China trades with the UK in US dollars. As the referendum results came in overnight, money markets took fright. In the space of four hours, the pound dropped against the dollar from £1.49036 to £1.33279 – a mighty drop of 10.57% (source: xe.com).
This week, one client spoke to us about the situation from their point of view. They’re a big player in FMCG (fast-moving consumer goods). They manufacture all their goods in China and then sell their products all around the world, including in massive volumes to the UK and Europe.
FMCG companies operate on wafer-thin margins. Arguably, of all the different types of importers and exporters, FMCG firms are the most vulnerable to currency volatility.
They were very worried about being hammered by this huge drop. They import from China, paying in US dollars but then selling on in British pounds. The pound dropped against the dollar by up to 17.8% in just 9 months (source: xe.com)
How have they been handling this sheer-faced decline?
First, they hedged their currency position so they have some time to adapt. Second, while hedging is still protecting them, they’re looking to find massive savings on their fixed costs. Will this be enough? More on that later…
Meanwhile, in Britain – a plan emerges?
The country let out a collective gasp of surprise when it became clear it had voted for Brexit.
Politicians were stunned – their response to this new world order not inspiring any confidence. To many, it seemed like the Brexit side had done no planning for what happened if they won. Even worse, the British government hadn’t either.
Fast forward three weeks. The pound is still depressed. But it seems like there may be some sense of direction with the appointment of Theresa May as the country’s new Prime Minister.
Within just a day, she announced a new department – the Department for International Trade. It’s tasked with “promoting British trade across the world and ensuring the UK takes advantage of the huge opportunities open to us.” Headed by Liam Fox, its role is to go global, looking beyond the EU and making trade agreements with as many countries as possible.
Mr Fox is full of optimism for Britain’s future prospect, believing “(i)t will be possible to secure bilateral trade deals with the rest of the world that are larger than the value of the EU single market within two years.” (source: The Guardian).
David Davis has been promoted to cabinet as the “Brexit Minister”. His brief is identical to Liam Fox’s except that Davis’s sole focus will be trade with the EU.
Could anything go wrong with the plan? In an ironic twist, the former head of the government’s EU unit, Oliver Letwin, has let it be known that “(t)he UK has no trade negotiators (and) all British negotiators are currently employed by the EU.” (source: Financial Times).
What does the future hold for business?
As a member of the EU, Britain was not allowed to make trade agreements with other countries – only the EU could do that. For example, it came as a surprise to many during the referendum campaign that the EU did not have a recent trade agreement with China.
There’s no doubt that Britain will have much more control over its future – eventually. And that future might be as bright and prosperous as the Brexit side promised.
However, the key word is “eventually” – there’s a long road ahead of us. So, what should importing & exporting companies do in the meantime?
First, you’re experts at this. The pound may have plunged against the dollar but it’s not the first time you’ve faced down and beaten volatility. Remember your company’s coping strategies when the US dollar appreciated strongly against the Euro not so long ago? On 13 July 2014, the dollar was at 1.36 against the Euro – in mid-March 2015, it hit 1.04. This Euro drop of 23% was bigger than sterling’s recent woes.
Second, lean on your suppliers. Reassure your partners that, in a few months’ time, the dust will have settled and sterling will be close to its recent highs. Take advantage of the trading partnerships you have and secure discounts. Great business relationships share the joy and the pain – that’s why they last.
Third, shipping is a buyers’ market. Have you seen the Baltic Dry Index of late? It’s rallied a little since February but it’s still two thirds down from December 2013 (source: CNBC.com). Make potential transporters compete against each other for your business.
It may get a bit turbulent for a little while for many businesses. If all the predictions of economic collapse and fiscal Armageddon get you down, remind yourself that you’ve been through worse before (remember 2008-2009?) and that it’s always darkest before the dawn.