It’s been nearly three months since Brexit. Three months since the Brits’ decision to leave the EU hit share markets around the world. European equities plunged. The British pound dropped dramatically.
Compared to the US dollar the British pound lost 11.2% of its value. The uncertainty of the decision made its way to Australia too, though not as dramatically. The ASX200 fell by 3.2% on the day of the decision.
But what seemed like an economic catastrophe quickly blew over. Instead of triggering a global economic collapse, the fear of Brexit fizzled out.
Alan Jones, the talk back radio presenter, summarised the situation as just a vote. And he’s right. All that has happened so far is a vote.
Now that markets are over their initial shock, all eyes are on the opportunity that Brexit presents. Britain needs trading partners, and will need to negotiate new trade deals. This spells potentially lucrative trade agreements for various nations.
Australia hasn’t wasted any time jockeying to hasten a British free trade agreement (FTA) either. I’ll get back to that in a moment. But first…
Why will Britain need new trading partners?
Brexit won’t be a reality until the government enacts article 50. Once Britain officially splits from the EU, they will be giving up free ‘borderless’ trade with other EU members. Future FTAs with the EU or other European nations will surely top the government’s agenda.
However, these kind of agreements take time. Just have a look at the FTA Australia signed with China last year. At 45,277 pages, it’s not exactly light reading! That agreement was 10 years in the making.
The Financial Times explained the obvious impact of Brexit:
‘Britain’s vote to leave the EU has thrown the country’s trading relationship with Europe into doubt. That in turn opens up big questions about the future of the British economy, with almost half of all exports going to the bloc.’
Eight of Britain’s top 10 trading partners are members of the EU. With so much at stake, the UK ministers are all aiming to maximise access to the EU’s massive market. Yet they remain steadfast on seeing Brexit through.
Once out of the EU, the UK should be able to negotiate a FTA with the EU for goods. The UK already complies with current regulations and there are no tariffs in force at present.
But an FTA for Britain’s service sector might be a different story. Trade deals usually exclude services. Why? Free movement of individuals is usually restricted between countries….unless you’re an EU member, of course.
This could cause problems as Britain’s service sector accounts for 80% of their economy. And it could put one in 10 British jobs in jeopardy according to Pro Europa.
For the immediate future, Britain needs friends, both inside and outside of Europe.
Looking beyond its immediate neighbours, it could well be Aussie winemakers reaping the rewards from Britain’s exit.
The best deal is the deal that’s done most quickly
From 4 to 5 September, the 2016 G20 took place in Hangzhou, China.
During the meetings, Malcom Turnbull said he would negotiate a ‘very strong’ FTA with Britain after it leaves the EU.
Days later Australia’s trade minister, Steven Ciobo, was making headlines.
On 6 September, Ciobo met the UK’s secretary of state for international trade, Liam Fox. It was Dr Fox’s second day on the job. But talks so far have been extremely positive. Ciobo stated that Australia would be ‘an ideal partner while Britain navigates its new economic freedom.’
He also remarked, ‘The best deal is the deal that’s done most quickly.’ After talking with Ciobo, Dr Fox announced the formation of a ‘working group’ of senior officials to start mapping out negotiations on the deal.
An FTA cannot begin until Brexit is a reality. Though this hasn’t stopped EU members from excluding the UK from informal policy meetings.
But regardless of timelines and political shenanigans, it’s positive news for Australia. In particular Aussie winemakers.
Ciobo suggested that access to ‘cheap Australian wine’ could be a ‘good fringe benefit’ of any FTA between the UK and Australia.
As it stands, duties are place on Australian wines sold in the EU, and hence in the UK. This duty doesn’t apply to competitors like France, Italy and Spain. They save around $110 million per year as a result.
As you can imagine, an FTA would likely see more Australian wines shipped to the UK. According to the Express, ending the EU import duty on wine could slash up to 15 pence off the cost of a litre.
But even if duties aren’t dropped for Aussie wine heading into the UK, Brexit could still benefit the Australian wine industry. This is because duties on wine may well apply to Australia’s EU competitors as well.
According to the World Trade Organisation, existing rules prevent the UK from favouring one country over another unless specifically worked out in new free trade agreements.
With or without an advantageous FTA with the UK, this all boils down to Brexit offering a great opportunity for Aussie winemakers like Australian Vintage [ASX:AVG] and Treasury Wine Estates [ASX:TWE]. Either the playing field is levelled between them and their major competitors in France, Italy and Spain…or the playing field gets tipped in their direction with a UK–Aussie FTA.
Either way, these are two stocks to keep an eye on.
Contributing Editor, Money Morning
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