Brexit: What does it mean for farm exporters, commodity exchanges?

 

The whole world is waiting with a bated breath for June 23 as to whether it is going to be a Brexit or Bremain. But for India and its trade arena, what sense does it make? Come, we will help you join the dots... 

On June 23, British citizens will vote: should the United Kingdom remain in the European Union, or leave? If its a Bremain, global markets will heave a sigh of relief and it will be business as usual. But if its a Brexit, it will trigger a dominos effect which may result in the realignment of Europe’s financial sector, property market, immigration, Free Trade Agreements, imports and exports.

Now, the background

The EU is a group of 28 countries that have agreed to abide by certain rules that supercede each nation's own rules and laws. This is mainly to facilitate trade and commerce in ways that make each signatory country better off. In principle, the EU supports four freedoms: the free flow of goods, services, workers and capital among all 28 countries. Mind you, the EU is different from the Euro Zone (a group of 18 countries that have adopted the euro as their currency). And here, the UK does not use the Euro, nor do other EU countries such as Sweden, Poland or Hungary. 

What will happen if its a Brexit?

As we said earlier, if its a Bremain, its business as usual for many secotrs and the stock markets could possibly see a rally. In case, it is a Brexit, what happens? Well, while an actual departure would take atleast 2 years with procedural hassles being worked out, the implications might well be immediate. The dollar would probably strengthen as many investors bought US securities as a hedge against this European parlour game. 

The UK, once it divorces itself from EU, would no longer benefit from the free-trade pacts among EU countries or with other nations governed by the EU deals. The UK could either negotiate trade deals with its European peers or do away with those deals. Being a global hub for finance and commodity exchanges (remember the bullion benchmarking taking place in London and the London Metals Exchange trading), there would be pressure on big banks or investors to move their operations and other activities out of the UK. and so, other trading hubs, especially New York stands to gain.

How does it affect India?

Brexit will increase global volatility thereby impacting capital flows and currency exchange. Indian businesses have substantial presence in both the UK & Europe. The Guardian says there are more than 800 Indian-owned businesses in the UK, with more than 110,000 employees. 

For long time, India has seen and used Britain as a trade gateway to the EU. So if Brexit happens, it may alter our trade equations with the entire EU. In case of a Brexit, we will have to re-negotiate our trade pacts which were being regulated by the EU. Indian investments made in the UK will be at a disadvantage because of correction in property prices (again, London property market is seen as a benchmark) and the probable changes in import tariffs.

The churn would add up to Indian exporters' compliance costs as we will have to adhere to two different standards. For instance, EU is the thrid largest importer of India's seafood. So, if Brexit happens marine exporters will suffer adhereing to separate sets of safety norms, quarantine measures and all. Also, the UK imports a major chunk from the Indian spices basket, while there are a separate set of EU regulations governing import of chilli and its products and nutmeg from India. 

Added to this is the possible depreciation of the euro/pound sterling which may hit these exporters. A sluggishness in exports mean there will be an oversupply of that particular produce in the domestic market. Falling exports is not a good indicator on a country's economic report card.