Brexit has Officially Happened. Where Does that Leave Hong Kong?

On the 31st of January 2020, the United Kingdom finally left the European Union. What does that mean, if anything, for business in Hong Kong?

The world was left reeling when, on the 23rd of June 2016, a 52% majority of British voters chose to leave the EU in the now-infamous and much discussed ‘Brexit’ referendum. A result that arguably no one expected, the impact of the shock reverberated globally. Markets took a hit, stock prices plunged, investors grew precarious. On the day of the referendum, the Pound Sterling fell 8% to the US dollar, its largest single day drop since the floating exchange rate was introduced. In Hong Kong, the Hang Seng Index fell 609 points (a 2.92% decrease), prompting the HK Government to caution the public about likely market volatility to come. The financial community worldwide was suddenly faced with a multitude of potential outcomes; most concerning, possible increased costs and barriers to trade. Hong Kong surely would not be unscathed.

While not many expected a quick and easy exit for Britain, no one could have foretold the long political debacle that ensued post referendum. However, despite the odds, the UK has now formally exited the EU, and has moved in to an 11-month transition period. The purpose of this phase is to allow time for negotiations between the UK and the EU, in order to determine their future relationship.

During the transition period, the UK is still subject to all EU rules, and still retains a place in the customs union, enjoying the privilege of tariff, duty and quota free trade, as well as free movement of people. Thus, for the short term it is expected that the real impact on the Hong Kong economy will be limited. Importantly, however, is that the precise future economic link between the UK and the EU is yet to be determined; a trade agreement between the two has been cited as first and most important on the agenda in the upcoming negotiations, set to begin in March this year.

All of the unknowns leave the global financial community in a state of limbo, characterised by continual uncertainty about the future implications of Brexit. It is expected that the feeling of uncertainty will continue to influence investor decisions leaving markets volatile and the number of new high-risk UK-based investments low. Updates on Brexit negotiations have and will continue to be featured in the news, further contributing to fluctuations in stock prices and sterling value. However, Hong Kong has proven relatively resilient to political drama in the UK, and so no market disasters are necessarily to be expected.

More tangible long-term implications of Brexit on the Hong Kong economy will not be realised until trade negotiations between the EU and UK have culminated. While the future is uncertain, there are several possible outcomes, implications of which can be predicted.

The transition period, as of now, is set to end on the 31st December 2020. British Prime Minister Boris Johnson has stipulated several times that he will not extend that deadline, although the EU has offered an extension up until 2022. Johnson is looking to settle a comprehensive trade deal by the deadline; however, EU chief Ursula von der Leyen has suggested that this will be impossible. For context, based on past trade negotiations, the average period of time taken to negotiate a trade deal with the EU is 48 months. Clearly, Boris Johnson’s goal is nothing if not ambitious. The UK has until July 1st to decide if would like to extend the transition period, until then it can be assumed that the transition period will finish at the end of 2020.

If the transition period deadline is upheld, it is most likely that a very limited trade agreement will be reached, and quick decisions about priority issues will have to be implemented next year. A limited deal may result in the introduction of tariffs, duties, quotas and border checks onto imports and exports between the UK and EU. This will cause issues for any Hong Kong based companies with supply chains running through the UK and the EU, increasing the cost of business. Following, there are an estimated 2.37 million EU nationals currently working in the UK, who were able to enter and begin work without a visa. It is unknown whether or not this privilege will be upheld in future, and so a sudden labour shortage is a possibility for any company that employs a significant number of EU nationals.

If the transition period were to be extended, it is possible that a much more comprehensive trade agreement will be reached. However, there is no guarantee that even after extension the UK will be able to continue to enjoy free trade privileges. Boris Johnson announced on the 3rd of February 2020 that the UK would not accept alignment with EU rules (including rules pertaining to competition policy, subsidies, social protection and the environment) in any future trade deal; the EU has made this a requirement for the UK in order to avoid tariffs.

HSBC and other major banks have already prompted clients with substantial business in the UK, including those based in Hong Kong, to put contingency plans in place based around the possibility of the UK leaving under a limited trade deal. It is an unfortunate yet highly probable reality that must be faced head on.

While negotiating a trade agreement with the EU is currently of utmost importance to the UK, the formal exit from the EU means that the UK can begin to look beyond Europe for more diverse economic opportunities. Strengthening overseas ties is now imperative for the British in order to ensure continued economic strength without the comfort of EU membership. There is some hope among the British that the ability to relax EU restrictions, and forge their own economic relationships, may help propel the British economy to new strengths.

Hong Kong is, as always, an attractive trading partner, given its strong economy, multitude of services and close link to Mainland China. Furthermore, the Hong Kong – UK relationship is well established; Hong Kong is a large market for UK exports, and both the UK and Hong Kong have placed significant investment in each other. Despite uncertainty, savvy investors in Hong Kong may be able to benefit from the UK’s now apparent need to strengthen global business relations. MP Richard Graham continues to be a proponent of strengthening ties with Hong Kong, after stating in 2016 that Hong Kong and China would be prioritised in the establishment of post-Brexit Free Trade Agreements.  If trade restrictions are introduced at the culmination of the transition period, Hong Kong and the rest of Asia will become even more indispensable for the British economy.

For now, uncertainty is a given. In the future, Hong Kong may stand to gain. The world watches and waits.