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Home / Business

John Ballingall: The economic impact of Boris Johnson's Brexit deal on New Zealand

By John Ballingall
NZ Herald·
19 Oct, 2019 03:10 AM5 mins to read

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British Prime Minister Boris Johnson. Photo / AP

British Prime Minister Boris Johnson. Photo / AP

COMMENT:

I really hope this article ages well. If things have imploded in Brussels or London overnight, then you may want to just turn the page now.

The risk of a no-deal Brexit is diminishing. It seems a compromise will be found that allows the United Kingdom to leave the European Union over time. Getting Boris Johnson's deal through the UK Parliament will be no mean feat, but the signs are more positive than we've seen in a while.

READ MORE:
• Brexit breakthrough? Negotiators agree on an outline Brexit deal
• Ultimate challenge for Boris Johnson's 'great' new Brexit deal with European Union
• It's on: UK and EU reach Brexit deal, fight shifts to British Parliament
• No-deal Brexit could lead to 'increase in dogging', UK cabinet minister warns

Johnson's proposed deal is unlikely to have much impact on the New Zealand economy overall, though it will be more turbulent for some sectors than others, and it could be a bumpy ride.

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The UK accounts for 2.7 per cent of New Zealand's goods exports and imports. It generates 6.2 per cent of our services export revenue (largely tourism); and is the fifth largest foreign direct investor here, accounting for 4.7 per cent of the stock of foreign capital.

These are important economic links, but the expected slowing of the UK economy under the proposed deal is unlikely to send shockwaves through the New Zealand economy.

A recent study by independent thinktank "The UK in a Changing Europe" estimates Johnson's deal will lower UK long-term income per capita by between 2.3 per cent and 7.0 per cent. The extent of the decline in living standards depends on migration settings and the impact of reduced integration with the EU on productivity.

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This decline is less damaging than a no-deal Brexit (up to 8.7 per cent) but worse than Theresa May's unsuccessful deal (up to 5.5 per cent).

Falling UK incomes dampen the demand for New Zealand goods, an effect amplified by a continued weak Pound.

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But given the long and deep historical and cultural relationship between the UK and New Zealand, it's hard to imagine UK consumers and firms turning away from the Kiwi products they know and love. Who wouldn't want a bottle of New Zealand's finest pinot noir or a comforting feed of New Zealand roast lamb at such a testing time?

And as the UK extracts itself from the EU single market, it will be more complicated and expensive to import from the EU than it is now, making New Zealand's exports look more attractive.

A high-quality, comprehensive trade agreement between New Zealand and the UK – a priority for both countries once the UK can negotiate by itself – would further boost the attractiveness of our exports.

As the UK extracts itself from the EU single market, New Zealand's exports could look more attractive. Photo / File
As the UK extracts itself from the EU single market, New Zealand's exports could look more attractive. Photo / File

Such an agreement would also make it easier for investment to flow in both directions. New Zealand could benefit as the UK looks to diversify away from EU markets and tap into the dynamic Asia-Pacific region's supply chains in partnership with Kiwi businesses.

The number of UK visitors coming for a holiday to New Zealand is likely to remain steady, as it has been since the 2016 referendum. Lower incomes and the weaker UK currency are making long-haul holiday destinations less appealing. On the upside, UK holidaymakers might think getting away from it all in New Zealand is a great idea after the past few years of economic and political uncertainty.

A similar story could hold for migration flows between New Zealand and the UK. The weaker UK economy and ongoing uncertainty around the UK's future with key trading partners may reduce domestic opportunities for UK workers, who might consider an overseas move.

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New Zealand's ongoing skills shortages would mean they will be very welcome here (as long as England, Ireland or Wales don't end up winning the Rugby World Cup – that might be just cause to tighten our migration settings for at least four years to avoid the gloating).

Conversely, as the UK's immigration policy settings tighten post-Brexit, fewer EU migrants will enter the UK labour force. That could open opportunities for Kiwis wanting to work temporarily or permanently in the UK, provided the points-based system expected to be introduced is favourable to New Zealand.

It won't all be plain sailing for New Zealand though. A few export industries will find things challenging.

The amount of New Zealand dairy and meat products the UK will import at reduced tariff rates after it splits from the EU is yet to be determined. UK politicians' promises not to make New Zealand exporters worse off will need to be made good. But this is all uncertain for now and could result in some tough negotiations between the UK, EU, NZ and other primary exporters at the World Trade Organization.

And agreeing a Brexit deal is just the start of the hard work for the UK. It needs to negotiate its future economic relationship with the EU and start working out its global network of trade agreements.

This will all take time – despite UK politicians' rhetoric – and will involve difficult trade-offs between competing domestic interests, as all trade agreement do.

This all adds up to a prolonged period of challenging economic times for the UK, and hence volatile trading conditions for some Kiwi businesses. Buckle up!

- John Ballingall is a Partner at independent economic consultancy Sense Partners.

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