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ANALYSIS: What to watch out for as Brexit negotiations begin

“Positive and constructive” was how the UK’s Brexit secretary David Davis described his mood as he kicked off negotiations with the EU on Monday morning.

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Smith says Rathbones research following the ‘leave’ vote, and a rising academic consensus, indicated the main risks lay in ‘non-tariff costs’, where the cost of doing business in the EU may be raised by new compliance and regulatory burdens.

Rathbones is keeping a close eye in particular on whether the UK will remain a member of Europe’s customs union under Brexit, which would be to the benefit of both parties to the negotiation, or perhaps even strike a bespoke customs deal.

If the UK gets a bad customs deal the cost of passing goods and people across borders into and within the EU could rocket. Byzantine regulations around proving that complex supply chains are compliant could add major costs for UK businesses, and could also deter EU customers.

He said membership of Europe’s customs union currently means accepting all its regulations, but as a non-EU member the UK would not be in a position to shape the rules it had to adhere to.

Worse still, membership of the customs union as it stands means members are not permitted to negotiate deals with any new partner nations – one of the key potential benefits of Brexit.

“We would be looking to see some sort of special deal [on customs],” Smith said.

At the moment, Turkey is the only country outside the European single market that is a member of the customs union, albeit its membership excludes services and agriculture. 

Jeremy Gatto, investment manager at Unigestion, said it was “early days” but a period of sustained heightened volatility in sterling assets may lie ahead until Brexit clarity emerges.

The firm advises investors to keep an eye on the tone of the negotiations, looking for signs of a ‘hard’ or ‘soft’ Brexit.

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