AN INTRODUCTION TO THE GLOBAL OUTLOOK SERIES

As global expansion experts, we recognize the complexities of managing an effective transnational strategy. There are several characteristics that must be considered when expanding into any new market.

The term “global outlook” is an exciting opportunity to reexamine some of the major markets that play a vital role in our interconnected and globalized economy. We want to provide a helpful resource for businesses that are looking to develop a strong global strategic direction.

With this in mind, we are thrilled to introduce you to our “Global Outlook” series! Throughout this series, we will work to educate and identify the current strengths, weaknesses, opportunities, and threats that are impacting these markets. We will dive into the year in-review, the political climate, economic challenges, and finally - the biggest areas of opportunity.

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GLOBAL OUTLOOK: UK

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YEAR IN-REVIEW

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PANDEMIC RESPONSE

Along with many of the developed nations, the UK continues to deal with the fallout from the COVID-19 pandemic. As vaccines became widely available to the general public in early 2021, the UK began a concerted campaign to drive vaccinations. This campaign took on extra importance in the face of the highly transmissible delta variant of COVID-19, which has contributed to a sustained spike in UK cases since the summer. Currently, 67% of UK citizens are fully vaccinated and 74% have received at least one dose. This places the UK roughly 10 percentage points ahead of the United States, which has 57.2% of the population fully vaccinated and 66.1% with at least one dose as of October 2021.

On July 19, Prime Minister Boris Johnson announced that his administration would lift most of the remaining COVID-19 restrictions in the UK. According to UK Vaccines Minister Nadhim Zahawi, “Thanks to the success of the vaccine rollout, we are now in a position to ease the majority of our domestic COVID-19 restrictions." The UK’s “Freedom Day” did spark fierce criticism from the opposition party. Labour leader Sir Keir Starmer “accused the government of "undermining the self-isolation rules at a critical moment.”

Like many other western countries, the pandemic in the UK has become an increasingly politicized issue, which will continue to complicate the ongoing response and highlight the intense political polarization in the country. Political analysts say that Boris Johnson’s handling of the pandemic will likely be a major issue in the next election cycle. Although the next general election is technically not scheduled until the spring of 2024, there are rumors that Boris Johnson is considering calling a snap election as early as next year. Labour party leadership is already preparing for that possibility.

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ROYAL DEPARTURE

In Jan 2020, Prince Harry and Meghan, the Duchess of Sussex, announced they would step back from the royal family. In a carefully worded statement, the couple made it clear their goal is “to work to become financially independent, while continuing to support the Queen.” The controversial move is considered very unprecedented for senior royals. It “could become a blueprint for other senior members of the family who want out -- for example, William's children, if they felt the same way as Harry as adults.” The couple detail their lives and their decision to leave in an explosive interview with Oprah Winfrey in March 2021. Currently, Prince Harry and Meghan are splitting time between the United States and the UK. From a business perspective, the “step back” has ignited heated debates around the huge tourism and merchandising industry that surrounds the royal family. More importantly, it has raised long-term questions about the proper role of the royal family in the 21st century.

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UK TRANSITION PERIOD

On Dec 31, 2020, the UK officially transited out of the EU. As of Jan 1 2021, the UK “broke from the European Union’s regulatory orbit...casting off nearly a half-century inside the bloc and embarking on what analysts described as the biggest overnight change in modern commercial relations between countries.” It has been over 4 and a half years since the referendum to leave the UK was approved by a narrow majority of the UK public. Boris Johnson, a staunch Brexit proponent, has lauded the end of the transition period as a powerful assertion of UK sovereignty. In late December 2020, Boris Johnson praised the UK for taking “back their money, their borders, their laws, and their waters.”  While the UK faces much uncertainty over the next several years, it is clear that this new era of UK international relationships could have significant ramifications for much of the world.

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GOVERNMENT

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BREXIT TRADE DEAL

A Brexit trade deal was finally reached in late Dec 2020. The entire deal is over 2,000 pages, and it sets the stage for the UK’s relationship with the EU moving forward. According to the Council on Foreign Relations, “The EU-UK Trade and Cooperation Agreement...respects the major red lines of both parties. The EU avoids a hard border on the island of Ireland and preserves the “four freedoms” of its cherished single market: free movement of goods, services, capital, and people. The UK achieves “zero tariff, zero quota” goods trade with its main trading partner and avoids any role for the European Court of Justice in settling trade disputes. On fisheries, the EU agreed to give up 25 percent of its existing quotas in UK waters over a transition period of five and a half years, after which there will be annual renegotiations.”

During the negotiation, both sides were concerned about “guarantee[ing] a level playing field in future trade relations.”  A level playing field will largely be protected by the principle of “managed divergence.” Essentially, both sides reserve “the right to retaliate, after a judicial review process, if they believe the other side has gained an unfair competitive advantage.”

2021 marked the beginning of this new economic agreement. Since the UK “formally left the EU customs union and single market,” new barriers were instituted and “although there [are not] any tariffs levied or restrictive quotas imposed, there [are] a whole series of new customs and regulatory checks, including rules of origin and stringent local content requirements.” This means that businesses will indirectly incur more costs when trading between the UK and the EU.

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NORTHERN IRELAND

The Brexit trade deal has significantly altered the economic and political relationship between the UK and Ireland. As part of the agreement, the UK has not imposed any economic barriers between Northern Ireland and the Republic of Ireland, which has been a full EU member state since 1973. As a result, people living in Northern Ireland have full access to the Republic of Ireland. In order to maintain the exclusive EU economic zone, the UK was forced as part of the Brexit trade deal to impose some economic barriers between Northern Ireland and the rest of the UK. This economic agreement is officially known as the “Northern Ireland Protocol.” Almost overnight, Northern Ireland became significantly more dependent on the Republic of Ireland for trade, which has dramatically changed the balance of power in the region. Imports from the Republic of Ireland to Northern Ireland have increased by 40%. Since “trade across the Irish border remains as it was before Brexit, with no new checks and controls,” it has “prompted some businesses to source more products on the island of Ireland rather than from GB.”

This is a major source of frustration for the UK, which was essentially forced to impose internal economic barriers as part of its agreement to leave the EU. Recently, the UK has threatened to invoke Article 16, which gives the UK the ability to institute “safeguard measures...if [the current Northern Ireland Protocol] is leading to serious "economic, societal or environmental difficulties." In a speech to the House of Lords in early September, Brexit Minister Lord Frost said, “[The EU] would be making a significant mistake if they thought that we were not ready to use the Article 16 safeguards, if that were to be the only apparent way forward to deal with the situation in front of us.” The UK government has threatened to trigger Article 16 in an attempt to force the EU back to the table again on their terms where the Johnson administration hopes to renegotiate the UK’s internal economic barrier and “reduce the difficulties in moving goods from Great Britain to Northern Ireland.”

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US TRADE NEGOTIATIONS

As the UK embarks on a course towards full economic and political autonomy, Boris Johnson has relentlessly tried to secure a new major trade deal with the US. A UK-US free trade deal would be a major victory for his administration and a powerful symbol for a post-Brexit UK. There were initial discussions during the Trump presidency. In 2016, Boris Johnson indicated that the UK “was first in line for a free-trade deal with the United States.” Despite optimism from both sides, a sizable US-UK trade deal never materialized.

Talks between the two countries have further stagnated under the Biden administration. When speaking to reporters before a recent meeting with Boris Johnson, President Biden said, “We're going to talk a little bit about trade today and we're going to have to work that through." UK officials have admitted that a new sweeping trade deal is not a top priority for the US at the moment, and Johnson told reporters that “The reality is that Joe has a lot of fish to fry.” President Biden has done little to refute the Obama administration’s position that “the UK would have to join "the back of the queue" in seeking a trade deal after Brexit.” Trade relationships are further complicated by Biden’s interest in the Northern Ireland Protocol. Biden has repeatedly expressed concern over the developing situation in Ireland. Citing his personal family connections on the island nation, Biden warned the UK against doing “anything that would jeopardize the peace accord in the North, according to officials familiar with the discussions.” With these factors in mind, Boris Johnson has finally started to hint that a trade deal is very unlikely before 2024. Boris says he favors “a good trade deal over a quick one.”

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AUKUS

While the US and the UK have not reached any major trade deals, the UK did enter into a historical new defense pact with the US and Australia. AUKUS is a major defense initiative, which will see the US and UK share top secret nuclear submarine technology with Australia. This new fleet of nuclear submarines will give Australia significantly more influence in the Pacific. Nuclear Submarines offer “greater speed, endurance, and range than their conventional counterparts—important characteristics when operating in the vast Indo-Pacific theater.”  The significance of AUKUS has huge implications for the UK and the globe. This defense pack is aimed squarely at curbing China’s growing influence in the region. The Chinese foreign ministry spokesman Zhao Lijian said, "[AUKUS] seriously undermines regional peace and stability and intensifies the arms race." The deal, which also covers AI and other shared technologies, is potentially “the most significant security arrangement between the three nations since World War Two.” The deal also has significant ramifications for the EU. The deal, which scrapped an earlier contract with French naval manufacturers, has frustrated French President Macron. With the departure of the UK from the EU and Angela Merkel potentially stepping down as the Chancellor by the end of this year, France is in a unique and very powerful position to drive EU policy over the next several years. In response to the AUKUS revelation, President Macron said in a recent statement that this move highlights the necessity for the EU to adopt an independent defense strategy, which will continue to grow the divide between the UK and the EU.

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ECONOMIC SNAPSHOT

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GLOBAL OUTLOOK RISKS

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SLUGGISH ECONOMIC RECOVERY

Despite a sluggish COVID-19 economic recovery, the UK is currently on track to grow by 7% in 2021, but some UK exporters are fearful of the country’s long-term economic prospects. “British economic output slumped by almost 10% in 2020, its biggest drop in more than 300 years, as it suffered one of the world's highest official death tolls for COVID-19 and endured months of curbs on business and social activity.” As international trade returns after the pandemic, this new upswing in trade “is threatening to leav[e] the U.K. behind, an early sign of the challenge Brexit is presenting [to the UK] economy.” Many UK exporters are worried what the mountains of paperwork and ballooning costs mean for their businesses and the larger UK economy. Some analysts are concerned that these new trade barriers are “ hobbling trade just as [the UK] economy needs all its engines firing to power out” of the COVID-19 economic downturn.

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ENERGY CRISIS

While working to expand their renewable energy infrastructure, the UK is still heavily dependent on natural gas - particularly from continental Europe, which in turn is heavily dependent on Russian gas imports. “Gas prices across Europe surged...after Russia’s state-backed gas company, Gazprom, refused to increase its exports to Europe – despite record-high prices across the continent.” Additionally, several UK nuclear plants were “forced to undertake unplanned outages for maintenance” and a series of international electrical cables from France were heavily damaged by a recent fire. The UK’s wind turbines have also suffered from “some of the least windy months since 1961.” These factors have resulted in a perfect storm of energy production shortfalls, skyrocketing demand, and supply crunches have recently plunged the UK into a serious energy crisis. “UK natural gas prices have increased by roughly 425% so far this year. In early October, they were nearly 740% higher than the same period in 2020, according to data from Independent Commodity Intelligence Services.” Soaring prices are expected to force “factories [to close for extended periods] or pass on rising costs to consumers unless the UK government provides relief from...energy prices.” The energy crisis will likely have a significant impact on a wide range of industries and consumer products. Experts warn that the energy crisis could potentially lead to shortages across the country during the winter. This crisis further threatens the UK’s economic recovery as customers are forced to bear the resulting economic costs.

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GLOBAL OUTLOOK OPPORTUNITIES

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EASE OF BUSINESS

Even without a new trade deal, the US and the UK enjoy a very healthy economic relationship. Trade between the two countries was valued at $273 billion USD in 2019, making the UK the 7th largest goods trading partner with the US. According to the Office of the U.S. Trade Representative, “U.S. exports of goods and services to the United Kingdom supported an estimated 665,000 jobs.” The UK is actually a very easy country to trade with given the UK’s remarkable similarities with the United States. The two nations share a similar culture, language, and values. Despite a tumultuous year, the UK remains a stable and robust trading partner, which means it could be a good fit for growing your international business.

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LOW-CARBON INFRASTRUCTURE

The UK recently signed several foreign investment deals relating to low-carbon sectors worth an  estimated $13.3 billion USD. These investments include several “sectors such as wind and hydrogen energy, sustainable homes and carbon capture” and will create roughly 30,000 new jobs in the UK.  As a result, the UK has managed to position itself as a uniquely equipped modern economy that is capable of facing the challenges brought on by climate change. It will no doubt continue to attract international investment as environmental conservation becomes an increasingly important factor in business.

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ARE YOU READY TO EXPAND YOUR GLOBAL OUTLOOK?

At CASTUS, we have experience growing brands in the UK and all over the world, so we know what critical data points and influencing variables need to be identified when planning for New Market Expansion. Our team provides strategic direction that streamlines the expansion process and optimizes resources as you grow.

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