In the global scheme of things, Brexit may look like something of a local issue for Europe. The US is busy pushing an agenda to reset international trade terms in a way that was unthinkable just a few years ago. The possibility of a new era of protectionism and international trade wars is dominating politicians’ discussions around the world. Even in Europe, there are arguably more pressing issues for the European Union than the long drawn out – and little progressed – discussions over exit terms for the UK. When the UK has left the EU next year (March 29 to be precise), trade will undoubtedly continue, deal or no-deal (though a no-deal scenario undoubtedly brings added challenges for UK business competitiveness). The EU, however, retains some big challenges on holding itself together with a clear mission that is accepted by people across its 27 member states. In its consistent line over the past few years, Berlin appears to worry far more about the integrity of the EU Single Market and holding the EU together than it does about Brexit. German companies have been big winners from the European project, not least in trading around the world with a currency that is surely cheaper than the D-Mark would have been.
The EU, we should remember, is at its heart – and its origins – a protectionist trade bloc. In a highly competitive world, it makes the most of geographical proximity so that neighbouring countries can work together to trade more easily and raise collective living standards. It also involves creating common standards and regulations to avoid the iniquities and chaos of trading arrangements globally (partly where Donald Trump’s ‘economic nationalism’ is coming from). Free trade globally is fine in theory, but in practice it is difficult to avoid all kinds of ‘unfair’ practices that countries indulge in to make their industries more competitive. The cheapest product may have been produced on the basis of ‘hidden’ government support or subsidies, subject to an artificially low currency or is priced for ‘dumping’ (grabbing market share with way below-cost pricing), for example. And the WTO is not exactly an organisation with a reputation for swiftly resolving trade disputes. It is seen as weak and ineffective, even if it acts as a default institution for an international ‘rules based’ order. The EU exists, like other trade blocs and bi-lateral free trade agreements, within this free-for-all international trading landscape. The EU was designed (after its first principle, which was to stop European countries going to war with each other) to build regional economic strength that can also be levered in free trade agreements – negotiated as a unitary bloc – with other parts of the world.
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The big fear in the UK industry is not so much tariffs (though they are most certainly not wanted) but delays to shipments of parts at borders.
I still recall the enthusiasm in Britain for the EEC’s Single Market back in 1992. It was presented as good for business to reduce red tape and trade more easily with our neighbours. Mrs Thatcher was a supporter. This, it seems, was – and still is – something of a no-brainer and has underpinned the success of the auto industry in the UK over the past few decades. The Japanese OEMs who came to Britain to set up manufacturing operations came for a host of reasons (not least, a welcoming UK government), but they also had a very firm eye on future exports to European markets. Automotive supply chains at UK factories are international and, especially, pan-European in flavour. Components pass – multiple times – seamlessly across the UK’s border with other EU member states. The big fear in the UK industry is not so much tariffs (though they are most certainly not wanted) but delays to shipments of parts at borders. We still don’t know how border red-tape – checks on consignments, possible admin for new duties, rules of origin – will look in the post-Brexit world.
If the competitive needle is moved significantly in the wrong direction (higher trading costs for companies who become outside of the EU Customs Union and Single Market), we probably won’t see the resultant impact for quite a few years. Companies that have invested huge sums in manufacturing plants don’t up-sticks just like that. Future investments could be tipped towards eurozone plants, but not necessarily; there’s the thought that the net position for firms in Britain may not be quite as negative as some are saying (exchange rates, tax rules, interest rates, other government ‘support’, can act as competitive counterweights). Much would depend on how burdensome new trading arrangements would actually be.
Of course, it would be reassuring for businesses to get a bit more clarity on what to expect. With less than nine months to go, they are getting jittery and speaking out publicly (where previously they held private meetings with ministers, giving the government space to make the political discussions). Investment decisions are being put on hold. The SMMT notes that car production is down in the first six months of the year and says investment has stalled, with just GBP347.3m earmarked for new models, equipment and facilities in the UK – almost half the sum announced in the same period last year.
The SMMT wants swift progress on a deal that, as a minimum, maintains EU Customs Union membership and delivers Single Market benefits. It wants an end to the current uncertainty about the UK’s future trading relationship with the EU. It warns that leaving the Single Market and EU Customs Union will bring an end to the seamless movement of goods that UK Automotive relies upon, with more than 1,100 trucks from the EU bringing components to car and engine plants every day. Without the customs union and the regulatory alignment of the Single Market, it warns that there would be disruption at the border undermining the competitiveness of the sector. Mrs May has said that the UK will be outside the EU Customs Union when it leaves. If there’s a solution that delivers much of what the UK has today on frictionless trade in goods with the EU – from a position inside the Customs Union – but from outside the Customs Union with the ability for the UK also to independently strike trade deals around the world, it will be quite something.
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By GlobalDataThe likelihood of no-deal is rising with each passing week.
Time is however, getting very short. A UK government position on preferred future trading arrangements with the EU is expected to emerge over the next week or so. Two years after the referendum result and with eight months to go before the UK exits, it’s about time perhaps. If I were in automotive manufacturing, though, I would be making plans for a no-deal or stripped down FTA default arrangement. BMW, for one, is. The likelihood of no-deal is rising with each passing week. This may well be the kind of negotiation that will ‘go to the wire’, but it has been hard work to get even this far and there is much detail to sort out as well as 27 countries’ parliaments (28 if we count Britain’s, which is riven with splits and discord) requiring ratification of a deal. We still have no real idea what it will look like, what customs changes there will have to be at borders, new systems to comply with and so on. Also, the two-year ‘transition’ is not actually agreed yet, either (it is conditional on the two sides agreeing a final withdrawal treaty).
The SMMT message to the UK government is that until it can demonstrate exactly how a new model for customs and trade with the EU can replicate the benefits the UK currently has, it shouldn’t change it. But there is a an excruciatingly difficult balancing act for the UK government. The government is politically weak, with the governing Conservative Party in a minority in parliament and itself split over Brexit terms. A vocal and well organised group wants a hard and clean break with Brussels and would be happy to go straight to third country status. Another group is more influenced by the interests of business and wants a ‘soft Brexit’ that retains some of the arrangements on EU trade that currently apply. Prime-minister Theresa May is trying to create a compromise on future UK-EU trading arrangements that the whole cabinet can sign up to. She must wonder herself if it’s possible to find a middle way (albeit with a few ministerial resignations perhaps). The UK’s voters voted to leave the EU in the referendum of 2016, so it’s a question also of reconciling that democratic result with the UK’s short-term economic interests – a well-managed departure that doesn’t unduly rock the UK economic boat. And, after all that hard internal UK gov negotiating work, she must present the UK proposal to Brussels. If Brussels says a straight ‘no’ (not exactly inconceivable), the discussions could move rapidly to emergency arrangements (‘keeping planes in the sky’ etc) that will have to be put in place to accompany a no-deal UK departure.
The EU, let us remember, is not exactly a flexible institution from a negotiating standpoint; all 27 have to be signed up to whatever common position they can actually agree on – and then they are pretty rigid in sticking to that agreed position. EU Councils – the decision making jamborees for EU member state leaders – come and go. There are not many left before the UK exits. The timetable is extremely tight. Businesses will be looking for Brexit progress and clarity, and very soon. If the UK side cannot manage to get that – and in a matter of weeks, not months – be prepared for no-deal scenarios.
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