Costing Brexit

In my last blog, I recommended some links that explored the very difficult negotiation course ahead for the UK.  It may involve six processes by one count.  It will certainly mean that the key ones are sequential.  The talks ahead are so mid-numbingly complex and interlocked, that the two year time frame looks distinctly optimistic.  Bearing in mind how long trade negotiations usually take, one has to wonder how realistic.

The two year time limit was not really based on a consideration of what was to be negotiated.  Even at this stage we’re not sure what precisely is to be negotiated.  How and what is the UK going to leave?  What will be the nature of its new relationship with the EU as a third party country?

What we do know is that the UK departure/reentry will be complex, whether you’re looking at a hard or soft Brexit.  It’s one big known unknown. There is a second very obvious known unknown: whatever shape and scale the negotiations take, they will have an immediate and ongoing impact economically.

There are two reasons for this.  As a member of the WTO trading with the EU (to take one model), British business will face tariffs, on average 4.8% but considerably higher depending on the sector.

Ben Chou, the UK Independent’s Economics Editor filed this report on the likely costs involved.  Based on the average tariff, the cost is reckoned at £4.5bn but as Chou notes this could be much higher.  You can argue that this is offset by the decline in Sterling but it is  not as simple as that: weaker Sterling means that inputs from abroad are more expensive and eventually those higher costs feed into wages and unit costs.  But tariffs have a second economic impact that is much harder to quantify.

As one businessman said to me recently the scale of the tariff is not the problem; its the form filling and port clearances.  And tariffs are not the only new bureaucracy; there are likely to be rules of origins which will complicate an exporter’s life.  To take another example, the EU refunds VAT to businesses within the single market and its all done electronically.  Third party countries have to file by paper, a lot of it according to another businessman whose company here in Ireland processes VAT claims for other businesses across the EU. The UK is looking to a future where it is third party country with the EU and its 53 bilateral partners, a total of 80 countries in all.

Which is why Heathrow’s chief executive, John Holland-Kaye, told the Financial Times (26/9) that leaving the Customs Union would mean “adding massive overhead for very little gain”.  The article in which he is quoted notes that the UK has a very lean operation with only 5,000 customs officers, compared to Germany’s 35,218.  That could easily double if new procedures are imposed on the £150bn worth of goods exported by the UK to the EU.  And putting new systems in place could take years.

Businesses are highly dynamic and thrive on certainty, including tried and tested bureaucratic routes that green light their goods and services to market.  It is generally only our Embassies outside the EU that are called on to help extricate an Irish exporter’s shipment out of some bureaucratic snafu at the port of entry. Talk to any exporter and they’ll tell you that one of the great obstacles to entering a new market is the regulatory one.

And the UK has to factor in too that the EU has some 53 free trade agreements with other countries with whom it will have reframe its trading engagement once out of the EU.

If British business faces new requirements, it will take time to smooth out the wrinkles and adjust.  That again underlines the importance of a transition agreement between the UK and EU.  For Foreign Direct Investment companies, their patience may be tested.  As Japan robustly pointed out recently, its companies had invested in the UK precisely because it was a member of the single market whose raison d’etre is getting rid of barriers to trade.

While globally trade liberalisation is under pressure, the EU is forging ahead in creating free trade with partner countries. New free trade agreements are near completion, such as with the US (TTIP) and Canada (CETA); and more planned, such as one with India. Even when trade agreements are not finalised, a whole raft of trade obstacles are cleared out of the way that free up increased bilateral business.

Looking internally, the EU the integration of the single market continues with the ground breaking single digital market and a capital markets union.  By not being part of these negotiations, the UK is incurring another cost, somewhat ineffable but very real.

Costing Brexit is in its infancy but costs both quantifiable and intangible there will be.

 

Eamonn

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