Car

 

Yesterday, senior EU negotiators warned that “the chances of Britain crashing out of the EU without a new (trade) deal were now “over 50%””.  Clearly, therefore, the UK’s preparations are not going well.

Instead of building trust, the UK’s Brexit Secretary, David Davis, seems to think that threats – such as promising “the row of the summer– are the best way to open discussions.

I have taken part in major trade and contract negotiations around the world.  Based on this experience, I believe his strategy is very unlikely to succeed.  It risks instead leading to a populist-style “Battle with Brussels”, which the UK will lose.  The UK will then crash out of the EU – with no deal on trade – long before the March 2019 deadline.

PREMIER MAY IS IGNORING HER OWN WARNING LAST YEAR
My key concern is that premier Theresa May seems to be ignoring her own warning before last June’s referendum:

The EU is a single market of more than 500m people, representing an economy of almost £11tn ($14bn) and a quarter of the world’s GDP.  44% of our goods and services exports go to the EU, compared to 5% to India and China.  We have a trade surplus in services with the rest of the EU of £17bn.  And the trading relationship is more inter-related than even these figures suggest.  Our exporters rely on inputs from EU companies more than firms from anywhere else: 9% of the ‘value added’ of UK exports comes from inputs from within the EU, compared to 2.7% from the United States and 1.3% from China….(my emphasis)

I am not alone in my fears. UK industry is becoming very worried about what may happen.  Paul Drechsler, President of the Confederation of British Industry (CBI), spelt out the key issue last week  – the need to maintain access to the Single Market and Customs Union.  He described the journey of a computer chip made today in Cardiff’s tech hub:

“The chip is bought by a company in Germany. The metals inside it are sourced from South Africa and Turkey, using free trade agreements the UK has through its EU membership.  Some of the plastics inside it are processed in Poland and Spain. Engineers from France, Croatia and Hungary worked alongside Brits in Cardiff to design it.  When finished, it is packaged by a worker from Bangor, Wales and delivered to the port by a driver from Slovakia.

“The chip has been made to European standards, its design protected by a Europewide trademark.  It was insured with a financial package covered by EU passporting and, when incorporated into a machine and put in the shop, it will meet Europewide levels of consumer protection.

“In other words, for that chip, and the British company that makes it, to remain as competitive as today we need: three new trade deals, free movement of EU citizens, three new sets of internationally approved regulatory and copyright standards and an agreement on EU financial services passporting.”(my emphasis)

A hard Brexit, without access to the Single Market or Customs Union, will not just impact the UK. As the CBI example confirms, today’s complex and extended supply chains mean that companies across the EU27, and around the world, will find their trade disrupted.

RULES AND REGULATIONS ARE AS IMPORTANT AS TARIFF BARRIERS TO MOST COMPANIES
Many in the UK chemicals industry – the UK’s largest manufacturing export earner – are also very worried.  Its largest customer, the car industry, is totally dependent on global supply chains and just-in-time delivery, as the chart shows. Going back to a pre-Single Market world of tariffs, customs barriers, endless form-filling and border delays will lead to major uncertainty and loss of business.

And, of course, tariff barriers – although important – are not the only issue. The future role of the European Court of Justice, and the rules and regulations under which products are sold, are even more critical, as a new survey by the British Coatings Federation confirms:

“Over three quarters of our members said that a separate UK chemical regulatory system would be bad for business. Maintaining regulatory equivalence with key EU regulations (REACH, CLP and BPR) through continued relations with institutions such as the European Chemicals Agency is essential to ensure we have a strong UK manufacturing base that can import chemical raw materials from Europe, and export finished goods such as paints, coatings printing inks and wallpaper without being at a competitive disadvantage.”

BREXIT RISKS ARE BEING IGNORED IN THE UK ELECTION CAMPAIGN
Given the criticality of these issues for the economy, they should be the major topic of the current election campaign. But instead May’s election manifesto simply promises:

“As we leave the European Union, we will no longer be members of the single market or customs union but we will seek a deep and special partnership including a comprehensive free trade and customs agreement.”

She seems to expect the Brexit negotiations to follow the pattern of the Treaty of Lisbon in 2014:

  Then the UK appeared to “opt out” of key domestic and legal policies to pacify the Eurosceptic tabloid media
  Behind the scenes, however, it negotiated a special Protocol 36
  After signing the Treaty, the UK immediately “opted back in” to many of the policies via Protocol 36

But it is very hard to see how this can happen with Brexit, as EU Commission President Juncker warned last month.

I am therefore not optimistic about the outcome of the talks.  I correctly warned – over a year ago – that Brexit was likely.  Having followed developments since then, I find it hard to believe the EU 27 will allow May a back-door re-entry via a new Protocol 36-type deal, after a “hard Brexit”.  This seems a totally unrealistic objective.

I hope I am wrong.  But if I am right, the current UK government strategy means there is no “business as usual” option for the vast majority of UK companies – or for many EU 27 and non-European businesses.  I fear, as I have warned since March 2016, “Brexit will hit UK, Eurozone and global economies“.