Brexit... "Nobody knows anything"

According to the latest comments in Supply management "four factors will be critical in determining the effect on the UK’s economic performance: trade, regulation, investment and skills."

"The UK’s ability to trade with the rest of the world has long driven its economy. Pessimistic think tanks such as the National Institute of Economic and Social Research argue that whatever future trading arrangement the UK comes to with the EU, it will be less advantageous than access to an open single market. The Centre for Economic Performance warns that even if the UK strikes a free trade deal with the EU, non-tariff barriers – such as rules of origin regulation – will hamper growth. Yet even a CBI/PwC study, which warned Brexit would hurt the UK, said some of the damage could be repaired if trade deals were struck with the EU and the US.

Various options for a new relationship between the UK and the EU have been suggested. None are perfect. Norway, which is not part of the EU but has free access to the market, probably pays Brussels around 83p for every £1 Britain pays – and still has to abide by EU regulations, over which it has no influence, to export its goods and services. Switzerland doesn’t have to implement EU regulations, but must show that their rules are equivalent to the EU’s, and the government has still not implemented a referendum vote against the free movement of labour because it fears losing free access to EU markets.

President Barack Obama famously said that the UK would be at the back of the queue for negotiating trade deals with the US. One American diplomat had a different, though no more encouraging, take on this, saying: “In our trade negotiations, we’re used to faxing the agreement to someone who signs it and returns it.” Would America behave differently because of its ‘special relationship’ with Britain?

The UK could just trade freely as a member of the World Trade Organization. Cardiff Business School’s Professor Patrick Minford, who is bullish about Brexit’s economic impact, argues that joining the WTO and scrapping all tariffs would boost trade. Yet Jeegar Kakkad, an economist who has looked into this issue for the British aerospace industry, suggests the WTO option could add 3-5% to prices.

Minford, an enthusiast for free trade, has warned the UK manufacturing industry would be mostly eliminated if exposed to the full force of global price competition. The other unquantifiable is whether – and if so, how dramatically ­– the next government would take protectionist measures to protect vulnerable sectors, such as the steel industry.

How much of a windfall would a bonfire of EU regulations provide for the British economy? Cutting back on rules covering climate change, gender equality, and working hours – and trimming some health and safety regulations – would deliver substantial savings. This strategy could make British business – especially the SMEs that are traditionally regarded as the drivers of the economy – more dynamic and competitive. Yet long-term gain could well be preceded by short-term social pain.

Some EU regulations are burdensome and many farmers often complain that Whitehall gold-plates them and makes them harder to comply with. The World Bank does not share the enduring belief that British companies are being shackled by red tape – it lists the UK as the sixth easiest country in which to do business.

Many EU regulations ­– notably those covering procurement and data protection – have already become UK law so the next government would have to decide which of those it wanted to repeal in Parliament. Scrutinising, modifying or throwing out those laws could be time-consuming – given that two thirds of MPs wanted to Remain – and tortuous, as changes to legislation would have to reflect whatever deal the UK has struck for access to EU markets.

The fear that Brexit would deter foreign investment was at the heart of the Remain campaign. The minority view, expressed by think tank Open Europe, is that foreign investment crowds out domestic investment, rather than adding to it, so a fall in FDI would not necessarily cause a drastic deterioration in productivity. Even the Treasury’s alarmist report on Brexit says only that productivity would grow more slowly although, as the UK already lags behind France and Germany on that measure, that still wouldn’t be great.

Immigration was the issue that ignited the EU campaign. PwC’s study says the fact that the UK population will not rise so fast, as unskilled migration from the EU is subject to greater control, could be a boon for the economy. Yet Oxford Economics believes Britain would be better off if migration was maintained at present levels.

Some sectors are more exposed on this issue than others. Brexit advisers Shepherd and Wedderburn note that two out of three firms in the UK construction industry already claim to have turned down work because of skill shortages. The sector has an ageing workforce – 22% are over 50 and 15% over 60 – and one in 10 of them were not born in the UK. As Shepherd and Wedderburn put it bluntly: “With UK unemployment at a low of about 5.1%, the labour shortage in the construction industry cannot be resolved domestically.”

The status quo will remain as the UK negotiates its exit, which could take two years from the point David Cameron’s successor invokes Article 50. That also means that the £350m a week saving in EU payments won’t be swelling the public coffers for a while. And when the saving is made, the government would have to divert £60m of that to replace the EU’s financial support for farmers or risk a rebellion in the shires. It would also need to take a view on how much of the EU’s investment in the UK’s knowledge economy it needed to match.

As Professor Alan Braithwaite, who has studied this issue on behalf of the Chartered Institute of Logistics and Transport, told SM in May: “Patterns of trade don’t change overnight – companies take years to establish networks and relationships and will be reluctant to change if they don’t need to.”

See the article in Supply Management 24th June