Undercover Economist

Counting the costs of Brexit uncertainty

I recently had a couple of conversations with bright teenagers. One wanted to discuss philosophy — Gödel, Turing, and Wittgenstein. Not a problem. The other asked me to explain Brexit. Not a chance. The Brexit saga is madder than a box of hallucinating frogs.

Most likely, Britain will push its way pigheadedly through the brambles of the Brexit negotiations. The country will emerge scratched and bruised but largely intact, proudly declaring that the ordeal was a brilliant shortcut, then fumbling for a map and compass. But, while that is the most plausible result, the risk of a total train wreck remains. More worryingly, it seems undiminished more than two years after the referendum.

A recent report from the academics at The UK in a Changing Europe think-tank explores the likely impact of a bitter, finger-pointing failure to negotiate an agreement under the Article 50 withdrawal process. This is not the only way in which agreement could fail to be reached, but it is the starkest.

In a truly acrimonious failure to reach a deal, British food would not pass EU import controls. Aircraft would be grounded and border crossings jammed. This would clearly be harmful to the EU and disastrous for the UK, so we can expect good sense to prevail on all sides. And yet, senior ministers in Denmark and Latvia have judged “no deal” to be a 50-50 possibility. It would be unwise, then, to dismiss the contingency as remote.

The UK’s own trade minister, Liam Fox, says the chance of no deal is even higher, 60-40. Why he wishes to emphasise the risk of a disruptive outcome is unclear; perhaps Mr Fox believes it will serve his political ambitions. It will not serve the exporters it is his job to represent. The trouble is that as businesses and individuals quite reasonably plan for trouble, they will damage the British economy. After an initially bullish response to the referendum result, UK consumers are now borrowing and spending less, with obvious consequences for high-street retailers.

Consumer caution can swiftly be reversed. But the business response to uncertainty may be less easy to unpick. This week, the Federation of German Industries (the BDI), warned about emergency plans being implemented if there is no agreement by mid-November. For a taste of what these emergency plans might entail, ponder Honda’s warning to MPs last year that if the post-Brexit customs process took 15 minutes per truck at Dover, the annual cost of that would be £850,000.

For a company of Honda’s scale, less than a million pounds a year doesn’t sound too bad — until we consider two things. First, the Freight Transportation Association’s estimate that the briefest delay at crowded Dover — just two minutes — would quickly spiral into a multi-mile tailback. At a busy port, short delays quickly become long and unpredictable ones.

Second, the World Bank’s Doing Business database reports that the typical time to clear border checks in high-income countries is not two minutes, nor even 15 minutes, but 12 hours and 40 minutes. This, remember, is not a train-crash scenario but business as usual for most of the rich world. The World Bank adds, helpfully: “It is entirely possible that the border compliance time and cost could be negligible or zero, as in the case of trade between members of the European Union.”

If things go badly, then, companies that have built supply chains on the assumption of frictionless borders will find those chains jammed hopelessly. Or we may decide in the end to remain in the customs union. Businesses simply do not know — and that uncertainty is already damaging.

To see why, simply imagine that you are organising a wedding for — say — March 29 2019. Taking a cue from Mr Fox, your chosen caterer boldly declares that it may be unable to supply the food — the chance of that, in fact, is 60 per cent. Let’s say you love this caterer’s food, prices, and service. Even so — how long before you cancel the contract and hire someone else? Not long. And it will do no good for the caterer to confirm in February that all will be well after all. That is far too late for you.

Businesses trying to trade between the UK and the rest of the EU find themselves in a similar situation. At what point do they decide it is too risky to assume that all will be well? According to estimates published by three Cambridge university economists — Meredith Crowley, Oliver Exton and Lu Han — some companies reached that conclusion two years ago. Several thousand British companies have ceased some exports to the EU, and several thousand more were discouraged from launching a line of exports, simply because the Brexit vote threw the future trade regime into doubt. Unpredictable trade policy is a kind of trade barrier in itself.

Economies can cope with all kinds of shocks, and have sometimes bounced back from hurricanes or earthquakes with astonishing strength and resilience. An utter fiasco in the Brexit negotiations will be survivable, in time. But even if the fiasco never materialises, the prospect is causing damage today. Nobody thought they were voting for an earthquake.

Written for and first published in the Financial Times on 7 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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