10 Truths about Brexit - and reality about Impact of a Hard Brexit on manufacturing and trade, including what would actually happen about the Irish / UK border

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Many of my previous predictions have turned out to be correct as of September 2018: for example no immediate economic meltdown, fall in currency leads to rise in exports and so on.  

Here is a common sense view of what is likely to happen in the event that the EU and UK fail to achieve an agreement before the UK leaves the EU.  

1. The pound will fall further against the Euro

This will make all exports of goods and services even more affordable for other nations to buy, and will make imports even more expensive.  If the pound falls a further 10% post Brexit, then the total fall since the vote to leave will be 25%.

2. EU import taxes will be almost irrelevant to UK exports

Let us take an average tax of 5% on any UK goods imported into the EU from the UK, and the other way round.  How much impact would that actually have when you take the new exchange rate into account?

British goods will be net 20% cheaper for French or German people to buy than before.  That's huge by any measure.

French and German goods will be net 30% more expensive for British people to buy.  Even more significant.

Net impact: far greater on companies exporting to the UK.  In any case, the rest of the world takes more UK goods than the EU, and the EU is rapidly falling as an export destination.

3. Boost to UK exports

Result 1: big boost in UK exports of goods and services globally, not just to the EU, and big boost to British people buying from British companies.

Result 2: increased UK prices of imported goods - but by a smaller percentage, because much of the price of imported goods is marketing, warehousing, distribution costs and retail margin.

But as I say the impact of a further 10% fall in the pound will be slight on national inflation.  How can I prove that?  Because of the fact that the UK has already absorbed 15% fall in the pound.  And the currently inflation rate is still a mere 2.3% some two years later, despite interest rates close to zero - hardly hyperinflation!  I remember fixing my own home mortgage for 5 years at 13.5% in the mid 1990s and being rather pleased about it, because inflation was over 10% and interest rates later rose to 15%.  The world did not come to an end.  Yet today, markets fret if an inflation in an EU nation trips over 3% for more than 12 weeks.

In any case, even if you think there will be some negative impact on UK exports of goods, the truth is that only a very small proportion of UK jobs are still linked directly to manufacturing - the national economy is driven mainly by global excellence in services.

4. Potential challenges for rapidly moving goods such as food

Customs checks will mean delays, depending almost entirely on how rapidly border controls are expanded. If either the EU or the UK feel a temporary blip needs sorting out, either party can agree unilaterally to temporarily reduce the number of inspections until staffing up has taken place etc.  This is not such a big deal.  Customs controls, like the length of immigration checks, can be ramped up and down in hours at the whim of governments, as they always are.

5. Huge EU dilemma about an uncontrollable border between Republic of Ireland and Northern Ireland

Here is the truth about the border which continues to be a major issue - it will be relatively uncontrolled.

a) It is very long, and hard to police - even assuming both countries wish to try to do so (as they found at the height of the Troubles)

b) In the event of a Hard Brexit, neither the UK nor the Republic of Ireland will have any deep enthusiasm for building a wall of steel and enforcing strict controls on behalf of the EU

c) The only way a hard border will be fully enforced will be if the EU pays for it and patrols it, which is unthinkable politically and practically - especially since the EU has professed it's determination to try NOT to divide the Island into two with a hard customs border

d) The border will therefore become quite a soft border between EU / non-EU.  Technically strong, but innefective in a typical EU "fudge"

e) A huge growth industry will then be large numbers of people smuggling a vast range of goods in both directions across that border - which will infuriate EU bureaucrats

6. All kinds of regulatory and licensing impacts - mostly straightforward to overcome with goodwill on both sides

These are not really to do with the core of Brexit ie free trade of goods and services, and more to do with a sudden gap in accreditation and so on - whether of medical degrees or of aviation licences.  Once again, these only become a problem if governments, including the EU, decide to make political capital out of being awkward for the sake of it. It is the easiest thing in the world for a particular licensing authority to say that they will recognise previously issued licences for an interim period of - say - 24 months.

7.  The EU will lose billions of Euros of income because Parliament very unlikely to honour all commitments made "in good faith"

A Hard Brexit will create an immediate financial crisis in the EU, even larger than if the UK leaves in an orderly manner with a proper comprehensive trade agreement.  It is very unlikely that the current or many future governments will continue to approve paying large sums to the EU, spread over the next 30-40 years or more, if the EU is perceived to have been intransigent and hostile. British voters would not tolerate it.

8.  The City of London will continue to be one of world's premier financial centres

Financial services is about more than a UK / EU border, however regulated.  London dominates many financial products and services globally, and one of the reasons is talent.  London is one of the biggest communities of banking expertise.  It is also one of the most popular cities in the world for international bankers looking to work in Western Europe.  Frankfurt's banking community is very small and the one in Paris even smaller.  

Yes of course, banks will need to maintain more bases in and out of the EU to comply with regulation, which will be expensive, but don't imagine 250,000 bankers relocating from London anytime soon.

9.  Many nations with EU trade agreements will eventually make similar ones with the UK

The UK is the 7th largest economy in the world, and will remain a vital target nation for all global traders.  Agreements will be signed.

10.  Trade with EU nations will continue to be huge

For over 3000 years, the UK has traded with European nations and will continue to do so, either officially through government controlled borders, or unofficially through smuggling.  It has ever been the case.  And the greater border taxes are, the more smuggling takes place.  Trade is an absolute rule of human existence.  And no amount of political posturing will change that fact for more than a short period of time.


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