BRexit - What Now?

Well, the dust has settled a bit. As I feared, we’ve voted to leave the EU. Also, the idea that the money saved will be ploughed into the NHS, and that immigration will be greatly reduced because of this have already been denied. Apparently they were only suggestions. Our credit rating is down and our exchange rates are down too - as just about every expert predicted. I will be charitable, and assume that the country took this all into consideration when they voted, and are getting what they wished for.

The question now is what is likely to happen in the future, and how can we take advantage of it all. Bear in mind that our treaties with the EU (and everyone else) have not actually changed yet. And it unlikely to until at least September 2018, depending on when the UK gives official notification that it is leaving.

Exchange Rates

First of all, lets look at exchange rates and terms of trade, and why this matters, as it is affecting us already.

The effect of this is complicated. Obviously our imports become more expensive as the pound goes down (as do holidays abroad). But our exports become cheaper, so we should sell more. On the manufacturing side, our raw materials and assembled parts cost more, so (say) a 10% decline in our exchange rate does not mean our exports are 10% cheaper - just the added value bit. Increased prices of imported food, oil, and manufactured goods imply a certain amount of inflation, which might result in increased wages and cost of production - hence more inflation, or just result in a reduced standard of living. This, of course, might be at least partially offset by wealth generated by increased exports. I did warn you it’s complicated. And this is the simplified version. It’s a topic often set as an essay subject in first year economics. If, as most experts seem to think, it turns out to be a bad thing for the UK economy, the classic response is to prompt growth by reducing interest rates.

The international value of our investments in the UK is less if the exchange rate falls. This generally results in an increase in interest rates to make UK investment more attractive, but this might be the opposite of what is needed for growth.

Is it good or bad for us? The truthful answer is that we don’t really know. It’s generally accepted that the price of sterling is too high for our export business, but the disadvantages are difficult to assess. The Bank Rate is already only half a percent, so there’s not much leeway to reduce it. And increasing it just puts up inflation. The nightmare scenario is inflation with no growth - stagflation. It’s a tough call. Fortunately the man in charge of the Bank of England seems to be a pretty shrewd cookie, so there’s hope he’ll get it right.

Also, while the pound in your pocket may stay the same (remember that phrase anyone?) our international debts (usually in dollars) will effectively increase, so more tax is needed to service them. This implies a rise in taxes, or more government spending cuts in order to find the money.

So, to summarise:

- Many goods will become a little more expensive, with almost immediate effect. - We should be able to export more, although this may take some time. - There is likely to be a rise in taxes, or cuts in government spending in order to service international debts - It’s really difficult to see how much our standard of living will be affected, but most are predicting that it will go down for some time.

EU Funded Improvements in the UK

It’s interesting that two areas of the UK that have seen millions of pounds put into infrastructure and other developments - Wales and Cornwall - voted to leave the EU. Yes, I know this was our money in the first place, but let’s put that aside.

It is assumed that commitments will be honoured until we leave the EU in 2018. After that, any further development will have to be funded by the UK Government of whatever flavour is in charge then. Good luck with that. History suggests preference will be given to marginal constituencies.

New Trading Relationships

We need to plan for the worst and hope for the best. We must assume that we will not have the same free trade of goods and services with the EU that we have today. More of that later.

We should start work on creating new agreements with Australia, New Zealand and Canada. Canada already has an agreement with the EU, and we could start with that as a basis and (hopefully) add services too. Actually, there are two trade blocs that we may be able to join (details cribbed from the BBC web site):

APEC

Members: Australia; Brunei; Canada; Chile; China; Hong Kong; Indonesia; Japan; South Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; Philippines; Russia; Singapore; Taiwan; Thailand; United States; Vietnam The Asia-Pacific Economic Cooperation forum is a loose grouping of the countries bordering the Pacific Ocean who have pledged to facilitate free trade. Its 21 members range account for 45% of world trade. Recently China has begun signing bilateral free trade deals with a number of Apec members.

Cairns Group

Members: Argentina; Australia; Bolivia; Brazil; Canada; Chile; Colombia; Costa Rica; Guatemala; Indonesia; Malaysia; New Zealand; Paraguay; Philippines; South Africa; Thailand; Uruguay The Cairns group of agricultural exporting nations was formed in 1986 to lobby at the last round of world trade talks in order to free up trade in agricultural products. It is named after the town in Australia where the first meeting took place. Highly efficient agricultural producers, including those in both developed and developing countries, want to ensure that their products are not excluded from markets in Europe and Asia. The developing country members of this group have now formed their own grouping, the G20. It may even be possible to join NAFTA - the North American Free Trade Area, although tis may depend on the view of the U.S.A.

Whether of not all members would agree to us joining any of these blocs and, if so, how long it would take, is a matter of conjecture.

Future Relationships with the EU - trade and tariffs

The starting point is World Trade Organisation rules. These are a set of rules and upper limits to import duties and tariffs used for trading between countries that don’t have any other special agreements in place. I’d like to give examples, but I haven’t found any simple ones. There are hundreds and hundreds of export codes for different categories of goods, and each one can have a different rate. I do remember that, at the end of the 70’s when I had to worry about such things, integrated circuits and components had a UK tariff of (from memory) 17%, whereas assembled printed circuit boards had a rate of 10%. Incidentally, this meant it was actually cheaper to import a circuit board assembled and manufactured in the Far East than it was to import the parts if we wanted to assemble them in the UK!

Our best hope seems to be a deal like the Canadians have been negotiating. (http://ec.europa.eu/trade/policy/in-focus/ceta/index_en.htm) If we can get away with this (and I hope we do), we may see very little difference in our trading relationship, and just about avoid damaging tariffs.

The elephants in the room are (1) the time taken to negotiate these trading deals (and the availability of people to do the work) and (2) the EU is likely to try to make sure we don’t just walk out of the EU retaining all of the benefits and none of the liabilities. If it looks too easy, everyone might do it!

If we don’t manage to maintain a free trade area with the EU, we will need customs documentation to import or export stuff from there. And if you take stuff abroad with you (like cameras if you’re a photographer, or instruments if you’re a musician) you’ll probably need a customs carnet so you don’t get charged duty when you take it into the EU and again by UK customs when you bring it back in.

Future Relationships with the EU - Freedom of Movement

Before the EU, more or less anyone with a British Passport could travel freely throughout Western Europe without a visa. I expect this aspect of travel to continue - once in the Schengen area, we’ll be able to wander about as now. We are unlikely to need visas to go on holiday to Benidorm, for example. We are likely to need a work permit to work in a EU country, and a residence permit to live there. It is possible that such a request may be treated differently in different countries, depending on the rules we apply for their citizens living here, on a tit-for-tat basis.

What is less clear is the treatment of benefits such as health care. In the UK, despite what many think, it is now impossible to claim benefits until you’ve been here for 4 years. I doubt we’d be offered anything better than that. More important though is reciprocal health care. Currently we can show our European Health Insurance Card (EHIC) in the EU and get access to state healthcare. It actually applies to the European Economic Area, which consists of European Union (EU), Iceland, Norway and Liechtenstein and, for the purposes of the EHIC, Switzerland. Any changes to the current healthcare systems could impact people currently living in the EU, especially retirees.

What if I’m a Company looking to invest in the UK?

The problem here is that we won’t know what the landscape will look like until we get there. Serious investment decisions have to take a reasonably long term view, and are risk averse.

Consider some different scenarios:

- A company (perhaps American) looking to create a base in the EU. It’s not worth taking the risk basing it in the UK any more. It may be OK, but it might not be. Personally, I’d look at the Netherlands. No problem getting staff who speak English and, come to that, any other language. - A UK insurance company currently trading in the EU. This business is facilitated by agreements allowing cross border trading for this sort of thing. It may be necessary to relocate the company to a country within the EU in order to continue to do so. Perhaps move the head office, people concerned with processing Euro payments and so on. Local UK processing, sales operations and so on would stay here though. - A company manufacturing cars. These are complex operations, typically importing different bits from all over the place and assembling them elsewhere. Bits from Belgium and Germany assembled here, bits from the UK assembled in the EU. On balance, I wouldn’t expect any of these companies to make any immediate changes. But they would obviously factor in any changes when introducing new models. If they get hit by tariffs either way I would expect production to gradually drift elsewhere.

Offshore Money

We’re already have an important role to play in hiding money offshore - we look after the British Virgin Islands, Cayman Islands and Bermuda. Because of the uncertainty of the UK’s future, more people with serious amounts of money are likely to squirrel it away overseas, and hold it in dollars or Swiss francs. This is unlikely to affect us much as serious money is already held there to avoid tax.