The political situation is developing at remarkable speed and taking unpredictable turns, so who’s to say when (or whether) the UK will leave the European Union, and whether it will be with or without a deal? The sobering truth is that the political uncertainty that has been business’s unwelcome house guest for the past three-and-a-half years is unlikely to go anywhere, whatever happens.
In the last few weeks, MPs have wrested the legislative agenda from the government, passing a bill that would compel Boris Johnson to request an extension from the EU, which he may or may not do. The Prime Minister responded by trying, and failing, to force an early general election, which might still happen before the planned Brexit date of 31 October. Judges approved Johnson’s decision to prorogue Parliament, then rejected it again, leaving the matter now with the Supreme Court.
All the while, EU negotiations on a new withdrawal agreement are technically ongoing. These may (but probably won’t) provide a much-needed compromise to break the impasse.
You’d be tempted to think a general election could reduce the uncertainty but, assuming the country is as divided as it was before the referendum, that’s unlikely to be the case. Even if Johnson forces through no deal on 31 October without an election (or, dare we say, another referendum), it would hardly draw a line under the matter. After all, no deal, which many business groups have consistently opposed, probably wouldn’t mean no deal ever, just no deal for now. Subsequent negotiations with the EU and other countries could carry on for years and take us in wildly different directions, from Little England to Singapore-On-Sea.
The bottom line for businesses is that they will need to prepare to trade on World Trade Organization terms until Brexit actually happens (which could be very soon) or until the moment it is decisively taken off the table, which could be years away.
Here are five interviews with leading experts to help explain what a no deal would actually look like.
Professor of economics, Cranfield School of Management, and chief economist, Chartered Institute of Procurement and Supply
Currently, a Turkish lorry takes 40 minutes to clear customs at Dover. If every lorry from the EU took that long, it would be a disaster. Even a four-minute average delay would produce a queue after one day that would reach half way to the Dartford Crossing. French lorry drivers would avoid getting stuck in these queues by dropping off their cargo but that means importers would be paying demurrage costs every day their container is in Dover. And who’s supposed to lift it off the dockside? The lorry drivers still in the queue trying to get to France? It could dislocate the whole supply chain.
In a way, tariffs are the easiest piece of the jigsaw – you know what the rates are and you deal with them. The key thing for me in the event of no deal is there are about 130,000 businesses that are going to have to do customs clearance for goods and services coming in and out of the EU that haven’t had to do it in the past. A lot of them are small and medium-sized companies that don’t have the skills or capacity for it, and they don’t seem to be developing them at the rate they need for a 31 October exit. There are a lot that are burying their heads in the sand.
I asked some people I know in logistics companies how many booths, for want of a better word, there are in Dover to process all these lorries. They said three. They expect the government will lift the barriers by day five and just let them through. My preferred system to mitigate this is where people fill in customs clearance forms ahead of time, indicating which lorry their goods are on. A camera at the port recognises the number plate and the lorry rolls straight through. There’s no physical stop, unless there’s a problem with the documentation. The French are putting this system in place but we won’t have it in time.
Those companies that can onshore their supply chains have sought to do so – that’s about 35 per cent that have been able to find alternative suppliers in at least some cases. But it’s not that easy. Over the past 30 to 40 years, we’ve significantly reduced manufacturing capacity in the UK so the idea that it could rise like a phoenix from the ashes is difficult. It’s not just the physical capacity - there are skilled labour shortages too, which would be exacerbated by the end of freedom of movement. Obviously, if there are going to be delays, you’ll need extra stock and somewhere to put it. But you couldn’t pick a worse date than 31 October because it’s in the run-up to Christmas. In July, Savills reported a national warehouse vacancy rate of 6.6 per cent. Anything below 10 per cent and the warehouses are considered full. There’s 7.15 million square feet of space under construction but that’s diddly squat.
The trend had been for more open global trade, until Brexit and Trump. Leaving the EU would free you to negotiate more trade deals but these take a long time – they can be nauseatingly detailed. And we’d have just thrown away our negotiating position. If you rock up to Donald Trump and say you want a deal including agriculture but you don’t want chlorinated chicken, he’s going to say: "Screw you, do you want a deal or not?" There is a view that negotiating more free trade deals will make the economy more competitive, which is true. But that takes time, and during that time you will be uncompetitive because cheap imports can come in more freely and compete you out of existence.
Chief economist, Centre for Economics and Business Research
It would be hard to avoid a technical recession [in the event of a no-deal Brexit]. Keep in mind that it’s not just Brexit that’s creating downside risks. There’s a broader global slowdown with repercussions from the US-China trade dispute, domestically we’re in a stage of the consumer credit cycle where people are paying off their debts and, after Brexit, you would see companies drawing down their stockpiles.
It’s almost a perfect storm, but we’re not imagining anything on the scale of the global financial crisis. Some businesses might have short-term cash-flow issues, so you would hope the government would provide some emergency financing to stop the shock translating into a much longer-term problem.
No deal would still leave a lot of questions open on things like trade deals and immigration, where I’d hope sense would prevail over sentiment. If there’s an approach to immigration that’s very open to both EU nationals and non-EU nationals, there could actually even be a net positive to our competitiveness in the long term. If things went in the opposite direction with migration controls and if there weren’t any trade deals in the next 10 years, then that’s obviously a big downgrade compared with no Brexit.
We’ve assumed there will be a free-trade agreement with Europe inside a five-year time frame, because we already have an existing framework to fall back on. With the US and Asia, I think it’s more of a 10-year timeline. There are a lot of elements that need to fall into place, and there’s no guarantee that there will still be the political will to drive it.
Recessions can sometimes be a self-fulfilling prophecy. If you expect one, then you don’t make investments, you don’t hire and you contribute towards it coming true. I do think businesses will need to be a bit more bold and decisive than they have been for a long time, whether that’s in terms of looking for new import partners or going into new markets or opening up EU offices. We’ll be in big trouble if everyone decides to "wait and see" for too long.
From a talent perspective, even with a no-deal Brexit, nobody’s expecting radical overnight changes in our labour market regulations or that people will suddenly be unable to get through passport control. The trend we’re seeing is a decline in EU workers but continued growth in non-EU workers, particularly at the mid- and high-skill level. There isn’t an obvious sign that people are about to stop recruiting but, if businesses feel that the UK has become a harder place in which to work or that it’s not connected to the right places, then that will have a long-term impact on investments.
The Little Englander thing deeply worries me. We have one of the most liberal labour markets anywhere outside the US. With our culture and the English language, that makes the UK a very attractive place for people.
And while we could benefit from being an even more liberal market, that also applies to allowing people into the country. Employers are waiting to see what the new immigration regime will look like. Boris Johnson is pushing for an Australian-style points system but there’s still a lot of uncertainty, especially for businesses, in construction or agriculture for example, that depend on lower-skilled migrant workers.
We live in an uncertain world – it will be Brexit one day; the next day it’ll be something else. Brexit has definitely stimulated more debate about strategic workforce planning, which we haven’t done enough of in the UK – to some extent because we’ve had very easy access to foreign labour. We’ve got to do more to educate our own population that there can be good jobs with progression and learning opportunities in, say, restaurants or customer service. Of course, you can look at your supply chains and plan for the disruption of no deal, but it’s just as important to talk to your organisation to create a sense of safety.
You might not be able to guarantee jobs permanently but you can say to your people: "No matter what you hear outside, we inside this organisation value diversity and are going to look after each other."
European law requires goods to be certified as meeting regulations, in some cases by a third party accredited by a member state so, after no deal, UK manufacturers may need to develop relationships with certification agencies based elsewhere in the EU. For services, the issues relate to whether you are able, from a regulatory perspective, to provide that service in the relevant EU jurisdiction. To avoid disruption, some temporary measures have been announced but, in the long run, we’ll need mutual recognition of regulations. There are issues around tariffs, customs procedures and rules of origin post-Brexit – existing EU free-trade agreements have rules about how much content can come from outside the EU before it affects whether the product is considered EU-manufactured. This may influence how much Europe uses the UK supply chain in the longer term.
If you have a just-in-time supply chain, your contracts will assume a minimum amount of time for a part to get from A to B but, because there’ll be some level of border disruption [with no deal], you’ll need to think about how far in advance to order. If you’re a supplier under an obligation to deliver within a certain period after an order is placed, then the disruption could potentially leave you in breach. Things will probably settle down as people get used to the new regime, but we advise sitting down with your suppliers or customers now to work out how to allocate the risks.
In the short term, we expect regulations will remain very similar. How far it diverges over time will depend on whether or not the UK wants to stay close to EU rules. Europe is likely to remain one of our major export areas so, in practice, even if the regulations do change in the UK, you’ll have to continue complying with EU regulations if you want to sell into Europe. For example, in chemicals, companies wanting to export to the EU will still need to comply with the EU regulation Reach standards. This means, in practice, companies are incentivised to lobby their own governments to introduce similarly strict rules in order to prevent them being undercut. It’s a race to the top, which is a good reason why you might not expect too much regulatory divergence in practice.
Lead economist, CBI
The first sign of disruption you’ll see is with the financial markets and the pound if it’s looking like a no deal is going to happen. Sterling fell by about 12 per cent after the referendum, so it’s not impossible to think there would be a similar decline, which could cause an inflationary shock.
The fall in the pound and higher trade and regulatory barriers would increase cost burdens. You might see companies shifting their activity in the supply chain, possibly even moving out of the UK for those that are more globally exposed. There may be a disruption to the labour supply and some investment projects would be put on hold or scrapped, at least until there was more certainty, and that would be coming at a time when business investment is already showing signs of unprecedented weakness for this stage of the economic cycle.
A recession is not an implausible scenario, though the disruption to the economy is hard to quantify. A lot depends on what the policy response is. We could reasonably expect some loosening in fiscal policy and a fall in interest rates. There have been some encouraging reassurances from the Bank of England that it would intervene to keep credit flowing, which is a lesson from the crisis of 2008.
The clock is ticking on things like short-term mobility, mutual recognition of qualifications and the Irish border. Getting these basics right would go a long way to mitigating the disruption and, if we’re in a no-deal situation, the first thing that needs to be done is both sides getting together and agreeing at least some temporary resolution.
The wait-and-see period for contingency plans may be reaching its limits, so you should ramp up preparations if you haven’t already. It’s important to communicate your needs to the government, and understand what no deal would actually mean to you as a business. Reach out to your staff to reassure and support them in whatever way possible. Think of what changes to your cost profile would mean for your business model. Because of the volatility we expect in the financial markets, it might be time to start hedging. Where possible, support your supply chain, especially if these companies are small and don’t have the same capacity to prepare. In this very uncertain environment, it’s essential to show real leadership.
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