THE FALLOUT FROM THE FALLING OUT
6th July 2016
My usual optimism has been severely tested in the last week or so. I am still trying hard to find positives from the UK’s decision to leave the European Union. I spent last week training Kosovan consultants on how to help their clients improve their export performance, and the EU is clearly their key destination. They think we are bonkers by the way. So it felt bizarre that the referendum result had happened only five days before, made slightly worse by Iceland beating England in the European Championships on the night of my arrival in Pristina. They say that good and bad things come in threes, so perhaps the lunacy of voting to leave the EU and the humbling of our national team in our national game is about to be supplemented by a new leader of the Conservative Party from the Leave camp? There are some steep hills to climb.
WAKE UP! WE ARE NO LONGER AN EMPIRE.
We need to dispel the myth that our fabulous country still has the kind of standalone strength that created the British Empire. That was a very long time ago, and we didn’t exactly cover ourselves in glory in the process. I heard a Voxpop interview with a few older voters from North Lancashire a couple of weeks before referendum day, and one gentleman talked about the spirit of the war years and how we had ‘stood up to the Germans’. Had it not been for the special relationship that had developed with the USA, who came to the rescue as we melted down the last of our municipal railings, we might have spent a few decades under some kind of fascist rule. Political stability and peace in Europe is one of the things that the EU has undoubtedly achieved. There are limits to our power and influence in today’s increasingly collaborative world, and we need to acknowledge that not bury our heads still further in the sand.
WE CANNOT AFFORD TO DAMAGE OUR SERVICES SECTOR
The British economy is imbalanced. Our growing services sector accounts for 90% of our GDP, and London’s strength as a financial centre has been one of the economic positives of the last decade or so. The Leave vote has unsettled that strength, with the pound taking a beating (today saw its lowest rate against the dollar since Mick Jagger and David Bowie recorded Dancing in the Street!), and market confidence is at best fragile. The Leave politicians have either continued to demonstrate that there has never been a plan for leaving the EU, or they have abrogated their responsibilities and jumped ship at this critical time for our country. The party of government is embroiled in a leadership battle that came about because of the referendum result, where the best we can hope for is the best of a bad bunch – at least Theresa May has experience whether you like her political stance or not. I happen not to. Then her Majesty’s Opposition, whose ability to shoot itself in the foot is close to attaining legendary status, has had more ammunition to topple the incumbent government than possibly any British government since those war years, yet they have decided instead to revert to squabbling among themselves.
THE UK IS WEAKENED OUTSIDE THE ECONOMIC CLUB
Strong economies need stability. For the whole of this referendum campaign most businesses have been treading a careful path. Confidence took a knock in the six months before the vote and the hope remained that a positive vote to remain in the EU would result in a restoration of the kind of confidence and stability that is needed to sustain and build investment. I am working on a project right now where US investors are looking to support the exporting business of UK companies. The vote to leave the EU caused them immediately to postpone any new UK investment plans, at least until our future relationship with the EU is more clear. Their view put simply is that our appeal has reduced from being a part of a common market with a catchment of 508 million people, to a United Kingdom of 65 million of which around 5 million don’t especially want to be ‘united’ any more!
THERE WILL BE NO QUICK FIX, BUT A FIX THERE HAS TO BE
The UK is not able to begin the exit process from the EU until it has formally invoked Article 50, and the exit process that follows will take two years from that point. The new leader of the Conservative Party as endorsed by the party at the forthcoming October conference will become our Prime Minister, and they will have the unenviable task of starting negotiations that will conclude one way or another in late 2018 or early 2019. Our negotiating position is very weak. Our country has made the democratic decision to leave a massive economic powerhouse, and that economic powerhouse wants us out as soon as is practicable because it has a responsibility to the other member states who want to move on. Any talk of a second referendum goes against the grain, because a democratic decision has been reached. So we all have to move on from here. There has to be a plan.
WILL THE UK BECOME THE ‘BILLY NO MATES’ OF THE WORLD?
My worry now is where do we move on to, and how fast can we recover? The Americans are not bluffing when they say that negotiations with the UK over trade deals will have to take their place at the back of the queue. We need to wake up to the reality that the US wants the EU, not the UK. The US and the EU are working hard to enhance trade, with the well publicized though not well understood Transatlantic Trade & Investment Partnership (TTIP) under negotiation. We are no longer entitled to be part of those negotiations. In truth, some of the building blocks of TTIP are already in place, with a Mutual Recognition Agreement (MRA) between the supply chain security systems of the two parties having been signed in May 2012 (the EU’s Authorised Economic Operator system ‘AEO’ – and the US’ Customs Trade Partnership Against Terrorism ‘C-TPAT’). The vote to leave the EU has made the previously special relationship not look too special. Trade Agreements do not happen overnight. They take years, even when negotiations go smoothly.
WILL THIS BE A DECADE OF WALKING THROUGH TREACLE?
So where does the UK go from here and where will we fill the gaps? Well trade will still happen whether or not we remain part of the EU. It will just be more difficult and the terms of our business with the EU and the US will be much less favourable. Business will also be affected by the respective exchange rates, and the reinstatement of customs duties with the 27 EU partner countries that we leave behind. The mantra that exports will be buoyed by a weakening pound doesn’t entirely hold sway, first because our export performance is nowhere near as good as it should be, and certainly not close to the Chancellor’s somewhat fantastical forecasts, and second because some of our manufactured and/or exported goods rely on components and other goods imported from the EU. Although there will probably be little or no change to Customs tariffs until our formal exit from the EU, our businesses will be adversely affected by unfavourable rates of exchange and eventually by the imposition of Customs tariffs.
THERE MAY BE ROCKY ROADS AHEAD, BUT THERE ARE STILL ROADS
There are rocky roads ahead, but because businesses may need to manage these challenges for a decade or more, now is a good time to think about your international business strategy: where you want to sell, what you want to sell, at what price, and who you want to help you sell it. I am not a fan of the expression ‘we are where we are’ because it feels defeatist. Exporting can provide economies of scale that UK businesses would not see in the domestic market, and there will be a way because there always is. Please call us if you would like us to help you to negotiate the rocky roads!
Meanwhile, the following article from the Financial Times dated 27th June makes for a good read: http://www.ft.com/cms/s/2/0260242c-370b-11e6-9a05-82a9b15a8ee7.html#axzz4DWhDZJlE