UK prime minister Theresa May hopes the EU will come to its senses and negotiate a fair Brexit settlement.
Unfortunately, current rhetoric suggests a “hard brexit” is the most likely scenario.
If so, who are the winners and losers?
In aggregate, no one wins trade wars. In isolation, there are winners and losers.
The average UK citizen is a loser thanks to higher inflation and the falling British pound. Retailers dependent on goods from the EU will get hit hard.
Common wisdom says UK exporters will get crushed because of EU tariffs, but that alleged wisdom is likely wrong.
For certain, EU exporters to the UK will get hit the hardest as noted by Germany’s Trade Position with the UK.
Germany’s Trade Balance with UK
Bluff or Stupidity?
Germany exports €50,963,643,000 more to the UK than it takes back in imports.
Clearly, Germany would suffer far more damages than the UK were both sides to remain stubborn.
UK prime minister Theresa May has another bargaining chip: corporate taxes. This especially comes into play given that Manual Valls, the French Prime Minister wants EU-wide tax rates, much higher than corporate tax rates in the UK.
EU Tariffs on UK Goods and Vice Versa
In the case of a hard Brexit, conventional wisdom says the EU would be obliged to place tariffs on UK goods.
I believe both entities could look the other way in negotiations, but let’s assume conventional wisdom is indeed correct.
Under this scenario, let’s further assume 15% tariffs by the EU and the UK on each other.
That may sound like a tit-for-tat deal but it is actually much worse on the EU, over and above the above trade figures, because of currency fluctuations.
British Pound vs. Euro
The British Pound is down about 22.5% vs. the Euro since the mid-November 2015 high.
The Pound is down about 16% vs. the Euro since May of 2016.
A 15% tariff by the UK on German cars would effectively mean the price of German cars to UK buyers would rise by a whopping 30% since May, but the price of British goods in the EU would be roughly unchanged.
A hard Brexit would mean the UK would no longer contribute to the EU budget. And a hard Brexit would also mean the the EU would not see the “€20 Billion Divorce Settlement” that it seeks.
Free from the nonsense of having to get 27 nations all to agree in trade talks, the UK can negotiate new trade deals much faster than it can now.
Let’s now look at UK Trade Relationships with the EU and rest of the world.
UK Trade Relationships
The above list shows the United Kingdom’s top import partners, countries that imported the most UK shipments by dollar value during 2015. Also shown is each import country’s percentage of total UK exports.
Thanks to the depreciating Pound, it’s not at all certain that the UK would lose exports to the EU. Moreover, the UK will have an easier time exporting to the US and Asia, assuming a fast trade negotiation.
Other UK Losses
The UK will lose some financial services activity, and that may even start quickly if the talks are as acrimonious as they currently sound.
Summation
I will not put any Dollar or Pound values on this as many things can and likely will change such as tariff rates and currency fluctuations. The global economy is also entering a slowdown so trade is likely to sink no matter what.
But as it stands, and contrary to all the Remain fearmongering and punishment talk, it’s the EU, not the UK that will get clobbered the most if there is a hard Brexit.
Advice
Salt and vinegar for everyone is a foolish idea.
My advice for the EU, not that I think they will take it, is to go over this framework of winners and losers and not attempt to punish the UK, because such a move is guaranteed to backfire.
Related Articles
- European Council President Promises Salt and Vinegar for Everyone
- EU Seeks €20 Billion Divorce Settlement
- EU Doesn’t Want Brexit “Negotiations”, the EU Wants “Blood Revenge”
- Brexit: How Hard is Hard? Searching for a Soft, Hard-Boiled Egg
- Article 50 Perfectly Timed
Mike “Mish” Shedlock
Discouraging other possible leavers is suggested as the reason the EU wishes to see a “hard Brexit” but that does not seem credible since none of the 27 seem keen on exit (granted some as yet minority political movements in many profess that aim) and none joined the UK in seeking EU reforms when Cameron was preparing for the referendum. In truth, those countries participating in the Euro would find exiting very difficult – Greece looked into doing so and found it could not live with the consequences (although how it lives with the alternative is less than clear).
There are some in the UK that are fighting for a Hard Exit as there is no Sovereignty benefit to anything else as it still handles control to the ECJ. Attitudes in some quarters are hardening in the UK no matter what the press suggests of splits etc. Anything less than total control back in the UK will lead to serious ructions here and in Europe as the dissent will be taken there one way or another.
This is why a clean break is needed if the UK wants to take back control of Laws and full sovereignty.
http://www.lawyersforbritain.org/eu-deal-customs-union.shtml
Sluggish systems fail against reactive and adaptative ones indeed.
Issue is in fact not depending on EU and UK but on how much immigration will put pressure on those spaces. EU will let go immigrants to UK as Turkey did to EU to punish anytime it feels like.
Sword of Damocles upon everyone in a matryoshka game.
Moreover, I feel like UK has nothing to sell to rest of the world except that it is a country that speaks English. Outside tourism, I need nothing from UK products ! That is the truth so UK will need very fast economical changes that for sure it has proven to be avle to implement over time.
Good luck to us all !
No guarantee but there is a chance, after exit, the UK will drop Corp Tax and will be fishing for European businesses that want to de-risk out of the Euro area that want a very encouraging government. It will also encourage European sub-assemply suppliers to avoid tariffs shipping to BMW(Mini), Nissan, Toyota, JLR/TATA, Honda etc that are UK based. Each will be encouraged to look outside of Europe for markets and component sources too – hence Chinese are keen to talk – that’s already started.
UK will suffer but the EU will end up with 5th-8th largest economy on their doorstep with attractive business environment that goes from being a net import market to closer to neutral.
Meanwhile the EU will be pushing jobs into East and South will be left to fester.
UK will have to fight for business tooth and nail via Tax and X-rate. This is 1939 all over again and will take 6 years (to 1945), possibly more, after Article 50.
The EU forgets there is still a core in the UK that are very bloody minded and will fight to survive through thick and thin. Don’t write us off just yet.
http://campaignforanindependentbritain.org.uk/wp-content/uploads/2016/10/ercchart4116.gif
Ireland needs to DEIVERSIFY FAST.
Mish – this is biased but worth a read as the logic is strange. Link below.
Italy lost car manufacture as it couldn’t compete – EURO – EURO was benefit to Germany.
The German commentator is interesting as German labour will end up paying no matter what as jobs go to Poland and Slovakia.
UK is likely to have a very competitive exchange rate going forward – politicos are on the case – as they are pushing for normalisation of monetary policy and now looking at serious tax incentives to all exporters to get the change needed. Honda supposed to be happy, Nissan now happier, TATA.Jaguar coming on side.
Germany already shipping jobs to Eastern Europe to compete. German employment will take a hit. Meanwhile UK manufacture will be incentivised with tax and x-rate and on tariffs, if correct, I have seen next £12Bn benefit to UK incoming vs outgoing that may be re-cycled to the UK Automotive sector !!. I can’t vouch this is correct yet but serious rumours.
http://www.express.co.uk/news/world/722056/Brexit-German-car-chief-spurn-UK-save-EU-job-loss-fears-Merkel
Hard Brexit is still a Win for Britain. Since we can sooner distance ourselves from the impending trainwreck of peripheral defaults. And frankly the sooner Article 50 is triggered the better. No point hanging around anymore. The vindictive bureaucrats in the EU have shown their colours….. The sooner Britain gets back on her feet and provides the other EU states with an example, the sooner this socialistic monstrosity can be dismantled.
So long as we can keep people together we’ll be OK but society is split and we have all, to some degree, become Fat & Lazy.
Interestingly – today I saw my first IMMIGRATION CONTROL van – Brand New. Never seen one before. Full livery and IMMIGRATION CONTROL all over it.
Have these existed for long?
“No point hanging around anymore.”
That is what should be the key point. No “negotiating terms” nonsense. Just “Good Bye. Fun while it lasted, let’s keep in touch. Call me if you need something I’ve got, or you’ve got something cool you think I could use.” That would leave by far the least opportunity for bad blood to be created and whipped up between regular Britons and Continentals going forward.
But, regular people aren’t in charge.The political class is. And for them, the longer, more drawn out and acrimonious the whole ordeal, the more time they get in the spotlight; grandstanding and pretending to “fight” for someone and something other than their sleazy selves and their petty “careers” and “legacies.”
You’ve been through court at some point….?
🙂
Or, more appropriately, 🙁
This was Der Spiegel a while back. I guess they have decided it’s very good fro Germany now and therefore the EU so harder the Brexit the better.
Ireland is already crapping itself. Food exports on low margin suffering due to the £.
There will be actions to displace European sourced products is they make life super hard – take that to the bank. East Africans do some great fresh fruit and veg to displace Tomatoes from the Netherlands and soft-fruit from Spain. Mexico interested and various others. Will help compensate for the £.
http://www.spiegel.de/international/europe/germany-has-much-to-lose-if-britain-leaves-a-1097029.html
as far as i’m concerned, the only advantages
to the UK leaving the EU are
1) no Common Agricultural Policy
this could mean a free market in food products (grains,meat, etc), although i wouldnt bet on it
2) UK gaining control of its own fisheries policy, just like in iceland.
now that must be a surefire winner. UK gets to control and protect its own fishery grounds.
3) getting rid of thousands of EU bureaucrats, less red-tape
4) control of its own immigration policy. UK could already do this anyway because of its
geography. it is also so obvious that countries in the EU are already or thinking of doing the same thing themselves (as in Hungary &c)
5) the right to make our own laws as we see fit, called Sovereignty (this is my #1 reason)
any resort to trade wars of any kind will lead to losers all round
(although it would be entertaining)
Add:
6) dodging having to bail-out various – UK has already contributed to Greece even though a Euro-zone issue.
7) EU mission creep leading to the UK joining the Euro.
8) Being out-voted on issue related to UK critical interests that may not be the critical interests of the rest of the EU members – FTT an example.
9) EU laws impinging on businesses doing little EU business and where the regulation/law is inappropriate to the business and it’s target geography.
All in, that’s quite a lot of money.
The trade surplus from the UK contributed over 1% of growth to Germany GDP. Better for the UK if that is kept within
https://www.youtube.com/watch?v=UCGedOGCrnQ
I think people in Europe and the US are sick and tired of the bullshit and just want their Country and culture back. Most political leaders are so far out of touch they just don’t get it and I think there is a movement that they can’t stop.
UK will have Hard Brexit as even the Canadians can’t get a deal after 7 years. UK has 2 years to get out.
I suspect UK will be out in 6 months after Article 50, forget 2 years, unless it’s in UK interest to drag it out to allow some more adjustment time. The waves of instability will slosh around for a while.
http://www.telegraph.co.uk/business/2016/10/17/if-wallonians-are-even-afraid-of-deal-with-canada-then-what-abou/
I agree I think there will be a quick exit, yippie
US financial institutions are more like to ship back to NYC than ship wholesale in the EU from what I heard. Hence Tusk said only Salt and Vinegar as EU may pick up much less business than they hoped whilst the UK loses too.
To keep the US insti’s in London there might be a contribution discussion so the companies see less cost in relocation (less need to do so), the EU gets some money and the UK keeps some revenue. What Tusk would call some chips for each.
However, this is only one scenario and it could all turn to shit quite quickly.
The problem with that line of reasoning is it assumes the money center finance is a value adding industry. It hasn’t been for decades, if it ever was. Take away whatever “services” the City of London provides the EU, and you’ve in reality given the EU a major boost, by removing a parasite.
And a parasite that, by now, has grown to a size where it is virtually crippling it’s host(s), to boot. Rendering them sclerotic, uncompetitive shadows of what they otherwise could have been, were it not for productive industries’ “need” to have massive resources diverted away from them, to fund the parasites’ lives in splendor.
Not value added but a decent tax revenue earner through employee spending, income tax etc.
The revenue is more than compensated for, by the depressing effect on the rest of industry. The UK and US would both be vastly more competitive internationally, were it not for everyone who actually does attempt to add some value, having to adjust their MO to maximize the cut the banksters get to take. It’s like Sicily. Everything anyone does, has to be done in a way that facilitates the Mafia maximizing their cut.
Driving the pound down when every nation on earth is trying to devalue their currency is doing GB a favor. Restricting trade is the same. Let the EU cut off their nose to spite their face. All this will just open up the markets for other countries. Global trade will work against the EU this time. Instead of Driving a German, French or Italian car, they will drive an American or Japanese car. Politicians cannot see the world they have created and are paying the price.
Totally agree, I know German companies are in panic mode and some are even talking about moving to the UK
Prof. Steve Keen – Lecture 07: Why the Euro is destroying Europe
“My advice for the EU, not that I think they will take it, is to go over this framework of winners and losers and not attempt to punish the UK, because such a move is guaranteed to backfire.”
Well, THAT settles it.
EU leaders need to dredge up some old audio of a prominent politician talking of groping women. Give them a chance to express faux outrage – rather than deal with real problems – and then go console themselves in their mistress’s arms …
Winston, yes. There is also the French-German contango that supports the whole shebang.
a) France needs protectionist policies for their farmers = EU customs union.
b) Germany needs the weak Euro = weaker Euro constituents in EU customs union.
c) Both need captive customers = customs union.
Hence they will defend the the death as they both have a fair amount to lose. Do you see Germany prospering under their own DM? The more weak hands that drop by the wayside the more the Euro will strengthen and become a proxy for the DM.
The lower barriers fall on agricultural products the more French farners will bitch and revolt.
UK daring to decide to move out is treasonous to them. An act of desertion.
“Juncker says on Brexit: British ‘deserters’ to get no EU favor”
They so much want to be the ones to pick winners.
May might fall into the same trap. She needs to be careful not to interfere in markets too much. Seed things perhaps, yes, actively choose winners to back, no.
UK did that in the past, 70’s, not a good experience.
The only thing that really matters is this: will the average British citizen be better off after a hard Brexit than they would be if Britain stayed in the EU? If the average Brit will be better off with a hard Brexit then it was all worth it.
How do you define better off?
As to what the future will bring – we don’t know.
We do know Cameron + Osbourne signed the UK up to take part in bail-outs and that may be called upon if we stay in. We do know creeping regulation and being out voted was beginning to threaten some areas of great importance to the UK. We do know the ECJ is the ultimate arbiter in legal matters. We do know the EU was shrinking as a destination for UK products.
We do know the EU has a bullying attitude. Proven.
The future, none can know for sure. We might dodge a bullet or walk off a cliff or both.
Option 3 (or 4 or whatever the next option is):
Germans tell Merkel to shut up and sit down (on illegal immigration, on picking fights with London, on subjugating herself to Brussels).
Hollande gets humbled in elections (assuming he isn’t removed as recent polls suggest is likely), and Hollande forced to balance the interests of French farmers and ship builders — with the fascist crap coming from Brussels.
Theresa May takes her sweet time, does what is in the interests of England (ignoring Brussels); and no one outside the media gives a shit whether it is a “hard” or “soft” exit.
Anyone who has ever been dumped, or been through a divorce, knows there are no winners and the distinction of “hard” or “soft” dumping is just tabloid nonsense.
The winner of any divorce is the one who stops whining about their ex and moves on with their life. Same here.
European import companies will just do deals with UK exporters in a country outside the EU. “Made it UK” will be relabeled to meet the approval of EU inspectors.
Exactly!
It is possible the EU could totally fall apart before this is even negotiated out.