Businesses are increasingly anxious about the United Kingdom possibly exiting the European Union. Now, they face a troubling scenario: a blind Brexit that could prolong trade uncertainty for years to come.
There are growing concerns that the UK might leave the EU in March 2019 with an agreement so ambiguous that it provides no additional clarity for companies and investors compared to the uncertainty that existed in June 2016, when Brexit was voted on in a referendum.
The political pressure escalated on Thursday when a key EU leader criticized the only concrete proposal for Brexit, while French President Emmanuel Macron labeled those who claimed leaving the bloc would be easy as “liars.”
“The likelihood of a vague Brexit, featuring just a minimal political declaration about the future EU-UK relationship alongside a legally binding withdrawal agreement, is gaining traction,” stated Mujtaba Rahman from the political risk consulting firm Eurasia Group.
A blind Brexit might pose even greater challenges for certain companies than an outright exit from the United Kingdom in March without a deal that assures preferential access to Europe’s extensive markets. While that would cause significant disruption, at least executives would understand the situation they face.
Stephen Phipson, CEO of the manufacturing trade association EEF, noted that extended uncertainty would be particularly hard-hitting for large foreign manufacturers with intricate supply chains spanning multiple borders.
Investments on Hold
Multi-national corporations such as Airbus (EADSF), Siemens (SMAWF), BMW (BMWYY), and Nissan (NSANF) are already in jeopardy.
“An automotive manufacturer with three plants in the UK and another in Eastern Europe is likely to redirect its investments there,” Phipson explained. “Executive boards are hesitant to allocate capital for investment because of the uncertainty of the environment.”
Following the Brexit vote, many companies have stalled their investment plans due to uncertainty surrounding potential new regulations, tariffs, or customs checks at borders. There is also confusion concerning the movement of staff between the EU and the UK and any potential new tax obligations.
BMW (BMWYY) announced on Tuesday that it plans to close its Mini factory in England for a month of maintenance immediately after Brexit, citing uncertainty about the availability of necessary parts. Jaguar has also noted Brexit uncertainty as a reason for placing 1,000 employees on a reduced three-day work week until Christmas.
Some executives are pinning their hopes on a proposal put forward by British Prime Minister Theresa May, which intends to preserve close trading relationships regarding goods and agricultural products while incorporating a transitional period of nearly two years.
However, Donald Tusk, the EU’s top political figure, took a firm stance against the Chequers plan following a meeting of EU leaders in Salzburg on Thursday, asserting that it threatens to undermine the integrity of the EU’s single market in goods and services.
‘Very Unappealing’
May continues to assert that her proposal represents the only viable path forward. Nevertheless, pressure from the EU, her own party, or opposition could force her back to the drawing board.
Nonetheless, a blind Brexit would face its own share of adversaries, including those arguing that the UK would surrender its negotiating leverage, specifically the £39 billion exit payment owed to the EU.
“Hardliners will argue that the UK is wasting its strongest bargaining chip — the £39 billion divorce bill with the EU — for ambiguous assurances regarding future relations, leaving little or no leverage during transitional negotiations,” Rahman noted.
When asked about a potential scenario where a blind Brexit leads to the UK ultimately departing without a final trade agreement, Phipson was straightforward.
“That sounds very unappealing,” he remarked.
UJ (London) First published September 20, 2018: 12:30 PM ET
