Relax – a no-deal Brexit will be fine

Preparations have been made, the costs largely sunk already. Deal or no deal makes little difference, says Matthew Lynn.

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About 8% of the economy is accountedfor by import and export trade with Europe

Preparations have been made, the costs largely sunk already. Deal or no deal makes little difference.

Rolls-Royce is stockpiling parts for its factories. Premier Foods says it is spending £10m on contingency plans in case supplies of food start to run out. EasyJet has set up subsidiaries in continental Europe to make sure it is still allowed to fly its planes into Spain and Italy, and many of the City's banks and fund managers have quietly opened up branch offices in Paris and Frankfurt to keep within the European Union's single market. With a vote in parliament looming on our exit from the EU, and with the result completely unpredictable possibly up until the very last moment, companies are understandably readying themselves for the possibility we will crash out on 29 March next year with no deal agreed between the UK and its former partners.

In the run-up to the vote, we have already heard warnings about the cost to business and the economy of not taking the deal the prime minister has negotiated because the only other alternative is nothing at all and that would impose horrendous costs on the economy and business. But there is a point that is usually overlooked. In fact, businesses have already made plenty of preparations for "no deal". And, most importantly, those preparations are largely one-off costs. While leaving the EU will undoubtedly do some damage to the British economy, and cost some money, by now the hit has largely been taken. After Christmas it won't make much difference whether we leave with a deal or not.

What happens when parliament votes?

When parliament votes on Theresa May's Brexit deal on 11 December the outcome will be completely unpredictable. The deal might be voted through. It might take multiple votes stretching into the new year. It might be passed by a new prime minister. There might be a second referendum, or a general election, or we might carry on bickering until March and just leave with parliament still unable to reach a settled conclusion. Indeed, maybe everyone will just keel over from exhaustion, rewind a couple of years, and cancel the whole thing. Just about anything could happen.

Against that backdrop, and the massive uncertainty it creates, it is only sensible companies should start preparing for no deal. If they have suppliers in Europe as many do then they need to make sure goods will keep flowing into the shops and warehouses. If they have supply chains linked into Europe, they need to maintain them, and if they are exporters they have to check they can comply with whatever rules may be imposed once we are no longer inside the EU.

"About 92% of the economy won't notice any difference whatever happens over Brexit"

Of course, it is important not to exaggerate the impact. About 16% of the UK economy is accounted for by imports and exports, and about half that trade is with Europe. So roughly 8% of the economy will feel some impact, but the other 92% won't really notice any difference at all whatever happens over Brexit. Even so, tens of thousands of companies will be affected.

And yet, like any economic shock, the impact will also diminish over time. In fact, there are two types of cost to Brexit. There are the tariffs that might or might not be imposed on trade. And then there are the compliance costs involved in coming out of the single market and customs union. The tariffs might well be permanent, although we have no way of knowing at this stage. It would be very odd if the UK and EU couldn't at some stage negotiate a free-trade deal, given the closeness of the two territories. But who knows? Even so, tariffs will be fairly modest, because World Trade Organisation rules don't allow for huge ones, and will be largely compensated for by the exchange rate.

The money's already been spent

Then there are the compliance costs. Leaving without a deal certainly creates a lot of expense in new logistics systems, coping with paperwork, dealing with tariffs, creating satellite offices and so on. That is all going to involve time and money that might have been better spent elsewhere. But the important point is this: those are largely sunk costs. Take an asset manager that decides it has to set up a branch office in Frankfurt, for example. It will take a hit. But it only has to be done once. Or a manufacturer who has to put in some extra administrative systems to cope with the paperwork of bringing in parts from Germany, or who has to appoint a sales representative in France to stay within the single market. It all involves a certain amount of expense. But once you've spent the money preparing for no-deal you don't need to spend it again.

Much the same is true of lost investment. There will be some global firms that will decide to skip an investment in the UK because we are leaving the EU. But those decisions have already been taken, and that investment has already been lost. There won't be anyone in the world who gets up on1 April, even if it is April Fool's Day, and suddenly discovers that Britain is no longer in the EU. Damage will have been done, but it can't be undone now, whether we agree a deal with Brussels or not.

In truth, if we get into February with no deal in place, it won't make much difference to the economy whether we leave with one or not. Business will have made its preparations. There will be disruption and expense, but we will already have suffered that. Two years ago, the costs of no deal were huge. A lot had to be done to prepare for our exit, and the potential for damage was substantial. After Christmas, the costs will be fairly minimal and if parliament realises that, it makes leaving with no agreement a lot more likely.

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