Winners and losers from a hard Brexit
Our exit from the EU is likely to be of the hard variety, says Matthew Lynn. Investors should back the industries that will flourish
We don’t yet know what Britain’s trade deal with the EU will look like once the transitional arrangement runs out at the end of this year. One thing is starting to become clear, however: Boris Johnson’s government, with a secure majority in Parliament, will refuse alignment with future EU rules and stick to that position, even if it means that a deal is not possible and we have to trade under WTO rules instead. Big business groups are not going to be happy about that, but it doesn’t make much sense for an economy the size of Britain’s to allow its regulations to be set permanently by an organisation it is not a member of. This creates an opportunity for investors.
The losers
The hit will be taken by any major manufacturing business with supply chains that stretch across Europe. The carmakers will be in trouble (although a few, such as Nissan, may be able to ramp up sales in the UK to make up for it). Rules of origin, tariffs and quotas will mean that logistics freeze up, just-in-time production systems have to be scrapped and tariffs of up to 10% may be faced in some markets. That is going to hurt. Car manufacturers are going to suffer, both in the UK and in Europe, and so will the parts suppliers and dealers who depend on car sales.
Chemicals and drugs makers might get hit and so might clothes, shoes and textiles manufacturers. And there may be losers in financial services if passporting rights for the City are lost as a result of failing to reach a deal: it won’t make a lot of difference to the banks, but fund managers and insurers may find themselves frozen out of lucrative European markets or forced to open units in Paris or Frankfurt.
The winners
The losers will do a lot of lobbying and make a lot of noise. But there will also be some big winners if we free ourselves from the rules that come out of Brussels. Such as? First, and most obviously, technology. Over the last decade the EU has pushed through ever-stricter controls on tech companies. It is still hitting them with a constant round of fines and restrictions – a potential ban on facial recognition, a hugely exciting new technology, is just the latest example. That may protect privacy, to some degree, but it also makes it harder for companies and entrepreneurs to innovate. The UK already has the leading tech hub in Europe. With lighter regulations, our tech firms can flourish, as can all the venture-capital houses that put money into them.
Next, finance. Sure, some of the big traditional asset managers and insurers may lose out. But the EU has also been imposing round after round of rules and regulations on finance. The City has always thrived as a global centre of innovation and excellence. From fintech, to cryptocurrencies, to crowd-funding, to financing emerging markets and new technologies, the smaller, nimbler finance firms will find business a lot easier if we set our own distinct rules from the EU.
Thirdly, retailers. True, there may be problems with supply chains. But shops will benefit hugely from being able to source the cheapest goods from around the world. We have been so used to EU quotas and tariffs – 16% on oranges, for example, or 8% on coffee, even though both are remarkably hard to grow in this country – that it will probably come as a surprise when we see how much cheaper products can be bought elsewhere. A round of price cuts may tempt people back into the shops again.
Finally, food production and agriculture. The industry has grown used to EU controls, but they never worked for the UK. We were stuck with a food industry hooked on subsidies and dominated by controls. And yet from lab-grown and substitute meats to vertical farms, agriculture is about to go through a technological revolution. The giant agri-businesses of France and Spain will oppose that fiercely, but freed from their lobbying the UK can pioneer those industries – which makes sense for a country that gave up on self-sufficiency decades ago. Farming will look very different with rules set in the UK, but it will also be a lot more profitable.