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. 

Recommended

How to prepare your business for Brexit
Small business

How to prepare your business for Brexit

Whether we have a Brexit deal or not, new procedures for importers and exporters will apply from 1 January. Get your business ready now.
27 Nov 2020
Brexit begins: what do the UK and the EU want from a trade deal?
Brexit

Brexit begins: what do the UK and the EU want from a trade deal?

With Brexit now done, the trade talks can begin. But who wants what from a UK/EU trade deal, and how likely are they to get it?
3 Feb 2020
Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021