Aberdeen Asset Management’s Head of Retirement, Gregg McClymont, was joined by two former Cabinet ministers to discuss the politics of Brexit: John Redwood MP, Chief Global Strategist for Charles Stanley Pan Asset, and the Rt Hon Douglas Alexander, Senior Fellow at Harvard University’s Kennedy School. The panel provided fascinating insights into the key events and considerations that will shape the exit negotiations and the potential impacts on the investment environment.
John Redwood said he believed the UK press and media had distorted the relevance of Brexit in a global context, stating, “The UK is the world’s fifth largest economy, but it is relatively small. I don’t think the UK economy is going to be damaged in the next year or two, and I don’t think you will see any of the main numbers for world growth, world inflation or world trade change at all this year or next year as a result.”
There has been more of an argument over what impact it might have on UK gross domestic product (GDP), he said. “We were treated to a wide range of very pessimistic forecasts from the Treasury, the Bank of England, a series of U.S. investment banks and others in the run-up to the vote. I think they were all wrong, but I can’t prove that yet.”
The expected loss of confidence in the UK’s economic future was misplaced.
The expected loss of confidence in the UK’s economic future was also misplaced. “They thought this would be manifest, not just in a hit to business investment but also in consumption, and suggested there would be a recession. We now have almost a quarter’s figures to tell us what actually happened. We see retail sales up, new housing sales up, house prices level or slightly higher, and no overall interruption in general output. Whilst there is probably still reluctance by some large companies to invest, others have seen the opportunities.”
Redwood pointed to such businesses as Amazon* and Wells Fargo,* who intend to increase their investment in the UK. The predicted “gloom and doom” has failed to materialize, he said.
Even if we end up with World Trade Organization tariffs, we would still be 6.5% more competitive.
One forecast that has proven correct is that the pound would fall in value. Redwood sees this as a positive thing, as it makes the UK a more competitive country. “Even if we end up with World Trade Organization (WTO) tariffs, which have been averaged at 3.5%, we would still be 6.5% more competitive. The Germans and French are now 10% less competitive, and they would have to add on any tariff they wanted to impose. If they wish to make themselves another 3.5% less competitive, then adopting WTO tariffs would be a very good way of doing that.” Redwood said the imposition of WTO tariffs would be particularly damaging to France’s agricultural industries and would damage the German car industry, “whereas we mainly sell services, and they are zero-tariffed.”
While the prospects for equity investments look strong, the Bank of England’s drive towards even lower interest rates means pension plan liabilities have risen. “That is a barrier to big company investment.”
Douglas Alexander described Brexit as an enormous legislative challenge, adding that it was of great significance from a geopolitical perspective. “I was in Harvard last week, and there is incredulity within the American Foreign Policy Committee as to the choice that we made in the United Kingdom. Given how central Europe has been to delivering international order since the Second World War, this is a seismic event for that international order.”
As Minister for Europe during the British presidency of the European Union (EU), Alexander saw first-hand the very delicate balance within the European Union, between the northern liberals and the southern protectionists. “The decision will have strengthened the southern protectionists and weakened the northern liberals. In that sense, the character of the European marketplace will change.”
He argued that the UK’s vote to leave the EU has strengthened some of the populist, nationalist and xenophobic forces in Europe; and that the EU without Britain will be smaller, poorer and less influential on the international stage. “The greatest fear is the risk of contagion. Brexit hit European policymakers at a point at which they had a pretty full in-tray to start with: the immigration and refugee crisis, problems of low growth across the Eurozone and the security crisis. Unless these negotiations are handled adeptly, we could see the very idea of a Europe that is free and at peace disappear.”
Political instability as a consequence of the Brexit vote would be compounded by constitutional instability in Scotland and Northern Ireland. “Anybody who saw Nicola Sturgeon’s statement outside Bute House on the morning of June 24 should have no doubt that an issue which many of us worked to resolve back in September 2014 roared back on to the agenda. We also saw the comments of the Deputy First Minister in Northern Ireland arguing for border control, and there’s no doubt that the character of the border between Northern and Southern Ireland is going to be a continuing issue.”
Brexit has resulted in profound uncertainty as to the character of Britain’s future relationship with Europe, Alexander said. “The Centre for European Reform argues that under the umbrella of the Section 50 negotiations, there are six discreet negotiations that we need to engage with as investors and as policymakers.”
These, Alexander said, are:
- the process of legal separation from the EU itself;
- the establishment of a free-trade agreement with the leader of the EU;
- the need for what insurers might term a “temporary cover”, given the length of time it is likely to take to negotiate a free-trade agreement with the rest of EU;
- the process of excision for the WTO as a full member;
- the establishment of a free-trade agreement or agreements with up to 53 countries with whom Europe presently has a trade or investment agreement; and
- agreements in relation to foreign defence and security policies.
Whatever else is negotiated, “taking back control” of Britain’s border, thereby ensuring the end of free movement, is one certainty. Alexander said the UK’s move towards a “hard” rather than “soft” Brexit was a cause for concern. “The politics and the economics today are pointing in different directions. What is most economically advantageous in the minds of many British businesses is actually the most politically unattractive, and what many politicians judge as the most politically attractive outcome is ultimately the most economically damaging.”
Some economic forecasts have suggested that the UK will face a reduction in the medium term of UK trade with Europe, which will not be balanced by greater trade with the rest of the world.
John Redwood commented, “There is a very simple choice for the rest of the EU. Either we carry on trading as we are at the moment tariff-free, or we revert immediately to the most favored nation status under the WTO so that, like America or China, Britain sells into the single market with their kind of access rather than tariff-free access.”
As a nation that trades extensively in tariff-free goods and services, the UK is arguably better-placed than a more manufacturing- or agriculture-based economy. Redwood describes the tariff-free option as the “sensible” choice. “Merkel and Hollande have very difficult elections to get through, and Britain’s friends will be the big business communities of Germany and France and the agricultural community of France in particular, who will be pressing their politicians not to impose any tariffs on their trade with us.”
There was consensus on the need for less uncertainty, but will the government be able to manage the negotiations effectively to bring about a swift and satisfactory arrangement?
Douglas Alexander has his doubts. “We have seen an unprecedented situation where the Secretary of State for exit of the European Union made his first appearance at the [podium] and Downing Street felt obliged to say within half an hour that his was a personal statement. Either you are speaking on behalf of the government or you’re not. My hope is that in the weeks and months ahead there will be a degree of clarity and rigor brought to the view of the British government ahead of them being [pressured] into triggering Article 50.”
As the fifth largest economy in the world, the UK would be making an important contribution to improving the WTO’s aim.
John Redwood commented, “We are in a very different position from a country negotiating a new trade deal with another country because we start from the position where we have a tariff-free and reduced barrier agreement in place. Also, we never lost our membership of the WTO. As the fifth-largest economy in the world, we would be making a very important contribution to advancing their aims.”
However, Alexander foresaw obstacles. “The only basis on which a country can negotiate trade deals is having first of all deposited their commitments with the WTO, and we are not in a position to do that for as long as we remain part of the Customs Union within the EU. We have to negotiate Article 50, which has to be agreed unanimously within the EU. We would then have to approach the WTO, and there needs to be unanimity of agreement among all members. That is before you then begin the process of negotiating the 53 free trade agreements that are presently in place between the EU and the rest of the world.
“Trade negotiations are a combination of arithmetic and psychology. The assumption that all of those countries are going to be willing to offer a country of 65 million people the same deal as we offer an economy of 500 million people is, to put it mildly, optimistic.” Alexander added, “I think there is no chance of serious engagement with Merkel or with Hollande this side of the elections.”
*Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.
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