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Washington Insider: Brexit Prospects | KTIC Radio

Washington Insider: Brexit Prospects

While presidential election prospects dominate the press in the United States and continue to reinforce commitments to U.S. anti-trade sentiment, the UK’s Brexit, especially a so-called “hard Brexit” with Britain retaining few EU trade access concessions is raising increasing concerns across Britain. Reuters carried an article last week that focused both on the politics involved and the potential economic consequences. It said the shock waves of the policy shift are already being felt and that they likely will be more significant in the future.

Sterling’s plunge since Britain voted to leave the EU “has pushed up costs so much for Scottish shortbread maker Bill Dean that he may have to lift prices to balance the books,” Reuters said. Already Dean has a $3.7 million investment plan on hold and says he may eventually have to shrink his business – and his workforce – if costs keep rising.

Dean’s business imports the chief ingredients of traditional Scottish biscuits: butter, flour and sugar, but only eight percent of his sales are abroad, so for him the weak pound brings few benefits and a lot of headaches. Sterling’s 17 percent dive against both the dollar and euro since Britons opted for Brexit on June 23 has come on top of commodity price increases that are eroding profitability, Reuters says.

That’s because prices for butter have jumped 75 percent since the referendum, inflated not only by the weak pound but also by volatile prices of its raw material, milk, on European commodity markets. Dean told Reuters, “We’d be looking at a reduced business model with fewer people if this cost trend continues in the coming years.”

Brexit appears to be pushing up prices for British shoppers and has “already cast doubt on job prospects,” Reuters says. At the other end of the corporate scale from Dean, Japanese firm Nissan has said it may scrap potential investment in Britain’s biggest car plant unless the government compensates it for any new tax barriers erected post-Brexit by the EU.

Still, some British-based businesses will benefit from the weaker pound, which makes their exports more competitive – as long as they keep their tariff-free access to the huge European market. Overall, for many firms that earn the bulk of their money abroad, the currency slide raises profits that they report in sterling. Smaller businesses which depend on domestic markets have no such buffer, Reuters says.

Scots voted to stay in the EU but were outweighed by a strong “leave” result in England and Wales, so Dean’s company has to deal with the uncertainties of Brexit. That has meant freezing its three million pound expansion plan. “It’s a big investment for us but it’s come slap bang in the middle of a moving situation which we have no control over, so it’s not a comfortable place to be,” he said. The combination of higher costs and continued uncertainty is damaging.

Reuters also describes a larger family-owned producer of shortbread, cakes and traditional savory oatcakes that exports about 40% of sales, helping it to withstand the hit from weaker sterling. However, that firm has an additional worry: keeping its large number of foreign employees. “With sterling at a five-year low against the euro, some EU workers might find work paid in sterling less attractive and this combines with doubts over whether they can stay in Britain after Brexit,” a company spokesman told Reuters.

Food producers employ about 110,000 foreign EU citizens in Britain, about 30% of the industry’s total, but Prime Minister Theresa May has promised to impose controls on immigration from the bloc after Britain leaves. In some more rural areas where employees are hard to find and costly to train. “Foreign nationals may well drift home if there is a persistent negative sentiment in this country,” the spokesman said.

“(They) make up about 300 or 400 of our 1,700 staff and they have been a real asset to the company,” said a family member that helps manage the firm. “Many food manufacturers in this part of the world in particular, which has a small population, are very dependent on them.”

Businesses are also worried by recent comments from Conservative leaders which have convinced some investors that by limiting immigration, Britain could end up without preferential access to the single European market in which goods and services move freely.

While Reuters is focusing on the recent declines in sterling and increases in some important consumer prices, the main impacts of the policy shift are still far in the future, with potential consequences that are mainly unknown. The EU is currently taking a hard line on proposed concessions to the UK in response to the interests of several of its larger members, including France and Germany, among others.

And, there are still murmurs of suggestions that the “full” Brexit may never happen. Still, the markets seem to believe it will, as do many important global investors, who think that it will be quite difficult for the UK to maintain favorable access to the continent—with all the economic pressures that may mean. Certainly, these are developments that should be watched carefully by U.S. producers as they evolve, Washington Insider believes.

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