A couple of months ago, The Financial Times YouTube channel explored the impacts of Brexit, where they tried to isolate the impact of Brexit from Covid and Ukraine crisis impacts. Their conclusion is that Brexit is a net negative for the UK economy.
They did this by looking at the trade data, but more interestingly, by looking at the actual experiences of a few UK small and medium enterprises. This is very illuminating to me because in the world we live in, a lot of major issues are reduced to a single data point or headline. It is very hard to understand the nuances and this prevents a good debate and analysis of what is actually happening. It is the equivalent of saying Price to Earning ratio is low! BUY! This leads us into hasty decisions, with no easy way to extricate ourselves afterwards
More importantly, the interviews with the owners/management of small companies allow investors who have never been involved in actually running a business to visualise and understand what Brexit actually did to hinder these companies' growth.
Impact to companies
- After the vote to leave the EU, the pound dropped 10%, which caused imports to become more expensive but exports did not rise. This led to an inflationary effect.
- In an interview with a director of Aston Chemicals, she pointed out that freight costs, and other costs denominated in USD, went up as a result.
- The FT pointed a drop in trade relationships between smaller UK companies and EU counterparts. This means they are unable to use their old strategy of gradually expanding their sales into the EU market (after establishing in the UK).
- In an interview with the founder of the Hampstead Tea Company, she used the example of an order from Italy, which after they shipped, sat in different custom houses for 12 weeks because of the additional paperwork required.
- In another interview with the husband and wife team of Little Star jewelry, they spoke of their plan to establish themselves in UK first and gradually expand into Germany, France.
- What this meant for the 2 companies was that before Brexit, they could ship goods anywhere in the EU without much impediment, but after Brexit, they had to deal with different regulations of 27 countries.
- The Hampstead Tea tried to get around this by setting up an EU entity as a distributor, which would receive goods from the UK and then send it out to different clients in the EU. While this may have worked at the micro level, what this also means is less economic activity taking place in the UK.
Astons Chemicals illustrated the macro effect when they set up a hub in Poland, thereby causing:
- less customs duties paid to the UK and more to the EU countries
- less goods passing through their UK warehouse and more from their Poland warehouse
- less work for freighters in the UK and more in Europe
- less employees in the UK and more in Poland
- The Little Star jewelry company shows that this workaround doesn't work for small companies. They had been winning business in the EU but that dried up overnight.
As a 2 person company, they do not have the resources to set up an EU distribution hub. While they can work with distributors instead, they would be charged 30 to 35% margins.
Not all clients may be willing to do the paperwork involved to import goods from the UK either. This had the effect of driving existing clients to EU suppliers instead. For the UK government, they are losing out on billions of tax revenue from these missed opportunities
The problem with deregulation
The Brexiteers promised a nimbler system without EU red-tape but this is not what is happening. Using the example of the UK chemicals industry, they spent GBP 500 million over a decade registering their chemicals with the EU regulatory system. Post Brexit, they are having to do the same on a separate UK register, an exercise the government estimates will cost GBP 2 billion. The Astons Chemicals director said its extra costs for no advantage whatsoever.
The labour problem
Industries such as construction, soft fruits and so on rely on labour and with free movement rules. They had access to a cheap labour pool from the EU.
Post-Brexit, this supply is affected. While the UK government argued at that time that this will encourage industries to become high skilled and lead to higher investment, this means that industries that relied on labour (and the economy as a whole) must now face a painful adjustment period. The video also suggests that some industries may not make sense to remain in the UK post Brexit
Northern Ireland
The Northern Ireland question is complex but suffice to say that the UK is trying to tear up their obligations under previous treaties and the EU opposes this. As a result, other issues such as trade relationships become bargaining chips in this dispute.
One positive effect for Northern Ireland is that they have a foot in the UK system and another in the EU system. This means they are now the "old" UK before Brexit and is becoming an attractive place for business.
Some bright (or not so gloomy spots)
The City (the London financial sector) came out of Brexit relatively well, as they spent loads of effort Brexit proofing their business.
They did this by looking at the trade data, but more interestingly, by looking at the actual experiences of a few UK small and medium enterprises. This is very illuminating to me because in the world we live in, a lot of major issues are reduced to a single data point or headline. It is very hard to understand the nuances and this prevents a good debate and analysis of what is actually happening. It is the equivalent of saying Price to Earning ratio is low! BUY! This leads us into hasty decisions, with no easy way to extricate ourselves afterwards
More importantly, the interviews with the owners/management of small companies allow investors who have never been involved in actually running a business to visualise and understand what Brexit actually did to hinder these companies' growth.
Here are my notes, based on the portions of the videos that dealt with the companies' experience. Note that this is not a complete summary and there could be errors and misinterpretation.
Impact to companies
- After the vote to leave the EU, the pound dropped 10%, which caused imports to become more expensive but exports did not rise. This led to an inflationary effect.
- In an interview with a director of Aston Chemicals, she pointed out that freight costs, and other costs denominated in USD, went up as a result.
- The FT pointed a drop in trade relationships between smaller UK companies and EU counterparts. This means they are unable to use their old strategy of gradually expanding their sales into the EU market (after establishing in the UK).
- In an interview with the founder of the Hampstead Tea Company, she used the example of an order from Italy, which after they shipped, sat in different custom houses for 12 weeks because of the additional paperwork required.
- In another interview with the husband and wife team of Little Star jewelry, they spoke of their plan to establish themselves in UK first and gradually expand into Germany, France.
- What this meant for the 2 companies was that before Brexit, they could ship goods anywhere in the EU without much impediment, but after Brexit, they had to deal with different regulations of 27 countries.
- The Hampstead Tea tried to get around this by setting up an EU entity as a distributor, which would receive goods from the UK and then send it out to different clients in the EU. While this may have worked at the micro level, what this also means is less economic activity taking place in the UK.
Astons Chemicals illustrated the macro effect when they set up a hub in Poland, thereby causing:
- less customs duties paid to the UK and more to the EU countries
- less goods passing through their UK warehouse and more from their Poland warehouse
- less work for freighters in the UK and more in Europe
- less employees in the UK and more in Poland
- The Little Star jewelry company shows that this workaround doesn't work for small companies. They had been winning business in the EU but that dried up overnight.
As a 2 person company, they do not have the resources to set up an EU distribution hub. While they can work with distributors instead, they would be charged 30 to 35% margins.
Not all clients may be willing to do the paperwork involved to import goods from the UK either. This had the effect of driving existing clients to EU suppliers instead. For the UK government, they are losing out on billions of tax revenue from these missed opportunities
The problem with deregulation
The Brexiteers promised a nimbler system without EU red-tape but this is not what is happening. Using the example of the UK chemicals industry, they spent GBP 500 million over a decade registering their chemicals with the EU regulatory system. Post Brexit, they are having to do the same on a separate UK register, an exercise the government estimates will cost GBP 2 billion. The Astons Chemicals director said its extra costs for no advantage whatsoever.
The labour problem
Industries such as construction, soft fruits and so on rely on labour and with free movement rules. They had access to a cheap labour pool from the EU.
Post-Brexit, this supply is affected. While the UK government argued at that time that this will encourage industries to become high skilled and lead to higher investment, this means that industries that relied on labour (and the economy as a whole) must now face a painful adjustment period. The video also suggests that some industries may not make sense to remain in the UK post Brexit
Northern Ireland
The Northern Ireland question is complex but suffice to say that the UK is trying to tear up their obligations under previous treaties and the EU opposes this. As a result, other issues such as trade relationships become bargaining chips in this dispute.
One positive effect for Northern Ireland is that they have a foot in the UK system and another in the EU system. This means they are now the "old" UK before Brexit and is becoming an attractive place for business.
Some bright (or not so gloomy spots)
The City (the London financial sector) came out of Brexit relatively well, as they spent loads of effort Brexit proofing their business.
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