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Brexit: logic dictates despite uncertainty

A view from Donald Maxwell-Scott, Technical Investment Manager at Rowan Dartington:

The only certainty is uncertainty when it comes to Brexit, however, logic still has its part to play.  After all, you didn’t need to be a fortune teller to know that Theresa May’s Brexit withdrawal bill was going to be shot down, or that she was also going to survive a vote of no confidence.  Both outcomes were easily predicted, but why?

For the last two years we have been bombarded with facts and figures about Brexit, most of these just predictions and highly speculative predictions at best.  We are now entering the endgame of the Brexit withdrawal negotiations, and these negotiations are not between the EU and Theresa May.  They are between the government and every party represented in the House of Commons.  The views of many of the MPs are known so theoretically there are only so many outcomes that can come to fruition.

Despite Theresa May’s defeat it was good to see her reach out to the other parties across the house. In our opinion this was necessary from the start, especially when Gina Miller won her case against the British government over its authority to implement Brexit without approval from Parliament.  Given the clear divisions within the House of Commons it was naive of Theresa May to think that she could bulldoze her Brexit withdrawal plan through the House.  She should have reached out earlier; something as important and divisive as Brexit should have been dealt with by all parties to ensure that it was palatable to everyone voting on our withdrawal.  Furthermore, seeing the House unite to solve Brexit could have healed some of the deep divisions currently experienced throughout the UK.

Olive branch

However, now that Theresa May has extended an olive branch to other parties, it’s clear to see that Jeremy Corbyn has been less than willing to meet the government since May’s new appetite for cross-party cooperation.  The reason Corbyn has given is that the only way he would be willing to sit down with the government and hammer out a cross-party agreement is if a no-deal Brexit can be ruled out, something Theresa May has thus far refused to do.

Whilst relatively few want a no-deal Brexit it would be foolish to rule it out completely.  The more you rule out, the stronger the negotiating position of the EU.  The EU certainly doesn’t want a no-deal Brexit, given that our trade deficit to the EU stood at £67 billion in 2017 (Source: UK Parliament).  The total of goods and services imported from the EU in 2017 was £342 billion (Source: UK Parliament).  So, should the UK crash out on a no-deal Brexit and we were to fall back on the rules of the World Trade Organisation, then it would be highly damaging to the EU.  While most tariffs would be reasonably low – around 2.5% to 3% – there are some considerably larger.

To protect the German car industry there are considerable tariffs on any country exporting cars into the EU.  You only need to look at our roads to see that most cars are BMWs, Mercedes, Volkswagens and Audis.  However, should the UK find itself having to rely on WTO rules then a 10% tariff would apply on all German made cars.  According to the European Automobile Manufacturers Association, the value of German exports to the UK stood at €22.7 billion, while the total from the EU stood at €38 billion.  So, effectively under the WTO rules, the tariffs would amount to €3.8 billion.  While there can be no argument against the quality of German cars, it would be a tough pill to swallow for UK consumers.  The chances are UK consumers would buy their cars elsewhere.  As for the German car industry, the implementation of these tariffs would be hugely destructive.

Germany

Given that Germany is the most powerful country in the EU and is currently teetering on the edge of a recession, it would be difficult to see them accepting a no-deal Brexit.  This is the primary reason why Theresa May does not want to rule it out, it will significantly weaken our position.  Of course, a no-deal would not necessarily be in our interests either but ruling out one of the few points where we too can exert leverage seems rather ill-advised.  We suspect that Jeremy Corbyn isn’t too concerned about a no-deal Brexit, after all he has been a longstanding Eurosceptic.  Deep down he probably knows that he is also unlikely to get a better deal than is currently on the table.  What he does want however is another election.  What is currently unclear though is whether a second referendum would be part of their election campaign.

What would happen if the UK were to go to the polls again?  Well depending on which poll you read both the Tories and Labour seem very close together with both ahead in different polls. This is somewhat surprising given Theresa May’s failure thus far to get a deal through the Commons.  However, Labour’s position on our exit from the European Union is equally unclear, thus restricting them from moving ahead in the polls.  Should we get another election then everybody will entrench further, and this would suit nobody.

Options

So, logically, what are the options in the House of Commons?  Even though it shouldn’t be ruled out, we don’t believe that we will end up with a no-deal Brexit.  An election is also unlikely as the government won their vote of no confidence.  This also reduced the chances of a second vote on Brexit.  A Norway plus deal is also unlikely, although this would solve the problem of the Irish backstop. Given that the government remains in power after the vote of no confidence then the only way forward would be further amendments to Theresa May’s deal.

Theresa May outlined on Monday that she would work with the rest of House to seek a solution, that way ensuring that her deal will secure enough votes to get it through the House a second time.  Logic is also sometimes known as ‘best guess’ so while this might be the logical outcome, we are not necessarily pinning our colours to the mast for fear of ending up with egg on our face.

It’s very difficult to find anything positive about the ongoing negotiations of Brexit, but one thing we can all be thankful for is that we don’t need to build a wall to separate us from the EU; something that US President, Donald Trump, is intent on doing on the southern border of the US.  His inability to secure funding to build this wall has pushed the US into a government shutdown.  This has resulted in many US government employees working without pay until it is resolved.  Perhaps there is something we can learn from Donald Trump after all; maybe we should stop paying our MPs until the Brexit impasse is resolved.  We would be willing to wager that all our MPs would be willing to work for compromises and solutions very quickly indeed!

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