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Brexit Disruption Opinion from Axelisys’ Director

Brexit Disruption…”This is single handedly the biggest, most disruptive thing to hit UK commerce in my lifetime. We’ve already seen the effects of simply thinking about leaving. The European Investment fund (EIF) which underpins Horizon 2020 and other UK innovation projects is set to finish. Regional Development Funding is also set to stop. So the areas with the greatest depravation and need now don’t have access to some €9 billion of investment funding every year all things included.
 
The drop in the pound, which has stayed at that low for over 12 months, had a limited, short-term beneficial effect on exports, which of course, is great for exporters. The ONS data consistently show that we export around £300 billion every year to the EU, yet import £500 billion, which is where our £200 billion trade deficit comes from and this money is to the net advantage of the EU.

The problem with Brexit is that now, export businesses are very likely to pay import duty on the goods and services imported into the UK and exported to the EU. Whilst this is paid by the company up to the border, the UK distributor purchases this at post-tariff prices and sells it on to UK consumers maintaining their margin. This ultimately means UK consumers pay that extra cost, especially since the selling company will also increase their prices to compensate for the tariff. There are of course, two outcomes:

Soft Brexit – Assumption of a symmetric fixed trade tariff. We don’t’ know yet what this would be, but let’s assume this is 10%. This means our £300 billion of exports are now costing the EU £330 billion and their £500 billion are costing us £550 billion. This makes the trade deficit £220 billion outwards. Which is an increase in outgoing money flow to the EU of £20 billion a year. More than dwarfing our membership fee.

In the case of no deal, WTO rules apply, and the tariffs range from 40% to 160% depending on the types of good, with foodstuffs incurring the highest tariff rates. Farmers in the UK are already going to suffer hugely with the loss of the Common Agricultural Policy (CAP), which funds some 55% of UK farming. That has now gone. Most farming margins are some 10% when selling to the UK’s big supermarkets. So this cannot be absorbed by the profit margin. Farming has to cut costs. But in this arena, they also have a problem. “cheap” foreign labour has now left and won’t be returning longer term, which leaves them in the position of having to pay higher to attract local staff and this isn’t happening. Even in the ready supply of student like we had in my student days, as the debts the students themselves have to pay are simply too high. So UK farming is basically dead. Even financial investment in robotics and automation won’t likely see that level of value being generated, when payment for those capital items has been accounted for. It will take so long to repay that investment, most farms will fold in the interim.

Then there is the financial services industry. Personally, I’m not convinced there will be as big an impact on the trading aspects of the FS industry. Mainly because we already trade globally and all currency fluctuations are securitised. Given the number of people working in London’s FS industry, 70,000 people expected to leave or be made redundant as passporting and other functions move to Europe, is still quite small. That said, it won’t survive unscathed. Startup funding from European sources is already being pulled. Many organisations initially expecting to grow in the UK are now growing European operations significantly more, halting UK recruitment and growth until they see what happens overall. We ourselves have chosen to go one better. As a digital business, we can work anywhere in the world. Our own aim is to move most operations out of the UK and EU altogether.

We are now seriously investing in Canadian operations. Company boards have a duty to safeguard the company and its operations. It is the board’s remit. We made the decision that we don’t have to present ourselves to that level of risk and as such, we won’t. Our team has included EU workers, simply on the skill levels and value for money they present with that, since they are a very highly educated staff base. We need analytical staff and the UK market simply isn’t producing them in high enough numbers to cover the shortfall. Include in that the loss of innovation funding, we simply have to go elsewhere.”

Ethar Alali, Director at Axelisys 

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