Planning for a disaster is already damaging the pre-Brexit economy

Ihad a couple of conversations with bright teenagers. One wanted to discuss philosophy — Gödel, Turing and Wittgenstein. Not a problem. The other asked me to explain Brexit. Not a chance. The saga is madder than a box of hallucinating frogs.

Most likely, Britain will push its way pig-headedly through the brambles of the Brexit negotiations. The country will emerge bruised but intact, declaring that the ordeal was a brilliant shortcut, then fumbling for a map and compass. But while that is the most plausible result, the risk of a total train wreck remains. Worryingly, it seems undiminished more than two years after the referendum.

A recent report by the academics at The UK in a Changing Europe think-tank explores the likely impact of a failure to negotiate an agreement under the withdrawal process. This is not the only way in which agreement could fail to be reached, but it is the starkest.

In a truly acrimonious failure to reach a deal, British food would not pass EU import controls. Aircraft would be grounded and border crossings jammed. This would be harmful to the EU and disastrous for the UK, so we can expect good sense to prevail on all sides. And yet, senior ministers in Denmark and Latvia have judged “no deal” to be a 50-50 possibility. It would be unwise, then, to dismiss the contingency as remote.

UK trade minister Liam Fox says the chance of no deal is even higher at 60-40. Why he wishes to emphasise the risk of a disruptive outcome is unclear; perhaps he believes it will serve his political ambitions. It will not serve the exporters it is his job to represent. The trouble is that as businesses and individuals quite reasonably plan for trouble, they will damage the British economy. After an initially bullish response to the referendum result, UK consumers are now borrowing and spending less.

Consumer caution can swiftly be reversed. But the business response to uncertainty may be less easy to unpick. The Federation of German Industries has warned about emergency plans being implemented if there is no agreement by mid-November.

For a taste of what these plans might entail, ponder Honda’s warning that if the postBrexit customs process took 15 minutes per truck at Dover, the annual cost of that would be £850,000. For a company of Honda’s scale, less than a million pounds a year doesn’t sound too bad — until we consider two things. First, the Freight Transportation Association’s estimate that the briefest delay at Dover — just two minutes — would quickly spiral into a multi-mile tailback. At a busy port, short delays quickly become long and unpredictable ones.

Second, the World Bank’s Doing Business database reports that the typical time to clear border checks in high-income countries is 12 hours and 40 minutes. This is not a train-crash scenario but business as usual for most of the rich world. The World Bank adds helpfully: “It is entirely possible that the border compliance time and cost could be negligible or zero.”

If things go badly, companies that have built supply chains on the assumption of frictionless borders will find those chains jammed. Or we may decide to remain in the customs union. Businesses simply do not know, and that uncertainty is already damaging. To see why, imagine that you are organising a wedding for — say — March 29 2019.

Taking a cue from Fox, your chosen caterer declares that it may be unable to supply the food. The chance of that, in fact, is 60%. Let’s say you love this caterer’s service. Even so — how long before you hire someone else? Not long. And it will do no good for the caterer to confirm in February that all will be well. That is far too late for you.

Businesses trying to trade between the UK and the rest of the EU find themselves in a similar situation. At what point do they decide it is too risky to assume that all will be well? According to estimates by Cambridge economists Meredith Crowley, Oliver Exton and Lu Han some companies reached that conclusion two years ago. Several thousand British companies have ceased some exports to the EU and several thousand more were discouraged from launching a line of exports, simply because the Brexit vote threw the future trade regime into doubt. Unpredictable trade policy is a kind of trade barrier in itself.

Economies can cope with all kinds of shocks, and sometimes bounce back from earthquakes with astonishing strength and resilience. A fiasco in the Brexit negotiations will be survivable, in time. But even if the fiasco never materialises, the prospect is causing damage today. Nobody thought they were voting for an earthquake. /©

A FIASCO WILL BE SURVIVABLE … BUT EVEN IF IT NEVER MATERIALISES, THE PROSPECT IS CAUSING DAMAGE