Brexit: will business pull the plug?

14/11/2017

Yesterday was a watershed, possibly. It may not be obvious. It may even be counter-intuitive. But, with David Davis promising MPs that they could have a vote on the final Brexit agreement was, in my mind, Parliament's redundancy notice. As far as Brexit goes, MPs have written themselves out of the script.

As it stands, the Brexit talks are poised on the edge of collapse. Within two weeks, we are looking at a failure to progress beyond phase one, which effectively means that the chances of an agreement are looking remoter by the day.

Yes, the MPs seem to be concerned about is whether they're going to get a vote on a deal sometime next year, a deal that may not – and most likely will not – happen at all. And if it does, they won't be able to vote against it or we end up with no deal, exactly the outcome that looks like it's going to happen anyway.

Basically, therefore, what MPs say and do between now and Brexit is largely irrelevant, which is just as well. Barring a vanishingly small number who are beginning to get to grips with the issues, they are so far behind the curve, or so besotted with their own agendas, that they have nothing useful to offer.

Far more important then was yesterday's meeting between Mrs May and a group of business leaders. Reported by Reuters, this was supposedly an occasion when a number of CEOs told the Prime Minister that she needed to speed up Brexit negotiations, "amid concern Britain will crash out the world’s biggest trading bloc without a deal".

In fact, the real value of the meeting was, most probably, in the opportunity it gave for the leaders of 15 business groups from Britain and continental Europe (pictured) to meet somebody who knew even less about Brexit than they did. With luck, they've been shocked into the realisation that they are on their own. No salvation is going to come from No 10.

And, after drawing attention to the lack of awareness in the business community, yesterday we got another example – not of total ignorance but a distorted view of what might transpire.

This came from Gabriel D'Arcy, the chief executive of LacPatrick in Strabane in Northern Ireland, one of the UK’s largest dairy producers, courtesy of The Guardian, who warns that food prices "would soar" after no-deal Brexit.

The thesis is not unfamiliar to blog readers, with D'Arcy predicting that a badly handled Brexit could lead to price hikes for food, and scarcity in the shops from April 2019, with dairy and meat products particularly hit. Something which the Downing Street Fifteen would also have found, he also complained that "ministers were too focused on financial services" and were putting the country's food security and food standards at risk.

"The impression in the industry", says D'Arcy, "is we are not relevant or sufficiently relevant to get a strong hearing in the negotiations". He then adds something that is certainly bothering the fishing industry as he says, "The risk is we are a chip that will be traded".

That, the man avers, "might be fine for England and Wales but not here in Northern Ireland", accusing Whitehall of being "fixated" with financial services and "not that bothered about food".

D'Arcy nevertheless professes to be happy for Britain to leave the customs union and single market, but not until someone in government "articulates the vision in detail and with examples, and explains, with concrete examples, why it is better than the current regime". He will have a long wait.

What then gets a little dubious is D'Arcy's claims that leaving the customs union in a "hard Brexit" scenario could lead to the price of meat doubling and the price of dairy, half of which is imported, rising by up to 50 percent.

A block of cheddar imported from Ireland that currently costs £1, he says, will cost £1.41 under WTO rules. With Ireland being a major producer of cheddar, he argues that this would prompt "a vicious economic cycle" and a period of "runaway" food price hikes.

Actually, reference to the current EU tariff rate puts Cheddar at €171.70 per 100kg. And, with the average price of the cheese at £733 per 100kg, £1-worth of cheese (not a large amount) would actually cost around £1.17 (depending on the exchange rate).

Nonetheless, this is a significant increase, although some other products attract no tariffs at all, while others are higher. Then, as regards Cheddar, although the Irish Republic would have problems, the UK would benefit from substantially lower tariffs arising from New Zealand and Australian quotas – the bulk of which the UK would keep.

In other words, there is an amount of special pleading going on here. The actual increased cost to the UK consumer will average out at a relatively low figure – even assuming that we do not go for the unilateral tariff-free option.

As regards milk sales, D'Arcy says that, with production plants on both sides of the border he can segregate his business in a Brexit apartheid, with northern non-EU milk staying north of the border and milk from across the border staying in the Republic of Ireland. However, he worries about the livelihoods of the 1,000 farmers he supports in Northern Ireland as "87 percent of their income presently comes from the EU".

Even that, though, is not that drastic when the current tariff for whole milk is €21.80 per 100kg - although that would be enough to make the liquid product uncompetitive, adding 21p to a litre. Even that, though, is not necessarily significant. Retail prices for whole milk range from a 65p/litre to over £1, so the cost of duty could be absorbed. Furthermore, skimmed milk costs more although duty is less, based on fat content.

With the picture very different from what D'Arcy is telling us, he still claims that, "Tariffs for food are going to be at prohibitive levels so that's going to drive the price of food up, and then it will probably give rise to another government intervention to dampen down food price inflation, which obviously will be very destabilising and that's not what the British voted for when they voted for Brexit".

Tellingly, though, D'Arcy does not mention non-tariff barriers. He does not mention that products of animal origin must be presented to Border Inspection Posts (BIPs) when they are imported into the EU (with similar provisions likely when food is exported from the EU to the UK after Brexit).

He says nothing about the fact that the UK cannot even export food to the EU until it gets country clearance – which could take months – or that the BIPs could take years to provide.

These, in fact, will be the real barriers to trade, and they will exist with or without a deal. Even if we manage to negotiate a tariff-free trade agreement with the EU, we will still be a "third country" and food products will still be subject of sanitary and phytosanitary (SPS) checks. On Brexit, these barriers will be so formidable that it is hard to imagine that there can be any trade at all.

With somewhat more validity, though, D'Arcy raises the issue of opening up the UK market to US imports to keep prices down if EU tariffs rose. "That would certainly give rise to a massive incentive to open the market to American hormone-impregnated beef and chlorinated chicken and food from the cheapest parts of the world", he says. "That will be the way to avoid food price inflation but that will be at some cost".

The deal here, though, will be the relatively low production cost – although these do fluctuate, and US advantage is not always as high as is imagined. However, D'Arcy warns that if the gates were opened to the cheapest suppliers in the world, the country would open the door to disease, fraud along the lines of the horsemeat scandal and threats to the country's food security.

It's a bit rich pinning the horsemeat scandal on cheap food, when that was very much of EU origin, affecting high-priced prepared meals. The more relevant point is that, if food from the US was admitted to the UK, the EU would either refuse to accept UK exports or impose such stringent border checks that it would make trade impossible. The price of "cheap" food from the US, therefore, would be the loss of our EU export trade (if we ever got it back), currently worth about £20 billion annually.

What is coming from D'Arcy, therefore, is wide of the mark. He has a point, but his focus is misplaced and he misses the real threats. Nonetheless, even if for the wrong reasons, there is merit in his claims when he says: "We are putting the domestic food industry at risk, we are putting food standards and safety at risk, and putting a massive amount of jobs and the viability of the rural economy at risk".

D'Arcy, who is being somewhat more forthright than many in the industry, says he felt compelled to speak out because he felt so angry at "this the eleventh hour" that there is no government in Northern Ireland to give farming a voice and no one in Westminster with a vision of Brexit.

"No one is banging the desks in Whitehall" to explain the dangers of a hard Brexit, not just to the farmer but to the consumer, he says. "The impression is in the [food] industry we are not relevant or sufficiently relevant to get a strong hearing in the negotiations".

And on that, not only is he right – he is massively under-stating the problems. But then, he is also under-stating the problems of a negotiated settlement. He, like most of the business community, has yet to come to terms with the consequences of the UK leaving the Single Market and acquiring "third country" status.

The level of ignorance here is bizarre, where even the worst case scenarios from industry don't actually approach reality. And when the politicians are further discounting the problems, we end up in cloud-cuckoo land – where we currently reside.

Then, that is without looking at the broader issues arising from a "hard border" with Ireland, where the pressure from Dublin is quite capable of collapsing the Brexit talks.

That brings us back full circle. While the MPs in Westminster obsess about their final vote, as each day passes, a deal looks more and more remote. By the time our politician wake up to this peril, it will be far too late, and many will never have seen it coming.

And there, business is truly on its own. If that was the message they took from Downing Street, it cannot be long before they draw their own conclusions and take the necessary measures, further reinforcing the irrelevance of Westminster. It may be business, rather than politics, that pulls the plug on Mrs May's version of Brexit.