Post-Brexit, Britain is going its own way. That way looks expensive

Except for protracted uncertainty over Britain’s future relationship with Europe, these are promising days at Cube Precision, a factory in the Black Country of England.

The company manufactures tools used to make parts for airplanes and cars. Some of those parts eventually wind up in jets made by Airbus, a company now overwhelmed with orders as a safety scandal engulfs its primary competitor, Boeing. Another catastrophe is also increasing its sales: Companies that had been hiring Chinese factories to make their tools are shifting orders to Cube Precision to avoid the chaos of the coronavirus epidemic.

But Brexit threatens revenue-destroying disruption.

Like most of British industry, Cube Precision is intimately intertwined with Europe, selling its wares to companies that send exports there. Last month, Britain officially left the ranks of the European Union. In the next few weeks, negotiators plan to begin hashing out a deal governing future trade across the English Channel. The positions staked out by the British government pose perils for businesses that depend on Europe for sales and parts.

Prime Minister Boris Johnson and his Conservative Party owe their commanding parliamentary majority to nationalist sloganeering that promises to “Get Brexit Done” and “Take Back Control.” As the government prepares for trade talks, it is asserting the right to diverge from European rules governing a host of commercial concerns — from fishing access and financial regulations to product safety, labour and environmental standards.

Britain might diverge, or might not, officials keep saying — a careful dance designed to limit the damage for British exporters while delivering on the political imperative to declare that Brexit has been achieved.

The negotiations amount to an extraordinary historical anomaly: After decades of trade liberalisation around the world, the governments of two major economies are sitting down to determine the extent of barriers they will place in the way of existing commerce.

If Britain is serious about writing its own rules, its factories could lose orders from European companies that now pay them to make parts and tools. Those companies might shift orders to suppliers on the Continent to ensure that their finished goods comply with European rules.

“We need to make sure that the trade deals are still in place so that we can supply our European customers, so that they can build their aircraft and build their cars,” said Cube Precision’s managing director, Neil Clifton. “In the worst-case scenario, there could be a lot of trouble.”

Studiously optimistic, he expresses confidence that, after the inevitable political brinkmanship, the politicians will strike a deal allowing business to carry on.

“I like to believe that the deals that we will get will be roughly broadly in line with what we have at the moment,” Clifton said. “Both sides have far too much to lose.”

But if three-plus years of tangled debate over Brexit has produced any clarity, it is this: What makes sense for business and what actually happens are frequently two different things.

While Britain has been part of the European Union, its companies have been able to do business with counterparts from Greece to Ireland as if this vast territory of 500 million people were a single nation, free of borders, tariffs and hindrances like customs checks.

Voluminous studies have concluded that abandoning Europe’s single market for goods and services will diminish Britain’s economic growth. Britain sends nearly half of its exports to Europe. Whatever the eventual terms of trade across the English Channel, some of this commerce is likely to confront impediments.

Under the terms of Britain’s exit, a transition period mandates that nothing changes until the end of the year.

Even by the standards of the typical trade deal, negotiations will be fraught, filling conference rooms in Brussels and London with armies of lawyers, accountants, bureaucrats and experts in the arcana of fishing, pharmaceuticals, farming, banking and manufacturing for months and probably years.

British law reflects the country’s decades of inclusion in the European trading bloc. Disentangling itself while determining new rules is a process that has been likened to unscrambling an omelet.

Johnson and his senior officials have oozed confidence that they can break from European rules and still maintain largely uninterrupted access to the European marketplace. His counterparts in Brussels have consistently said this is nonsense.

“The truly difficult choices still lie ahead,” said Phil Hogan, European commissioner for trade. “The further the U.K. chooses to diverge from the European standards and rules and regulations, the less it can benefit from the protections and economic strengths of the EU single market.”

European officials are adamant that Britain respect rules governing a level playing field, including labour, tax and environmental standards, along with prohibitions on subsidising industry.

Johnson aims for a deal that avoids tariffs and quotas on products, similar to the arrangement that Europe forged with Canada in 2016. That deal took seven years to negotiate. Johnson insists Britain will complete a deal with Europe by the end of this year — a stance that experts assume will give way to a euphemism for an extension.

If talks break down, Johnson says, Britain can trade under the terms laid down at the World Trade Organisation. That would entail tariffs on British exports to the Continent averaging a modest 3%.

But trade experts say that position is either a bluff or foolhardy. If Britain crashes out of the European bloc without a deal, that invites expensive disruption at ports.

And tariffs are not the primary concern. A departure from European regulations could prompt global companies to put new operations in Europe while avoiding Britain.

Between the middle of 2016 — when Britain voted to leave the European Union — and the end of last year, business investment increased only 1%, according to government data. Over the three previous years, business investment expanded by a total of 16%. If Britain diverges from European regulations, the slowdown could worsen.

“The real cost is lack of investment,” said Charles Grant, director of the Centre for European Reform, a research institution in London. “Food, manufacturing, cars, aerospace, chemicals will all have big problems.”

Part of Johnson’s motivation to diverge from European rules is his eagerness to negotiate a trade deal with the United States, affirming his oft-repeated claim that Brexit is an opportunity for Britain to look beyond Europe.

The Trump administration is likely to demand that Britain break from European food safety standards, allowing US companies to export chlorinated chicken and genetically modified crops.

Accepting such products would provoke public anger in Britain. Whatever the gains from a trade deal with the United States, they would not compensate for the likely loss of sales to Europe.

“The EU is a big market, it’s very close, and we are completely integrated with it,” said Andrew Goodwin, chief United Kingdom economist for Oxford Economics in London.

Britain’s auto industry generates annual revenue of 82 billion pounds (about $107 billion) and employs about 800,000 people, according to Deloitte, the global accounting firm. Those jobs are highly dependent on unimpeded trade across the English Channel.

Some 60% of car parts and accessories made in British factories are exported to Europe, while plants on the Continent are the source of 80% of imported car parts in Britain. Eight out of every 10 cars made in Britain are exported, according to the European Automobile Manufacturers Association, a trade group.

Inside a factory in Shrewsbury, a town famed for its medieval streets, SDE Technology operates towering presses that pound metal into desired shapes, deriving 70% of its revenue from making auto parts.

As the company’s chief commercial officer, Christopher Greenough, walks the concrete floors of the plant, he stops at a crate full of curved pieces of stainless steel, part of a car exhaust pipe. The factory sells this product to a company in Germany that supplies BMW.

That part alone generates annual revenue of about 500,000 pounds (about $651,000), or 4% of SDE’s sales. “If there are tariffs, that would affect this product,” Greenough said.

Still, he and the company’s chief executive officer, Richard Homden, echo the traditional justification for Brexit.

“Going forward, we should have our own destiny,” Homden said. “We shouldn’t have to look to Europe to set the standards.”

When pressed to provide an example of a European rule that impedes their business, both men come up empty.

“I can’t think of any,” Greenough said.

They express confidence that Johnson will extract a favourable deal. Still, they acknowledge risks, prompting them to distinguish their business with new products.

The company is investing some 6 million pounds (about $7.8 million) for new technology that can produce especially light car bodies — a promising feature as the industry shifts toward higher fuel efficiency standards and electric vehicles.

One major source of uncertainty is now gone, factory managers say. After three-plus years of agonising political debate over whether Brexit would actually happen, Johnson has resolved that question.

In the town of Telford in the English Midlands, Advanced Chemical Etching makes metal components for cars, jets, drones, satellites and medical devices, with many of these wares destined for Europe.

January was the company’s best month ever, said the chief executive, Chris Ball. Sales grew more than 40% from a year earlier.

He hopes the politicians will not derail those gains.

“Similar trading terms as it is now,” he said. “That would be the ideal thing.”

© 2020 New York Times News Service