Opinion

Can two New Yorkers provide a soft landing for a hard Brexit? (or will chlorinated chicken get in the way?)

UK brexit

By Sven C. Oehme and John M. Zindar

The painful process of the United Kingdom leaving the European Union after 46 years may now lie in the hands of two New Yorkers: Donald Trump born in Queens, and Boris Johnson born in Manhattan while his parents lived near the Chelsea Hotel.

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Despite Parliament’s recent vote to block a crash-out Brexit and force Prime Minister Boris Johnson to seek an extension if necessary, the likelihood of him taking his country out of the European single market by October 31st without a deal over a future commercial relationship is still high.

Indeed, Johnson has long maintained that the UK has nothing to fear from a Hard Brexit, with Trump’s encouragement along the way. He could still try to ignore or outmaneuver Parliament’s mandate, but perhaps more likely, the EU may have lost all patience and is ready to accept the risks of crashed-out UK.

Yet a sharp break with the EU by the UK poses dangers to economic prospects and the integrity of the kingdom itself. Already since the June 2016 referendum when 52% of the 72% of participating voters chose Brexit, the process of doing it has torn apart British society. Scotland will likely go independent and Northern Ireland may change it status as well.

It is difficult to estimate the future economic costs associated with a Brexit crash-out, and both sides have their own figures.

A recent report from S&P Global Ratings reveals the costs to the UK already incurred in the 33 months since the vote through March 2019: $86 billion, or about $3,500/person. That accounts for a 3% decline in GDP to near recessionary levels, a depreciating trend of the pound making it the worst performing reserve currency in the world, the inflationary pressures of the UK’s global trade deficits and increased government spending, as well as a plunge in household spending and fixed investment rates.

Those are the current costs already incurred, but future costs of a hard Brexit could loom larger. The high estimate of lost GDP is 6%. The low estimate of average lost revenue for British firms is 10%.

It will be a bumpy road for the UK, and Johnson has made clear that a quick free trade deal with the United States is key to softening the economic impact. He has placed his country’s fate in Donald Trump’s hands. This could prove problematic.

Trump and Johnson

The U.S. market is nominally slightly larger than the EU’s. On purchasing power parity, the EU accounts for 16% of global output versus the USA’s 15%. Thus, British firms could easily make up losses in Europe. But windfalls for the UK from integrating into the USA via a trade treaty will likely have little short-term impact.

First, it takes an average of 28 months to negotiate a free trade treaty with the United States. But President Donald Trump is eager to help his close friend Boris, so making a quick deal conceivable. Still the mechanics of diverting trade from the world’s largest trading bloc to the world’s largest economy could take a few years to show effect.

An agreement will require much surrender of sovereignty to the much larger partner. No matter how much Donald likes Boris, one can expect a long list of White House demands for throwing the UK a lifesaver. The UK will need to compromise on food and other consumer safety standards, revamp its national health system and loosen its regulations on animal welfare, the environment and much else.

Moreover, the Trump Administration could place non-trade issues on the table, e.g. insisting that the UK pull out of the Iran Nuclear and Paris Climate accords.

That’s a hard sale for Boris when just 21% of his country has a favorable view of Donald Trump. Although they may not admit it, Britain is much more European than American. Johnson must convince his people that societal adjustments are worth securing the USA as the partner that will turn a hard Brexit soft.

It’s a big bet, but just maybe, the two New Yorkers with a strong affinity for each other can pull it off.

Mr. Oehme is President & CEO of The European-American Business Organization, Inc. (www.eabo.biz). Mr. Zindar is a Partner at the same.

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