Business as usual, until it’s not usual?

The last week of February could have been a defining week for global trade. We could have seen the imposition of tariffs on $200bn of Chinese imports into the US; we could have seen the UK Parliament taking control of the Brexit process.    But we didn’t...

Dr. Rebecca Harding, Liveryman, CEO Coriolis Technologies

Cans have been kicked down the road for political reasons. Donald Trump signalled his willingness to delay the process of imposing tariffs. There is no “magical date”, he tweeted, and, a couple of days later, suggested that he would meet President Xi of China “soon”. He is still under pressure over the wall with Mexico; he has to decide whether or not to implement proposed sanctions against Venezuela; he will need to look at whether or not the EU’s car sector poses a national security threat and act accordingly, and he has a Summit with President Kim on denuclearisation of the Korean Peninsula. This may be too much for a president who prefers to deal with one bi-lateral problem at a time.

Brexit is increasingly following a similar path. This was to be the week of the meaningful vote, but has been postponed until March 12th at the latest and has meanwhile allowed Parliament a vote on a no-deal Brexit and potentially an extension to Article 50. While Theresa May might protest that she is not running down the clock to March 29th, this will certainly be how it is interpreted. On the face of it, the delay is to give time to “positive” discussions that the UK government is having with the EU. In reality it has the effect of diffusing the challenge from Yvette Cooper and Sir Oliver Letwin who want to take the prospect of no deal off the table and ask for an extension to the Article 50 process if no agreement on the Prime Minister’s deal has been reached by the 13th March.

How do you deal with this level of uncertainty in the global market generally and the UK market in particular as an exporter?  Just two months ago, the government advised businesses to “prepare for a no deal Brexit.” So what does this actually mean? The answer, of course, is that nobody really knows, and there may not be a no-deal Brexit anyway.

“Business as usual until it’s not usual” is the strategic equivalent of “keep calm and carry on.” It is perhaps less of a cop-out than it sounds. The Santander Trade Barometer[1] of Winter 2018 points out that 61% of international businesses are confident or very confident about their business prospects. 29% are worried about geopolitics, but only 18% about protectionism; even though 44% businesses cite Brexit as a concern, only 50% are actually preparing for it. Of these international businesses 80% operate in the eurozone; they are confident, less than 50% are concerned about Brexit, and less than half of those are preparing for it. In other words, this is telling us that international businesses are concerned, but not so concerned that it is affecting their planning.

There are three things that help explain this apparent lack of concern. First, the consequences of any change in the nature of importing and exporting themselves will have been factored into decision-making several months ago. For example, those businesses that require finance to cover the time when goods are in transit, the count-down to a no-deal Brexit began in September, when 120 day terms for finance began to fall on the wrong side of 29th March. Now a 30 day term will fall outside of the time remaining to Brexit.

For a small business, the political uncertainty means that the supply of finance will have become more restricted, particularly in the last three months; businesses should plan for harder access to finance in the coming months if uncertainty continues.

Second, for all the talk of Trade Wars, actual action has been limited. Tariffs of 25% on iron and steel and aluminium imports into the US have been implemented and there are additional tariffs of $250bn on Chinese exports to the US and $110bn of US exports to China. There is at present no increase in tariffs with the EU or any other country except in iron and steel. At present, there are no tariffs on EU automotive trade with the US, and the most likely scenario is that the “national security” concerns that the US has will be replaced by greater contributions to NATO and a trade agreement that over time comes to resemble the TTIP (Trans-Atlantic Trade and Investment Partnership) that Mr. Trump pulled out of when he was first elected.

For a UK small business, this increases the costs of trade. If there is a no-deal Brexit then the UK becomes a Third Country and reverts to WTO rules. This means it will join Mauritania as the only other country in the world that trades solely on WTO rules. Every other member of the WTO has Free Trade Agreements with at least one other country. The UK reverts to WTO base tariffs, increasing the costs of imports and exports, making trade simply more expensive, potentially over a long period of time if we cannot negotiate post-Brexit trade agreements swiftly. At this stage, this is the worst case based on no deal, but any business will be watching its costs and holding back on investment.

Finally, in successive surveys, it is currency uncertainty that is a key concern of international businesses. This affects the costs of imports and the competitiveness of exports. Yet since July last year, the value of sterling against the US dollar has remained between $1.26 and $1.32 and against the euro between €1.10 and €1.16. It seems that currency markets are not reacting excessively to political uncertainty, largely because it is now being priced in. At present, the currency risk is arguably perceived and not actual.

For a small business, therefore, the currency hedge against either currency is relatively stable and narrow. The concern will be that a no-deal crash will create a run on sterling that lasts for longer than a few days. This would have a profound effect on inflation through import prices and is something to watch. What is almost certain, however, is that the strength of the US dollar, which has been the dominant feature of the ten years since the financial crisis will be sustained irrespective of what happens with any agreement with China.

These are uncertain times, and markets and businesses loathe uncertainty. It creates hype and misinformation; worst of all, it is inherently uninsurable. However, the fact that a full blown trade war globally would be catastrophic for the global economy seems to be guiding the thinking in Washington and Beijing. Similarly, there are said to be “dozens” of Conservative MPs who will vote against a no deal Brexit which would be a disaster for the UK’s international businesses and the UK’s households because of the longer term effects on prices and economic security. Against this backdrop, planning for business as usual may yet be the best option.

ENDNOTES:   [1] https://www.santandercb.co.uk/insight-and-events/news/growth-sight-despi...