Brexit Postponed Amid Political Gridlock; Industry Disruptions in Store

By Chris Mitchell, vice president, global government relations

The United Kingdom’s effort to leave the European Union, known by the nickname “Brexit,” is bogged down in political uncertainty, which in turn is creating disruptions in the global economy. With a “no-deal” Brexit possible within two weeks, here’s a recap of recent developments and the possible impacts on the electronics industry. (And let us know what you think about Brexit.)

First, a Quick Recap

Following a 2016 referendum in which the “leave” side won narrowly, the British government invoked Article 50 of the Treaty of European Union, which lays out a two-year process for member countries to withdraw from the EU’s political and economic structures. That process was set to conclude by last Friday, March 29.

British Prime Minister Theresa May finalized a Withdrawal Agreement with the EU in November 2018. However, Parliament rejected the agreement on January 15, as well as two subsequent versions of it on March 12 and March 29. In a rare move, rank-and-file members of Parliament took control of the chamber twice in the last week to hold “indicative votes” on 12 Brexit alternatives, but none won a majority.

Just yesterday, following a lengthy cabinet meeting, Prime Minister May signalled that she would seek a further extension from the EU until May 22 and that she would work more closely with Labour leader Jeremy Corbyn to forge a compromise.

Top Takeaways

1. The urgency remains even as the deadline is postponed.
PM May asked for and received an EU extension of the Brexit deadline to April 12. She now has indicated she will seek an extension until May 22. But May 22 is right around the corner, and the country’s political leaders remain at loggerheads. It is not clear whether working with Corbyn can deliver a deal with majority support.

2. A no-deal Brexit remains a real possibility and would wreak havoc.
Goldman Sachs has estimated a 15 percent likelihood that the UK will exit the EU without a deal in place. Some fear the likelihood is even greater, and most agree the outcome would be dire. World Trade Organization (WTO) tariffs would go into effect, requiring goods to be re-priced accordingly. Customs officials would need to re-establish rules and procedures at the border, but it’s uncertain whether adequate infrastructure could be put in place that quickly.

3. A new PM is likely soon.
Throughout her tenure, May has come under withering criticism from both the Left and Right for trying to chart a middle course. In a last-ditch effort to win more Conservative Party votes for her Withdrawal Agreement, she pledged to step down if Parliament adopted her deal. The ploy did not work. Now the British political class is gearing up for a leadership contest on top of everything else.

4. A general election is also possible.
Britain’s next national election is not scheduled until 2022. Parliament can trigger an election sooner, but the current Conservative majority is largely opposed, having lost seats in 2017 in an election that May did not need to call. On the other hand, the current impasse, if it continues, may make general elections a necessity. The Labour Party may pick up seats in a general election, but few experts think it would be enough for a strong mandate, and any election would be at least several months away.

5. Manufacturers must plan for various scenarios.
Saddled with these uncertainties, companies with operations in the UK and EU are hedging against the various outcomes. IHS Markit’s Rob Dobson expects that “the impact of Brexit preparations, and any missed opportunities and investments during this sustained period of uncertainty, will reverberate through the manufacturing sector for some time to come.” In the near term, the uncertainty has led to advance purchasing and stockpiling of inventory, leading to surges in manufacturing production. But many companies are shifting their supply chains away from the UK, sourcing goods and materials from other EU countries or from outside the region altogether. Airbus, Nissan, Ford, Siemens and Sony are just a few of the companies that are considering or actively shifting operations out of the UK as a response to Brexit.

6. The electronics industry may be disproportionately impacted.
According to an Oxford Economics study commissioned by IPC, the EU28 electronics industry employs more than 2.4 million workers, with about 8 percent or 196,000 of them in the UK. Without an orderly Brexit, the UK could slide into recession in 2019, and the country’s share of the EU’s electronics workforce could drop even further. It’s impossible to predict with precision, but the electronics industry has a highly globalized and complex supply chain. New trade barriers and uncertainties will constrain the ability of British electronics companies to leverage the European electronics marketplace and labour force.

7. Brexit has already harmed economic growth in the UK.
A column in the Financial Times says the UK economy has already shrunk by 1.5 percent since the Bank of England’s 2016 forecast, even as the world economy has grown. Goldman Sachs predicts that a no-deal Brexit could whack UK GDP by another 5.5% and depreciate the pound sterling by 17 percent. The New York Times reports the UK has forfeited its role as an economically and politically stable country from which companies can base their European operations.

With so much at stake for the electronics industry, IPC will continue to stay abreast of developments and keep you informed. Let us know what you think by taking our survey or dropping me a line at ChrisMitchell@ipc.org.

 

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