The reality of Britain’s exit from the European Union — Brexit — grows nearer and clearer each week. Despite the promises of Brexit supporters that exit would benefit Britons, evidence is mounting that it will instead leave them much worse off. There are growing signs of concern from foreign investors, who put their money in Britain precisely because it offered access to the larger EU market. Brexit threatens that strategy and they have warned the government in London of the consequences.
The new mood was evident earlier this month when a delegation of Japan’s top business leaders, along with the country’s ambassador to the United Kingdom, warned that harmful effects on their operations resulting from the decision to leave the EU would force them to close shop in Britain. Their chief concern is the prospect of tariffs on goods moving between Britain and the mainland, but they also worry about new customs procedures and the end of the freedom enjoyed by London-based financial firms to conduct business throughout Europe. In each case, Brexit threatens to raise the cost of companies in Britain that service the European market. According to one estimate, Britain could lose 75,000 jobs in the finance industry over the long term without open access to the EU market.
Japanese companies made their concerns clear in a memo given to the London government immediately after the June 2016 Brexit referendum. Its logic was summed up by Ambassador Koji Tsuruoka after this month’s meeting. “If there is no profitability of continuing operations in the U.K. — not Japanese only — then no private company can continue operations,” he bluntly warned.
That threat has teeth. Japanese companies have invested more than $56 billion in Britain, making it the second-most popular destination for Japanese funds, trailing only the United States. The result is more than 1,000 Japanese companies in the country that employ more than 140,000 people. The automaker Nissan alone provides nearly 7,000 jobs in the U.K.’s largest car factory. Nissan, Honda and Toyota build a little less than half of Britain’s 1.67 million cars.
British politicians insist that they can strike a deal that protects those investments — eventually. There is little indication that European officials share that optimism, however, and many businesses are not inclined to wait and see how things work out. The pace of change is accelerating and executives cannot afford to sit still for over a year to make investment decisions. Business leaders abhor uncertainty and prudence demands that they hedge against the worst outcome — new barriers to U.K.-based operations. Britain is already feeling the effects of uncertainty: It is the slowest growing economy in Europe and among the Group of Seven members.
British Prime Minister Theresa May and her top officials understand the need for reassurance. They told their Japanese guests that they recognized the importance of maintaining free and frictionless trade after Brexit, but offered little beyond that. Indeed, they could not: There is no agreement in the Cabinet on what should be the terms of Brexit, and there is no reason to believe that European negotiators are going to go easy on London to expedite a deal.
Difficult as it is for the British government to reach a consensus on its bargaining position, that task will become even harder as the date for exit approaches and the costs grow clearer. Recently leaked government impact assessments show that Brexit will hammer every part of the country, no matter whether the terms of the split are “hard” (no agreement is made) or “soft” (Britain stays in the single market).
Losses range from a 16 percent drop in the Northeast if no deal is struck to a 1 percent fall in London if Britain stays in the union market. In no circumstances does any region gain over the study’s 15-year time frame, and regions that voted for Brexit would be hardest hit. The study also reportedly forecasts an additional 21 percent rise in retail prices, a 17 percent rise in food and drink costs and a 14 percent rise in motor vehicles and parts in the 15 years after Brexit.
Another private analysis of 122 industrial sectors shows 3 to 23 percent drops in exports among medium- to high-tech companies, and output would fall in every scenario. Groups that back Brexit have countered with their own analysis that shows modest gains; they have long since conceded, however, that claims of a Brexit windfall were mistaken.
Japanese companies are as sensitive to the negative impacts of Brexit as are British citizens. The irony is that those companies have been investing in the U.K. to make up for market stagnation at home. In other words, the warnings issued to the British government should be heeded by Japanese policymakers as well. Brexit is a sign of the future in more ways than one.