Brexit and the New Industrial Backdrop

As an analytic piece last week in The New York Times observed, the certain imminence of some form of Brexit is further confirmation that the post-war era of liberal and increasingly frictionless international trade is over. A new era is underway in which national interests take top priority and where bilateral trade agreements become the norm. For U.S. industrial companies, this will mean even more changes than the recent US-China tariff battle has sparked. 

Shaken by the trade war, many US companies now manufacturing in China are reconsidering and reshaping their supply chains. Vietnam and other Southeast Asian countries so far are the major beneficiaries of this shift, but technology is providing another opportunity. Advancements in automation and artificial intelligence have improved productivity and quality so much that the cost advantage of overseas production has declined while the economics of domestic manufacturing has improved. 

With our huge domestic market, US manufacturers are in a better position than their European counterparts to manage the coming world order where access to foreign markets may be restricted. The renegotiated NAFTA agreement also helps US companies. But trade uncertainty remains, and that exacts a price. A study by an economist at Boston University and accounting experts in Europe found that since the 2016 referendum on Brexit, the average American company has seen investment growth limited by 0.5% a year and hiring slowed by 1.7% due to Brexit uncertainty. 

Even if the uncertainty abates, the new world trading system will probably be more costly than the one it replaces. A world of three major trading blocs — China and its sphere in Asia, the European Union and North America — won’t be as dynamic as a world that was more open to all. And in such a world, the U.K. (or England by itself, if the union dissolves as some fear) will be very lonely indeed. For US industrial companies, uncertainty about tariffs, export opportunities and international alliances is likely to become the new normal.