22 June 2018

Airbus, Project Fear and the truth about a no deal Brexit


Today’s chapter of Brexit’s Never Ending Story comes to us courtesy of Airbus, whose Brexit risk assessment warns that it may need to make a series of decisions over the next two months, potentially relocating some activities out of the UK if there is no withdrawal deal and no deal on transition.

Airbus is a multinational aeroplane manufacturer and aerospace firm, with about 15,000 employees in the UK. Its corporate headquarters are in the Netherlands, its main site is in France, and although it does have other manufacturing sites in other parts of Europe (in Germany and Spain), it also already has sites outside the EU (in China and the US). There’s no intrinsic feature of Brexit that means Airbus has to move.

We should also be sceptical about relocation threats on the “cried wolf” principle. A lot was made about Airbus’s decision to trade in euros in the early 2000s and the threat of relocation then if the UK did not join the euro. It never happened. During the EU referendum Airbus was frequently cited as a firm that would relocate if there were a vote to leave. But in February 2018 the company committed to staying in Britain “long into the future”.

Furthermore, the scenario this “risk assessment” deals with – a no deal Brexit with no transition deal either – is one the UK government says it is committed to avoiding. Indeed, most of the political signals appear to be that the UK government is intent on reconstructing almost all the features of EU membership and will let the EU be seen to “force” it to do what it manifestly wants to do anyway.

However, let us suppose that, somehow, a no deal scenario were to arise. That remains a possibility, not least because the EU may well refuse the UK’s attempt at utter capitulation. Should we think of talk of firms like Airbus relocating as “Project Fear”?

Airbus may or may not mean it this time. But the general lesson Remainers and advocates of the softest possible Brexit want us to learn is that, in the event of no deal, many firms currently located in the UK might move their activities outside. That seems entirely fair to me. A scenario of large tariffs and non-tariff barriers between the UK and EU would lead to significant structural change in the economy — just as joining the EU did in the 1970s.

But what is, crucially, missing from all these discussions of car or aerospace manufacturers or financial firms relocating out of the UK in the event of no deal is the movement in the other direction. As well as the UK-based operations that would move into the EU to escape tariffs and non-tariff barriers, there would also be EU-based operations that would relocate into the UK.

And because the UK imports around €4 of goods and services from the EU for every €3 it exports there, we should expect the flow of firms and investment into the UK, stimulated by no deal, to be much larger than the flow of firms and investment out. It’s just a brute error of basic economics to think that the question is “how bad would a no deal Brexit be for the UK economy in the short term?” In the short-term UK output would gain from a no deal Brexit.

This is a basic point far too often ignored in current debates. Part of the reason Trump has found it tempting to impose tariffs on countries with which the US has a trade deficit is that, in the short-term, such protectionist measures are likely to boost US GDP. Free trade is better for economies in the long term, because it benefits consumers and encourages competition and the free exchange of ideas and innovations, and because trade facilitates friendlier political relations, reducing the economic instability associated with political tensions. But part of the challenge of selling free trade ideas is that when countries are net importers, politicians face the temptation to exploit the short-term boost an economy can get from protectionism.

The UK is a large net importer from the EU. So it follows, as a basic, standard point of economics, that the UK economy should expect to gain, in the short-term, if trade barriers are raised between the UK and EU. Airbus may or may not go in a no-deal scenario, but other firms certainly would. But far more investment and relocation would be inward. Don’t let the “soft Brexit” advocates fool you on that.

Andrew Lilico is an economist and political writer.