Brexit Talk
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Brexit Talk

Will Brexiteers blame the European Union if Brexit is a Costly Mistake?

In reply to an answer on this, it’s worth highlighting the thinking missing during the vote.

“I agree that the past and the future cannot directly compared. On the other hand I think to describe remain and leave as “status quo” and “leap” is misguided. Even the EU’s most fervent fans describe the project as an “experiment”, and the nature of the EU has changed constantly since it’s formation — so to present staying within the EU as offering a “known” future is unrealistic.

I think its also unrealistic to present taking political risk as an inherently bad thing. Every time we vote to change our domestic government we are, in a sense, taking a leap into the unknown. Often those leaps turn out to be quite good ideas.

Of course leaving the EU may turn out to be a terrible mistake, but to present it as a bad decision simply because the outcome is not yet known, or to present the uncertainty as inherently undesirable, makes no sense to me.

Many people would normally see accepting a status quo as the worst of all options, and taking a chance as the only way to advance in life”

Response: Political risk isn’t a bad thing. Though in the case of [Jeremy] Corbyn, he was a predictable disaster at a very important time in UK politics. The issue of political risk is one thing, but Brexit isn’t an issue of political risk. I see this a lot and it really needs putting to bed. Brexit was a “politicised” issue not a political one. The UK system conflates subjects which are not related to politics, into politics.

Economics is distinct from UK wide politics. Economics is a subject that pertains to everything from budgeting in a UK family, through organisational corporate finance (completely private) and healthcare spending, all the way up to international money flows.

Law is a topic that is independent of political positioning (albeit that many of the policymakers and parliamentarians are lawyers). It covers everything from individual acts, all the way up to war crimes and human rights, as well as interactions with neighbouring states. Civil and workers rights fall into that.

The one thing Brexit was not about, in terms of intent and consequence, was politics. Al the consequences of Brexit will be felt in all these other, facets of British life. It is those things that will affect Jo Public. Politics will not be what affects Jo public in the move away from the EU, because, at the time of the vote, the associated subjects were not removed from the politicisation of it. Some people saw it as a game with no consequence. However, the consequences are very, very real.

We are talking about stuff which at maximum, is changing the colour of the walls in a room in our “UK mews” house or adding a new bedside lamp. Brexit by comparison, is demolishing the house with the aim of rebuilding it, before you’ve determined if you can get a mortgage, can source the materials cost effectively, and can get the labour to do it. It is exactly this comparison in fact. Who would do something so reckless?

To call the EU an experiment is misguided, but not because it isn’t one necessarily. It’s because every single socio-political and economic framework started out as one and is still one. Democracy started out as one. Socialism started out as one. Capitalism started out as one. Cuba started out as one (and still is one). This means there isn’t a political position in the world that isn’t some form of experiment. Hence, to single out the EU as one is focusing on one of a myriad of other cases all of which are the same in their intent, if not structure and operations.

What you are saying about the EU changing regularly is true. There is no challenge there. However, we are talking about stuff which at maximum, is changing the colour of the walls in a room in our “UK mews” house or adding a new bedside lamp. Brexit by comparison, is demolishing the house with the aim of rebuilding it, before you’ve determined if you can get a mortgage, can source the materials cost effectively, and can get the labour to do it. It is exactly this comparison in fact. Who would do something so reckless? Did you do that with your house? If you did, how did you find going to the bank after you’d demolished it?

This is why I go on about a UK wide lack of mathematical literacy a lot. The decision falls into the realms of a really simple calculation involving two variables:

  1. What is the risk it’ll not provide a similar standard to what we have? This is 100% on the EU component, since we definitely will not have what the EU is currently giving us, aggregated with the probability of of getting trade deals with partners around the world and them having the same trading collateral as the EU overall. Note, it isn’t just a take, it’s giving up something as well.
  2. What is the impact of that risk happening?

The latter can then be determined by chaining together all downstream supply chains to determine the net effect to UK households. This latter process itself isn’t “uncertain”. It’s near enough a guaranteed effect (because those chains from raw material to consumer exist now and probably will not disappear in their entirety — they may reshape on the other side of the border into the UK, but the question is how? However, UK inland distribution channels will almost certainly remain the same unless it becomes cheaper to fly it out of the UK to then fly it back in again — if you’ve done international travel before, it sometimes is). The biggest uncertainty is what happens at point 1.

Value At Risk

So with these two numbers you can quantify what’s called the Value At Risk. How much do I/we stand to lose if this hits? You can do this sector by sector. Let’s take one that definitely going to be hit.

Farming, as one of the UK’s few self-sustaining sectors, is 45% dependent on CAP (I’m not sure I agree with the 65% numbers being thrown about, but I remain to be convinced). That sector is finished on the flip of a coin sort of probability unless it can achieve what is in essence a 90% swing (so that the UK pays their 45% contribution and they’re competing for a smaller put with a lot more agencies) I think there’s no doubt about that. It’ll hit some types of farming more than others, but it’s basically done. Next in the chain…

This means an over-reliance on EU exports (since importing products like milk impacts its shelf life, they can’t bring it from too far away in the quantities they need to) and they have increased by 25% due to the drop in the value of the pound. Milk as a raw material is traded on the commodities market, just like Gold, Silver etc. and even has it’s own futures market.

UK milk is sold at 27.13p per litre at farm-gate prices, whilst it’s sold on the commodities market for 16.85 cents (unprocessed — needs pasteurising). This means we have sourced milk from abroad at lower prices than farmers sold it at pre-Brexit. Fine. Dairies move into processing plants, probably subsuming the dying farms and buying up their processing machinery. Farmers have to find something else to do. But why can’t they work with the dairies? Well..

This time, we have introduced a greater import costs (shipping and freight, which wasn’t there before), duty (customs) and are buying at distributor level per metric tonne (MT), before it gets to dairy level. Each of those introduces an economic cost increment into the supply chain.

  • Shipping to the port adds about £600 per tonne of milk, which takes the price per MT to £2,600 (including pound loss, but no tariff)
  • Tanker and train haulage adds £400 per MT
  • Dairies processing adds the processing costs of around £1100 per tonne (note, these numbers come from conversion to farm-gate from unprocessed)

Hence, the cost per metric tonne is now £4,100 per metric tonne. Accounting for wastage (there’s a lot, since most of milk is water — even evaporation is a problem) add marketing, and packaging, placement etc. and that translates to around as 47p per litre for what was a farm-gate price of 27.13p. Supermarket 10% markup and we’re in the 51p a litre position for what was a 44p/l product. Again, this is without trade tariffs. Consumers did not get a 10% hike in wages to accommodate a 10%+ rise in prices. This means reduced residual income.

All this was predicted and predictable. There is zero uncertainty here. As demonstrated in “Dispatches: Brexit and your Shrinking Shop?” the other night and predicted even by me a week after the vote. To quote my own medium post (One Week On…)

“When an event like that and Brexit happens, there is usually a seismic event, then a ‘propagation delay’ as the effects are fully absorbed into society

What about the farmers? They are jobless now. To add them to the processing workforce (it’s one to 3 jobs that can be shared out) is unnecessary. So they’re gone. Though I’ve seen Brexiteers shout “Good” without realising they’ll be the new “immigrants”.

And this is just one single supply chain. There are a myriad of others for goods and services, some of which interact (e.g. the cost of utilities affect milk processing which ups the prices even more). It is a combinatorial problem.

For example, if something costs £100 in 2x £50 of stock and one supplier is also a 50% supplier to the other supplier (which often happens) a 20% increase in the cost of supplier 1 to supplier 2 means supplier 2’s costs are now costs £55, which coupled with their own 10% hike due to Brexit is £60.5, which is passed on to the customer. Supplier 1 puts up their prices to £60 and the total cost to the end tier 1 supplier, is £120.5 which is passed onto the consumer. Hence, this little effect adds 50p more, even than the 10% hike. It is these combinatorial relationships between suppliers that make this such a complex process and to meddle with things we don’t understand it downright dangerous. That’s uncertainty on a massive scale.

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Ethar Alali

Ethar Alali

EA, Stats, Math & Code into a fizz of a biz or two. Founder: Automedi & Axelisys. Proud Manc. Citizen of the World. I’ve been busy