Archives for March 2016

Reasons to be fearful … Brexit and Trump

In just eight months’ time it is possible, though currently not plausible, that the UK will be negotiating its departure from the EU and that Donald Trump will be the President-elect of the USA.

Though the current opinion polls show both being very close contests, the current bookmakers’ odds indicate that the probabilities of the UK voting to leave the EU in the June referendum and on Donald Trump winning the US presidential election in November, are each approximately 30%. Mathematically, this means the chances of both occurring are about 10%, but this combined probability is very sensitive to small changes in the opinion polls.

What would the financial and political worlds be making of such an outcome?

The first implication would be that the political establishments on both the   UK and the US would have been defeated by the votes of the populace. The political class would be shown up as having completely misunderstood or ignored the needs and desires of those they have sought to represent.

Both the Brexit and Trump campaigns appeal to those who want to feel they should have control of their own destiny, by asserting their rights ahead of those from outside their own land. The main cause of this has been the global equalising trend of labour incomes for all but those at the very top of the global income distribution. The emergence of China and India into the global economy has allowed western companies to make increasing use of their, relatively cheap but well-educated, labour pools, ahead of their more expensive Western labour forces.

The second implication is that Brexit requires the negotiation of new trade agreements with all other countries. Aside from the negotiations with the rest of the EU on our interaction post-Brexit, which is one of the largest unknowns for those arguing for Brexit, the single most important trade agreement would be with the US.

Despite the media’s fixation with Trump’s incendiary remarks with regard to Muslims, in fact the major focus of his stump speeches are the implications for the average American worker of the trade agreements that the US has signed in recent decades, and his perception that the US has been the “sucker” or the loser from these agreements. He intends to rescind many of the existing trade deals. In such a situation it is hard to see why he would put much of a high priority on doing any deal with the UK, even more so any deal where his self-proclaimed negotiating skills led to a good deal for the UK.

Thus whether or not Trump is the next President could have major impact on the UK’s economic success should the UK vote “Leave”. The problem for the UK electorate is that the Brexit vote precedes the Presidential vote by some 20 weeks.

The result of these timings is that come the end of the year, the UK could find itself negotiating an exit from the EU with very disgruntled European negotiators, keen to ensure that other countries do not become attracted to the idea of leaving the EU, and facing a US ruled by Donald Trump, who has little interest in any further free trade agreements.