In the recent hours, UK Prime Minister Boris Johnson repeated his intent to have the UK exit the EU on October 31, come what may. He is seeking a "deal" with the EU, but says he will exit without one. There are a variety of legal and Parliamentary obstacles that may prevent him from doing so, at least by October 31.
The scaremongering in the mainstream financial media about this no-deal "Brexit" has no end. Basically, according to the hysterical media, the UK will become some species of economic backwater if it is no longer subject to the whims of highly paid tax-and-spend central-planning EU bureaucrats in Brussels.
But why would it be so? The assumption behind this scenario is that UK exporters will face a 10% tariff on its exports to the EU, and that therefore this will cause UK exporters to relocate to the continent, causing a recession (or worse) in the UK.
Nobody seems to be questioning why the EU would be compelled to impose tariffs on UK goods. In fact, I could have sworn that the EU -- and every other country around the world -- has been complaining that the U.S. under President Trump has imposed, or is threatening to impose, additional tariffs. The EU bosses clearly say that imposing tariffs is a bad thing.
Well, if the EU is complaining that Trump is raising tariffs, and it says that tariffs are bad, why is the EU itself threatening to impose them? The UK has not threatened the EU with any tariffs. This is squarely an EU threat to the UK -- not in response to the UK imposing any new tariff.
Automobiles are a common example of how tariffs work. The EU has a 10% tariff on cars from the U.S., for example. However, it has a 0% tariff on cars from Mexico. Audi moved its Q5 production from Germany to Mexico over three years ago, and can export it tariff-free to the EU. Audi doesn't make the Q5 in Germany -- or elsewhere in the EU -- anymore.
Same thing for Mercedes, which built a factory in Mexico for the GLB SUV, which is arriving in Mercedes dealerships later this quarter. It's being imported into the EU from Mexico tariff-free. So, why would the EU treat a car made in the UK any worse than a Mercedes made in Mexico? It wouldn't.
The question that Boris Johnson ought to ask on behalf of the UK, is why the EU has a zero percent tariff on cars from Mexico, but threatens to impose a 10% tariff on cars made in the UK. Why, indeed? Why does the EU threaten to impose a tariff on the UK, when it seems plenty happy to have 0% tariffs on Mexican-made cars?
The EU has a choice, as to whether it imposes a tariff or not. Nobody is forcing it to do so.
Therefore, it seems clear that the EU is threatening this tariff only in order to scare the UK and public opinion in general: "If you leave our club, we will punish you."
An EU tariff on the UK would also hurt the EU. Why? Because the people in the UK would have less money with which to buy things made in the EU. That's a dollar-for-dollar -- or should we say Pound for Euro? -- relationship that goes both ways.
As a result, it seems like the EU is just bluffing about imposing tariffs on UK goods. It's not in the EU's interest to do so, anymore than it is to levy a tariff on a car that comes from Mexico. If they can't bother taxing a car that comes from Mexico, they're not going to do it on a car that comes from the UK either.
Speaking of bluffing, this whole episode reminds me about the scares leading up to the U.S. November 2016 election. When the odds quickly shifted mid-way through the election evening, the U.S. stock futures first fell sharply. Why? Because we had been told that a Trump win would be bad for the markets.
But then, just in time for the market opening only hours later, investors realized that perhaps what we were dealing with was simply a case of lower taxes and deregulation? At that point, doom turned into triumph, and the U.S. equity markets rallied for approximately 15 months before leveling out.
Could it be the same thing here? The markets are primed for a Brexit causing an immediate market crash. But are these fears rational? They depend on the EU imposing tariffs that are entirely elective (per definition), and that the EU doesn't impose even on Mexico.
Boris: Call the bluff. Jump into the pool. The water will be deep, warm, and the sun will shine when you emerge victorious seconds later. No-deal Brexit will also mean no-tariff trade with the EU -- contrary to today's hysterical fears.
At the time of publication, the author was short TSLA and long F. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.