Brexit and Business

This question:  “Should the United Kingdom remain a member of the European Union?”  Will become a reality one way or another on the 23 June. Since the Conservative government lead by PM Cameron promised a referendum for a national Brexit vote, questions have been never-ending on what the impact would be if the United Kingdom parts ways with the E.U. The vote is expected to be close but what effect would this have on the private and public sectors? Should the UK decide to leave, the government would have two years to negotiate a withdrawal under Article 50 of the E.U. Treaty.

European Trade

An in-depth analysis by Global Counsel (GC) of London determined that: ‘The EU is a more important trade partner for the UK than the UK is for the EU.’  The UK plays just one sixth of E.U. economy with one tenth of E.U. exports are sent to the U.K. The report also stated that the U.K.’s trade deficit with the E.U. had risen by 2013 to €66 billion or around 0.6% of GDP of the E.U.27. Most of the trade with Europe is with a few countries such as Germany which by 2013 was exporting €78 billion in products to the U.K. with imports from the U.K. at €50billion. One area that the U.K. plays a major role is in the global supply chains. In 2009 the U.K. exported close to $54billion USD in business and financial services to companies in the E.U. Also that year, ‘… the UK exported over $30bn of mining and chemical products and over $20bn in the transport, telecom, and wholesale and retail sectors into international supply chains.’ As a result these supply chains are becoming more important component for competition.

One concern the report stated that should Brexit occur is that ‘…regulatory divergence that adds to the cost of trade is likely to increase over time, damaging bilateral trade volumes and the UK’s position in European supply chains. The costs will be borne by consumers as well as businesses.’

If the U.K. exits, the terms for accessing various sectors of the marketplace would have to be re-negotiated this would include the standards and regulations as they apply to those sectors.

‘The EU tradition of harmonization rather than mutual recognition means the choice for the UK is likely to be either to adopt EU standards or for firms to bear the cost of meeting two sets of standards. The UK would be less able to influence the future development of the single market, particularly in services where regulatory barriers remain significant and where full liberalisation could add 7% to UK GDP.’

Foreign Direct Investment

Of all the countries in the E.U. the U.K. is the largest recipient of FDI. The E.U. provided almost 46% of the FDI in the U.K. by 2013 but it has been as much as 53% in previous years. The effects were summed in a poll of British firms in the GC report, ‘…the impact of Brexit will be damaging not only to FDI, but also to the investment intentions of UK firms, with 29% more saying it will have a negative than a positive impact.’  The U.K. is host to almost half of non-EU firm’s headquarters, more than Germany, France, Switzerland and the Netherlands combined. But this could change after Brexit as it would bring forward the need for the U.K. to ‘…negotiate third-country treatment under the directive or a series of new double taxation agreements with member states. That would take a considerable amount of time.’

Financial Services 

The U.K. in particular London, plays a dominant role in the financial services sector with a total of $880billion claim with E.U.15 mostly with businesses and households.  The report pointed out that the U.K. bank exposure is as much as $1.7trillion in total and with London as a major international financial centre should Brexit occur and depositors decide to pull their funds out this would be damaging to its role in financial services. The result GC points out would possibly make other E.U. cities more attractive for depositors and investors including Amsterdam, Frankfurt, Paris and Dublin. ‘Businesses in Europe would lose due to higher charges, poorer products and less liquidity. European corporates would, for example, find it more inconvenient and costly to raise capital in London, which currently provides a one-stop shop.’

Industrial Policy 

Should the U.K. decide to Brexit, one area of concern is with the collaboration the E.U. and U.K. have on research and development. The European Research Council provides the U.K. the highest amount of funding than any other E.U. country, 50% more than what Germany gets, which benefits U.K. universities funding for project-based research from these EU contributions. ‘Ten of the top twenty universities in the FP7 programme are in the UK, including the top three.’ The E.U. research funding has benefited industries in the automotive, aerospace, pharmaceuticals, and chemicals sectors and there are fears this funding might be jeopardized should Brexit occur.

Also at risk are universities with publicly and privately funded students that the U.K. would be required to change migration controls.

‘The impact on industrial policy in the EU depends on the Brexit model, but we may see a weakening of competition policy, looser collaboration in education and research, and fewer EU students in the UK. The UK government may intervene more in high-profile and politically sensitive procurements.’

The Budget

The U.K. contributes annually to the E.U. a net sum of £8.5 to £9.5billion and will under current terms continue this contribution until 2019.  E.U spending across the U.K. varies with most of the E.U. spending being on agriculture and structural funds with some benefits going to poorer communities. Should this funding be lost to the Brexit vote to leave, the U.K. government would have to decide to make up the financial shortfall in its entirety or just a percentage of it. There is also the issue of VAT collection with the E.U. since VAT revenues fund E.U. budgets.

For the E.U. the departure of the U.K. would be substantial as the U.K is the second largest contributor to the E.U. operating budget.

In the end GC concluded: ‘The UK government is, however, likely to come under political pressure to compensate those that lose out, particularly as this might impact on the continuing debates about devolution and independence within the UK.’

Immigration

No issue has generated more political debate than the issue of immigration especially when it comes to whether or not the U.K. should stay as a part of the E.U. The GC report states that immigration is an important part of the business model as it provides a variety of needed skilled labour for U.K. businesses. The Confederation of Business Industry (CBI) says 63% of its members felt that free movement of labour worked to their benefit.

‘It is estimated that 1.5m new jobs will be created in higher-skilled jobs popular with EU15 migrants by 2022. Few new lower-skilled jobs will be created, but there will be a high demand for labour to replace retirees in these areas’ according to the report.

Additionally, migrants, particularly younger workers provided they have the skills needed are more likely to be net contributors to public finances, ‘On average migrants have contributed 34% more in fiscal terms to the UK than they have taken out, or £22.1bn in total in 2011 terms.’

It is believed London would be the most impacted if Tier 1 (highly skilled, entrepreneurs) and Tier 2 (skilled, graduate) potential workers had their movement restricted. Poland is one of the top sources of immigrant labour followed by Lithuania and Ireland as these countries would provide the necessary skilled labour and remittances back to these countries.

It’s Complicated

The intertwining relationship the U.K has with the E.U. is not going to be easy to unravel and there is quite a bit at stake as a result. These issues could be perhaps just the tip of the iceberg should the U.K. decide it’s had enough of the E.U. If there is one country that could properly work with the results of an up or down vote outcome I think the U.K. will do quite well.

For More Information: www.global-counsel.co.uk

Article by Kevin Murphy: www.kevinmurphy.london

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