Focus on Manufacturing | Irwin Mitchell | Brexit - uncertainty abounds

Britain’s relationship with its continental neighbours has, for more than 40 years, been defined by its participation in the European Union; Britain’s stance on free trade, law-making and immigration, to name but a few, have all been shaped by the supranational powers of the EU.

That could all be about to change – in June the country votes on whether it believes that the UK’s prosperity lies within, or without, the pan-European bloc.

The opening shots have been fired; there is division within the government and an even split of opinion across the general public.

Amongst the UK’s manufacturers, the position is no less clear with large manufacturers extolling the virtues of free trade and access to labour whilst a number of small and medium-sized manufacturers lament the expense and frustration of bureaucracy and look to a less onerous regulatory environment without the interventionist hand of the EU.

What will happen?

Uncertainty prevails as to precisely what form a Brexit would take; the timescales, administrative hurdles and cost can only be guessed at presently. What is clear is that:

  • If Britain votes to leave the EU, it will have to renegotiate its relationship with the bloc and/or its members to cover issues such as trade, movement of goods and labour and law-making.
  • There would be an immediate cost-saving for the government, with various estimates of the extent of Britain’s net annual contribution to the EU coming in at between £5.7 billion and £8.8 billion.
  • Nothing would happen overnight and it has been mooted that the process of Britain extricating itself from the EU may take in excess of two years during which time it would keep its seat at the table but would be there purely to observe, with its influence reduced to practically nil.
  • The impact upon trade is a matter for debate with economists espousing views which vary from the post-Brexit landscape being bleak with the UK’s exporters in particular hampered by more expensive international trade to those who believe the UK could prosper absent the bureaucracy and economic restrictions posed by EU membership.

In the event of a “stay” vote on 23 June, Britain would work within the parameters of a redefined relationship with Brussels following the government’s protracted deliberations with the EU earlier this year.
What is the relevance for manufacturers?

Britain’s trading relationship with Europe would fundamentally change. The extent to which Britain would be able to replicate the free trade arrangement is uncertain. The EU chief, Jean-Claude Juncker, asserted that there was no “Plan B” for Britain’s relationship with the EU in the event of Brexit; whether or not that is posturing is a question which may have to be answered after 23 June.

Britain’s trade within the EU is in decline and figures from the Office for National Statistics indicate that UK exports within the EU are at an all-time low.

Between 1999 and 2014, exports from the UK to other EU member states dropped from 54.8% of the UK’s total outputs to 44.6% as emerging markets opened up to British exporters and, in recent years, a sluggish European economy diluted the appetite for British exports.

Continental Europe’s status as the primary destination for UK exports would be unlikely to change on account of Brexit, given the strong demand for British goods across most of the EU’s member states.
Arguably, the ease with which the UK’s manufacturers can access skilled migrant labour would be affected with visas becoming necessary even for migrants from continental Europe.

Given the current skills shortage in the sector, which we have addressed elsewhere in his edition, having Britain on the outside of the EU could further exacerbate extant issues with labour in the sector. In reality, this could be a red herring as entry into the Schengen Agreement would ameliorate potential problems with sourcing a skilled workforce from EU member states.

Britain may become a smaller, less relevant player on the international stage. Over the last 12 months, the UK’s steelmakers have looked outwards and lobbied the EU to increase tariffs on cheap Chinese imports in a vain attempt to save jobs, and many would say the EU’s perfunctory response pointed to its diminished value to the sector.

Proponents of the union would argue, however, that by Britain standing alone, that clout would be lessened further still and the EU represents the strength in numbers which is required for a group of 28 relatively small economies to stand up to the might of the USA, China, India and others.

How would the post-Brexit landscape look?

In the event of a vote to leave the EU, attention would turn to how Britain manages its trading relationship with the 27 states which would continue to form the EU. Britain may opt to join the European Free Trade Association, together with Iceland, Liechtenstein, Norway and Switzerland.

Alternatively, it may negotiate its own trade agreement with the bloc as a whole or its component members. Three living examples point to what Britain’s future relationship with the rest of Europe might look like in a post-Brexit world.

  • Norway: A member of the European Economic Area but not the EU, Norway has access to the single market (with the exception of prescribed financial services) but is not constrained by regulation of agriculture, fisheries, justice or home affairs.
  • Switzerland: Not a member of the EU but a party to the Schengen Agreement, allowing free movement of people, and a party to a number of individual trade treaties with EU member states.
  • Turkey: Neither a member of the EU or the EEA but party to a customs union with the EU, granting it access to the single market whilst not subjecting it to regulation from the EU.

Alternatively, Britain may opt for a clean break from the EU and either fall back on its membership of the World Trade Organisation for the purpose of regulating trade or look to trade treaties with countries beyond Europe, building links with North America, China and India.

At the moment the question is not only what will happen on 23 June 2016 but, in the event of either a “leave” or “stay” vote, what would happen afterwards.

In that regard, the UK’s manufacturing sector is in a uniquely paradoxical position, benefitting from producing highly sought-after products which should still find a market across Europe in a post-Brexit world whilst potentially finding itself shut out from markets by a historically protectionist EU. The outcome could be reduced demand for UK-manufactured goods or increased prices for foreign customers for those same goods. This is only one of a number of imponderables as Britain goes to the polls for a referendum of potentially unprecedented consequence.

Wolfgang Schäuble has warned the UK that Germany will be one of several nations to take a tough stance over post-Brexit trade negotiations. It is difficult to gauge how much of what has been said by the UK’s European trading partners is rhetoric and, much like the domestic discussions around the subject, cut through the wealth of posturing to get to the crux of what the risks and opportunities are to the UK of a life without the EU. The next few months will be critical not only for the fact that a decision will be reached on the UK’s EU membership but also from the point of view of ensuring that UK plc is well-placed to capitalise on either eventuality; be it with, or without, EU.