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A ‘No Deal' Brexit Would Be The Most Economically Damaging Outcome For Uk Business

19th July 2019

Photograph of A ‘No Deal' Brexit Would Be The Most Economically Damaging Outcome For Uk Business

In its latest report, the Committee on Exiting the EU warns that a ‘no deal' Brexit would lead to severe disruption, pose a fundamental risk to the competitiveness of key sectors of the UK's economy and put many jobs and livelihoods at risk. It would represent a sudden rupture for the closely entwined economies of the UK and the EU 27.

'No-deal' is the least desirable option for the UK

The Government's own economic assessment shows that a ‘no deal' exit from the EU would be the most economically damaging outcome for the UK. The effect would be most severe in the North East and the West Midlands, and the chemical, retail, food and drink and manufacturing sectors would be hardest hit.

The Committee finds that without a deal the UK could not rely on Article XXIV of the GATT to maintain current tariff-free trade arrangements with the EU. If the UK were to leave the EU without a deal, the European Commission has said the UK will become a third country without any transitional arrangements.

The Committee also concludes that a non-cooperative ‘no deal' cannot be the desired end state for UK-EU economic relations.

The Committee's latest report examines the implications of leaving the EU without an Article 50 Withdrawal Agreement - a ‘no deal' exit - on different sectors of the UK's economy: services, automotive and manufacturing, food and farming, chemicals and pharmaceuticals and research and higher education.

Chair's comments

The Committee Chair, Hilary Benn MP, commented:

"We heard from representatives of important sectors of the UK economy which are all great British success stories. Every single one warned us of the damaging consequences faced by their members in the event of a no-deal Brexit.

"The UK's position as the front-runner destination for venture capital investment in technology firms would be jeopardised. The UK's car industry would be put at a competitive disadvantage because it would face tariffs on its exports to the EU and interruptions to its highly-integrated supply chains. ‘No deal’ would lead to problems with some food supplies and, we were told, would be ‘disastrous’ for UK farming. The sudden introduction of tariffs on the pharmaceuticals and chemicals industries would seriously challenge the viability of their supply chains. The UK’s higher education sector - a world leader in science and research - would experience a short-term shock and longer-term reputational damage from which it would struggle to recover. And UK services businesses would risk loss of market access and face uncertainty about how no deal would affect their staff working in the EU because they would be treated as third country providers by the EU.

And yesterdays latest forecast from the independent Office for Budget Responsibility that a no-deal Brexit could cause a £30bn hit to the public finances, with an economy pushed into recession and asset prices and the pound falling sharply, will only add to the deep concerns of UK businesses.

"A no deal Brexit, with no GATT XXIV agreement, would be at best a foolhardy gamble and at worst, lead to severe disruption, and it is neither desirable nor sustainable as an end state for our economic relations with the EU.

"This clear evidence reinforces our previous conclusion that a ‘managed no deal’ cannot constitute the policy of any responsible Government."

The Committee will report further on the implications of a no deal exit for citizens’ rights in the Autumn.

Conclusions and Recommendations

Introduction

1.The Government’s own economic assessment shows that a "no deal" exit from the EU would be the most economically damaging outcome for the UK, with the effect most pronounced in the North East and the West Midlands, and the chemical, retail, food and drink and manufacturing sectors would be hardest hit. These findings are reflected in the recent statements from senior members of the Cabinet, including the Chancellor of the Exchequer, the Chancellor of the Duchy of Lancaster and the Secretary of State for Business, Energy and Industrial Strategy. The Government’s own analysis reinforces our previous conclusion that attempting a "managed no deal" cannot constitute the policy of any responsible Government. (Paragraph 11)

Services

2.The nature of cross border trade in services means that non-tariff barriers are important. The Government has said that, if the UK leaves the EU without a deal, then UK businesses would be treated as third-country service providers by the EU. The UK would risk a loss of market access and an increase in non-tariff barriers. This is reflected in the Government’s own modelling which found that moving to WTO terms, and the consequences of non-tariff barriers being raised, would have the greatest impact on UK services compared to all the possible outcomes. (Paragraph 38)

3.A no deal exit would not allow for future arrangements on mutual recognition of professional qualifications. This would have an impact on the ability of some UK services to export to the EU as they do now. It is possible that mutual recognition could be negotiated, but that would require a deal with the EU. Furthermore, it raises concerns as to the long term international standing of UK professional qualifications. (Paragraph 39)

4.Ensuring that personal data can continue to flow between the EU and the UK as it can now has been a major challenge for the UK in the negotiations so far. The priority for the UK has been to secure a data adequacy decision from the European Commission, a process that takes a considerable time. This is exactly the type of process, to allow the UK and the EU to negotiate and adapt to a new relationship, that the transition period was intended for. Leaving without a deal would abruptly remove the transition period and create considerable bureaucratic and legal obstacles for businesses that depend on the free movement of data. In addition, the UK is set to lose its ability to influence how EU policy on data evolves in the future, because it will no longer have a seat on the European Data Protection Board (EDPB). It is difficult to see how leaving without a deal would create the atmosphere necessary for the UK to try to negotiate any sort of input to the EDPB. (Paragraph 40)

5.Leaving without a deal would mean the UK will be outside the EU regulatory regime for services. One way to mitigate this loss of market access is for UK businesses to open a presence in an EU27 Member State. This could lead to a reduction in services delivered by Mode 4 (temporary movement of the person delivering the service) and an increase in services delivered by Mode 3 (establishing a commercial presence within the EU27). The UK is creating circumstances that incentivise the UK services industry to relocate part of its operations outside the UK. (Paragraph 41)

6.The services sector should not necessarily be looked at in isolation from the goods sector. If barriers to trade are introduced between the UK and the EU, as a consequence of the UK leaving the Single Market and the Customs Union, with no agreement in place to mitigate the current terms of trade, then barriers to trade in goods could have implications for the ability of UK services to export to the EU. (Paragraph 42)

7.If the UK leaves without a deal, then there would be considerable uncertainty on the terms under which workers in the UK services sector would be able to travel to the EU for work. This would be important for certain sectors which need flexibility in how quickly they can send staff across the EU. It would also have implications for sectors where the nature of their work involves less predictable schedules or touring, such as in the creative industries, and for smaller businesses that are less able to manage red tape as a consequence of being outside the Single Market. (Paragraph 43)

8.Many businesses are still not taking all the measures necessary to prepare for no deal. Smaller businesses are less likely to take steps to prepare. They may not have the capacity. Many simply need to know what the future trading circumstances will be so when they invest time and resources in making changes, they can do so knowing that they will only have to do so once. It appears likely that a proportion of businesses, especially SMEs, will not be able to prepare until there is more certainty on the outcome. (Paragraph 44)

9.If the UK leaves without a deal, then the UK would be separating itself from important sources of EU funding. The UK Government will be under considerable pressure leading up to a no deal exit to commit to fund the shortfall in any current EU funding streams. It is unclear how leaving without a deal on 31 October 2019 will help cultivate goodwill and the necessary conditions for the UK and EU to resolve this situation quickly. (Paragraph 45)

10.The situation will be particularly challenging for small and medium sized enterprises (SMEs). We call on the Government to set out what financial support it will provide to SMEs in the event of no deal, where SMEs should go for clear communication explaining the specific support for SMEs in the event of a no deal, and how this support will be delivered from 1 November 2019. (Paragraph 46)

11.This Committee is concerned that the UK’s position as the clear front-runner destination for venture capital investment in technology firms—an area seen as a future growth sector—will be jeopardised by a no deal exit. (Paragraph 47)

12.Given that services account for 80% of UK GDP, and that alignment with the EU’s Single Market is the only way in which friction can be removed from UK-EU trade in services, it is vital that the future trading relationship between the UK and the EU is based on close alignment with the EU’s Single Market. Membership of the customs union alone would do relatively little to support the UK services sector. (Paragraph 48)

Automotive sector

13.Leaving the EU without a deal would mean that the UK automotive sector would be subject to the EU’s Common External Tariff on its exports to the EU27, its largest market, adding costs estimated at around £2,700 for UK cars. These costs would undermine the competitiveness of UK exported cars compared to cars manufactured and traded within the EU and cars manufactured in countries, including South Korea and Japan, with free trade agreements with the EU. (Paragraph 65)

14.Without any agreement on cumulation with the EU, it would be difficult for UK-manufactured cars to benefit from any trade deals reached with third countries as, for most lines, the proportion of UK-produced content is currently below 50%. There may be potential for some onshoring of supply chains in the automotive sector, and in manufacturing more generally, but there is also evidence of jobs being lost in the supply chain as manufacturers in the EU27 reduce their own exposure to the disruption of a no deal exit. (Paragraph 66)

15.Turkey is currently a major supplier of components to the UK’s automotive sector. As a member of a customs union with the EU, a no deal exit would also require Turkey to erect new barriers and checks in its bilateral trade with the UK, placing further costs on the UK automotive sector. The Committee notes that trucks attempting to enter the EU via the border between Turkey and Bulgaria can be subject to tailbacks of up to 17km and delays of up to 30 hours. (Paragraph 67)

16.The UK automotive sector relies on highly integrated supply chains. Delays at the border will create disruption and inefficiency for businesses relying on components arriving "just in time" and in the correct sequence. Failure to maintain these processes risks putting the UK automotive sector at a competitive disadvantage in a highly competitive industry. Planning for a no deal has also already placed a substantial cost on the UK automotive sector and has had a chilling effect on investment in the sector. (Paragraph 68)

17.It is clear that a no deal exit would result in the UK automotive sector—a great British success story—being put at a competitive disadvantage. (Paragraph 69)

Food and farming

18.The Government’s provisional no deal tariff schedules would allow many agricultural products to enter the UK tariff-free while UK producers would face high tariffs exporting to the EU, currently the market for over two-thirds of UK agri-food exports. Sheep meat would face a tariff approaching 50%, bringing the viability of that sector into question. While on the island of Ireland, products moving from south to north would not face tariffs but those moving north to south would. Northern Irish milk products would no longer be certified to cross the border to be processed, putting the continued business of Northern Irish milk producers at risk. (Paragraph 82)

19.Requirements for customs and sanitary and phyto-sanitary checks at the border are expected to create delays in agri-food supply chains, 40% of which currently pass through the short straits crossings to Dover and Folkestone, the busiest crossings most likely to be subject to delay. Delays at the short straits are likely to lead to selective and unpredictable shortages in certain foodstuffs, as well as price increases. (Paragraph 83)

20.A no deal exit will also see the UK cut off from the European Food Safety Authority and Rapid Alert System for Food and Feed which ensures that food health risks can be quickly notified and managed. We call on the Government to clarify urgently what replacement provisions will be put in place to ensure the safety of the UK’s food. (Paragraph 84)

21.The Department for Environment, Food and Rural Affairs has worked constructively with the food and farming sectors. However, we have no reason to doubt the concern that no deal would lead to some interruptions to food supplies in respect of certain products or to doubt the analysis of the NFU that no deal would be "disastrous" for UK farming. (Paragraph 85)

Pharmaceuticals and chemicals

22.The success of the UK’s chemical and pharmaceutical sectors rests on highly-integrated just-in-time supply chains. A disorderly no deal would disrupt these supply chains overnight, and, according to the Government’s own figures, would reduce GVA for the pharmaceutical and chemical sectors by over 20% over 15 years, compared to what it would have been had the UK not left the EU, as a result of tariff and non-tariff barriers. Pharmaceutical industry representatives were clear in evidence to us that no deal is a leap into the unknown, but that it would likely harm the life sciences sector and increase risks to patient safety, affect the supply of medicines and could lead to price rises for the NHS. For the chemical industry, which is at the top of supply chains for numerous other sectors, disruption at the border will have profound consequences for UK manufacturing, with resulting costs to the UK economy. (Paragraph 117)

23.Under no deal, chemical and pharmaceutical companies operating in the UK will be cut off from EU regulatory systems and databases, which protect the environment and patient safety. Companies operating in both markets will need to register chemicals or seek marketing approvals for drugs twice, in the UK and the EU, an expensive and bureaucratic process that will reduce the attractiveness of doing business in the UK. Chemical companies will need to undertake new commercial negotiations with competitors to secure data needed to register chemicals. For the pharmaceutical sector, no deal will mean the UK’s relegation from the first to the second league of international markets, and the likelihood of longer waiting times for certain medicines as a result. (Paragraph 118)

24.The EU has said that in the event of no deal, the UK will be treated as a third country and there would be no provisions in place on the exchange of data between the two entities. This carries harmful consequences for the life sciences sector which relies on the exchange of data for clinical trials, pharmacovigilance and the detection of unsafe or counterfeit medicines. The risk of any reduction in patient safety is unacceptable. The industry has already invested in the implementation of the Falsified Medicines Directive and the Government must set out urgently options for a replacement safety framework to eliminate the risk of unsafe and counterfeit medicines entering the UK supply chain. (Paragraph 119)

25.The manufacturing process for pharmaceuticals and chemicals often entails components crossing borders multiple times. The sudden introduction of tariffs would therefore seriously challenge the viability of the two industries’ supply chains. While the Pharmaceutical Tariff Elimination Agreement would soften the impact of a no deal based on WTO terms, it has not been updated for nine years and does not cover a wide range of finished pharmaceuticals, components and equipment, meaning tariff barriers would be imposed on the newest, most innovative medicines and components that are traded between the UK and the EU. (Paragraph 120)

Research and higher education

26.The UK is widely recognised as a world leader in science and research. A number of UK universities consistently rank in the top 50 worldwide. The UK’s economic wellbeing and industrial success is enhanced by its cutting-edge scientific and technological innovation. (Paragraph 135)

27.The Government has made positive strides towards supporting Higher Education and research through an immediate post-exit funding crisis through the Horizon 2020 underwrite. The Settled Status Scheme is also providing some certainty for long-term researchers and academics. However, the overwhelming message we received from this sector was that leaving the EU without a deal would cause a short-term shock and longer term reputational damage from which the UK Higher Education sector would struggle to recover. (Paragraph 136)

28.Anticipation of no deal has already precipitated a decline in applicants to research and technician roles and for UK based grants. EU students, who form a vital part of the highly skilled diverse student population in the UK, are turning down places because of continued uncertainty and modelling has suggested this could have severe consequences, including course closures, for some academic institutions. The UK is losing out on high profile research projects as funding uncertainty is leading to more projects being EU based. (Paragraph 137)

29.Although the scope exists to negotiate association to many EU projects, this is unlikely to be straightforward in the event of an acrimonious no deal. (Paragraph 138)

Conclusions

30.It has been suggested that the UK could leave the EU without a deal and rely on Article XXIV of the GATT to maintain tariff-free trade with the EU in the absence of a negotiated agreement. Article XXIV is the GATT provision that allows for an interim agreement between two parties in anticipation of a free trade agreement or customs union. It requires an agreement between the two parties, a plan as to how the end state will be reached, and for this agreement to be notified to all parties to the WTO. By definition, leaving without a deal means there is no agreement. Article XXIV does not provide a means to mitigate the risks to EU-UK trade in the event of a no deal exit. (Paragraph 139)

31.It is clear from the evidence that we have received in preparation of this report that the economies of the UK and the EU27 are closely entwined through highly integrated supply chains operating in the car industry, other areas of manufacturing and the agri-food sector. UK exports of goods and services to its largest and closest market also operate on the basis of frameworks of regulatory provision applicable to transport of food produce, pharmaceuticals, chemicals, automotive parts and the flow of data. The UK’s exports of services and its higher education system rely on agreed provisions on recognition of qualifications and frameworks for collaboration in research and student exchanges. A no deal exit would represent a sudden rupture for all of these sectors. A no deal, non-cooperative relationship cannot be the desired end state for UK-EU economic relations. The closeness of the economic relationship is most evident in the agri-food sector on the island of Ireland. Those businesses that have not prepared for no deal will clearly be more affected than those that have. (Paragraph 140)

32.The EU has consistently maintained that the Withdrawal Agreement, including provisions for the settlement of the UK’s financial obligations, guarantees for citizens’ rights and provisions to ensure that there is no hard border on the island of Ireland, will not be re-opened and that, in a no deal scenario, discussion of future cooperation would require settlement of these three issues as a pre-cursor to any further negotiation. The UK would also risk a great deal of goodwill by pursuing a no deal exit. (Paragraph 141)

33.Some have argued that a no deal exit would bring the EU “back to the table" and that the UK would secure a better deal as a result. This is, at best, a gamble. At worst, it could lead to severe disruption of the economy, pose a fundamental risk to the competitiveness of key sectors of the UK economy, and put many jobs and livelihoods at risk. (Paragraph 142)

Read the full report HERE

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