EU ReferendumA guide for business

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Table of contentsTHE EU AND UK BUSINESS ............................................................................................................................ 1

Introduction ..........................................................................................................................................................................1.1

The European Union Single Market – What does it mean and why does it matter? .............................................. 1.2

The Single Market and UK Business ................................................................................................................................. 1.3

Regulation............................................................................................................................................................................. 1.4

The costs of EU regulation ..........................................................................................................................1.4.1

The benefits of ‘regulation’? ...................................................................................................................... 1.4.2

Labour & Migration ............................................................................................................................................................. 1.5

Inward Investment .............................................................................................................................................................. 1.6

BREXIT - THE IMPLICATIONS ....................................................................................................................... 2

Introduction ......................................................................................................................................................................... 2.1

How might the EU react to a vote to leave? .................................................................................................................. 2.2

The process of leaving the EU .......................................................................................................................................... 2.3

What would ‘Brexit’ look like? .......................................................................................................................................... 2.4

Membership of the EEA – ‘The Norwegian Model’................................................................................ 2.4.1

Bespoke bilateral deals – ‘The Swiss or Canada model’ .......................................................................2.4.2

A ‘WTO’ scenario ..........................................................................................................................................2.4.3

What would Brexit mean for the UK’s global trade agreements? .............................................................................. 2.5

What would Brexit mean for regulations affecting business? ....................................................................................2.6

What would Brexit mean for labour & migration? ....................................................................................................... 2.7

What would Brexit mean for inward investment? ........................................................................................................2.8

Uncertainty and Brexit ........................................................................................................................................................2.9

REFERENCES .................................................................................................................................................... 3

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1.1

The referendum on Britain’s membership of the European Union represents one of the most significant decisions the UK public has faced for decades. Both leaving and staying will have profound consequences for the UK economy, the UK’s place in the world and for the future trading climate of UK businesses.

At the same time many businesses tell Business West that they feel the quality of information in the current referendum campaign has been poor. For the impartial observer, much of the campaigning so far has been confusing, unclear and delivered with significant levels of personal animosity.

Business West has set out to identify and explain some of the key issues that concern businesses. Though there are various factors which will influence individual voting decisions, here we explore the issues relating to the EU and Brexit that will be most pertinent to business.

The European Union operates a single market which

removes economic barriers between member states,

allowing free movement of goods, services, capital and

people.

As a free trade area and customs union, the EU has

removed all tariff barriers and customs checks on trade

within its borders. More than this, the single market aims

to remove the ‘non-tariff barriers’ that restrict and add to

the costs of trade by harmonising regulations and product

standards across its member states.

In economic theory, a larger market means greater

efficiencies of scale, greater competition, higher levels of

foreign direct investment and higher levels of productivity

– the main reasons why many economists believe that the

UK’s membership of the larger European single market

has been beneficial.

With 500 million people and a combined GDP of $18.5

trillion, the EU represents the world’s largest internal

market. It also has the deepest levels of economic

integration between a group of nation states.

As a customs union with a common external tariff, the

EU conducts trade negotiations with third parties as

a single bloc. The UK influences EU trade negotiating

policy through our seat on the European Council and its

diplomatic power within the European Commission.

1.2 The European Union Single Market – What does it mean and why does it matter?

The EU and UK business

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1.3 The Single Market and UK Business

The UK has traditionally held strong trade links with the EU. In 2014, the 27 other EU members accounted for 44% of the UK’s exports in goods and services and 53% of its imports. While strong economic growth in many developing countries outside the EU has increased the importance of these markets to UK trade, the EU remains by far our largest trading partner (see Figure 1).Though the proportion of UK exports to non-EU markets is growing, in volume terms our recent growth in exports has been larger to the EU (see Figure 2).

Advocates of continued EU membership stress that the ability to import and export goods freely and simply within the single market has enabled many UK businesses to trade successfully with the EU, increasing their market size and profitability. Unrestricted access to this market, without tariffs, quotas or customs controls, has also allowed domestic firms to enter into pan-European supply chains and exploit the economies of scale that can drive wider competitiveness.

In contrast, those who want the UK to leave the EU suggest that being part of the single market has negatively impacted upon the ability of the UK to export to other markets worldwide and has added additional costs that have made the UK less globally competitive (see Regulation section).

“Free movement of goods across the EU without trade barriers is a huge positive to our operations.” Nextivity

“It’s easy to trade with Europe and we like doing so. The single market makes it a seamless process.” Ted&Muffy

“This is a once-in-a-lifetime opportunity to allow us to negotiate trade deals around the world with countries that the EU has failed to do because of the conflicting priorities and interests of all the member countries.” Construction and Development company, Cheltenham

1.4 Regulation

As single market members, the UK and its businesses are subject to a common set of regulations that apply across the European Union. The subject of regulation is one which prompts different reactions from different businesses.

Regulation is one of the main concerns relating to EU membership raised by Business West members. At the same time, other members emphasise the benefits of having ‘one set of rules’ that allows them to trade efficiently across Europe.

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Figure 1

Figure 2

1.4.1 The costs of EU regulation

The cost of EU regulation can be heavy, particularly for smaller businesses that trade solely on a local scale.

27% of West of England firms surveyed in 2014 indicated that the EU’s Health & Safety regulatory framework negatively impacts their business, for instance, and 24% suggested that the Working Time Directive has a similarly negative impact.¹ Product regulations affecting certain industries are also commonly cited by businesses, such as ‘REACH’ in relation to chemicals and ‘Biocides’ covering biocidal products.

Conforming to these standards can be technically demanding, time-consuming and costly, particularly for SMEs lacking designated compliance departments.

Some businesses are also concerned about the impact of the EU’s broader set of labour and environmental standards, which they feel makes them less competitive.

“EU regulation is no good for small businesses. We feel overburdened with legislation from Brussels” Snows Commercials

“EU regulation has adversely affected my business. I used to make 20-30 trailers a year, but now this simply isn’t possible because European legislation adds too much cost.” Shaftesbury Trailers

“The continual stream of EU legislation that affects the chemical industry is not only extremely expensive, it is bureaucratic and anti-competition.” H Plus Limited

1.4.2 The benefits of ‘regulation’?

In complex economies, market access is increasingly determined by rules as well as tariffs, and so a common market means common regulations. Increasingly in today’s global economy it is so-called ‘non-tariff barriers’ which present the most significant impediment to trade, where countries design regulations which favour their own companies over those of other countries.

The EU single market aims to remove non-tariff barriers through the harmonisation of product standards. The EU has also attempted to create a ‘level the playing field’ in areas that can impact upon business competition, for example in environmental regulations and the enforcement of EU-wide employment law.

Many UK firms which trade with the EU value this common regulatory framework and the way it allows them to compete on an equal footing with their European counterparts. It enables them to make products to one set of standards in the knowledge that they can be sold across the whole of the European Union. When surveyed in 2014, Business West members said that “harmonisation of standards across the EU” was the second most important benefit for their companies of EU membership, after access to a larger market.² The UK has historically had a strong record of influencing EU standards and regulation, with the UK currently occupying the second highest number of regulatory standard committees after Germany. Leaving the EU would mean the UK could no longer formally influence EU rules, yet it would still have to comply with them if it wanted continued access to the single market.

In the context of the single market, those in favour of EU membership view compliance with EU regulation as a quid pro quo for membership: allowing UK companies unimpeded access to other markets in Europe requires the UK to offer a level playing field to European firms in return. Therefore the UK companies that benefit least tend to be those that trade solely at a domestic market level, whilst those that benefit the most tend to be exporters.

In certain sectors EU rules can also open up new global markets to UK firms without having to duplicate standards. Other regions often design their own rules around EU benchmarks. In some sectors the European Union has become an important regulatory standard for the rest of the world, and hence the UK has been able to influence regulation whilst attracting Foreign Direct Investment.

One example is in the mobile telephone sector, where European and UK companies such as Vodaphone and Orange have been at the forefront of setting EU rules,

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which have in turn been influential globally. There is one set of regulatory standards across Europe, notably the Radio and Telecommunication Terminal Equipment (R&TTE) directive. Harmonised standards here allow UK companies ease of access into markets across Europe, promoting economies of scale and reducing costs.

“European standardization is a very important factor in our business, and removes the need for country-specific type approvals.” Nextivity

“With a common regulatory regime, we know we can sell in any EU country. Many other countries around the world also comply with CE marking, which represents a real advantage.” Heber

“Our access to the European market is conditional upon our holding the necessary approvals under the European Pressure Equipment Directive (PED). One of the key functions of the PED is to ensure common standards, and critically from a business perspective, a level playing field in the market place.” Seetru

1.5 Labour & Migration

The free movement of people is a key tenet of the single market. It has allowed UK firms to recruit employees with specialised skill sets easily from across the EU, without the need for work permits. Many businesses value the way this has helped to plug gaps within the domestic workforce. Studies have shown that EU migrants tend to be more educated, younger, more likely to be in work and less likely to claim benefits than the UK-born.³ Some commentators and businesses, however, are concerned that immigration has led to wider pressures on UK public services and on UK quality of life. The ability to recruit without paperwork is viewed here to represent a ‘lack of control’ rather than a benefit to business.

“25% of our employees are non-UK born EU nationals, who were recruited locally and hold positions which were open and advertised to all architects.” O’LearyGoss Architects

“We value the ability to recruit the most skilled and progressive people from any EU country.” Gardiner Bros & Co

“The biggest threat by far to the UK economy is the strain huge immigration numbers will put on our local services and the education of UK nationals. Although some immigration helps reduce the shortfall in skilled resources and also provides valuable unskilled resource in some areas, it is significantly outweighed by the numbers coming into the UK.” Engineering business, Bristol

1.6 Inward Investment

Though there are many reasons why firms invest in the UK, one major consideration for large investments is market size. Some international companies prize access to the single market, and Britain’s position within the EU has almost certainly served to increase its attractiveness to international investors. Indeed, over three quarters of foreign investors cite access to the European market as a reason for their investment in the UK (E&Y, 2016)⁴. We currently have the world’s third largest Foreign Direct Investment stock, with its associated benefits for productivity and economic growth.

The EU itself is also a major source of inward investment into the UK. In 2014, EU countries accounted for £496 billion of the stock of inward Foreign Direct Investment, 48% of the total.⁵

Others argue that the UK’s large domestic market, respected legal institutions and sound business regime, along with the weight and mass of experience and expertise in certain sectors (for example the City of London), make it an attractive location for inward investment regardless of its access to the single market.

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2.1

There is considerable uncertainty around what the UK’s relationship with the EU might look like following a vote to leave. The precise nature of this relationship is important, since different ‘post Brexit’ options will have significantly differing implications for the way in which UK businesses are likely to be impacted.

At present there is no common proposal being put forward by the campaign to leave the European Union – although there are a limited number of options available, based on the precedents set by the European Union in its relationships with other countries and based on the global trade rules set out under the World Trade Organisation.

Within these ‘post Brexit’ options there is a tension between what is best in terms of access to the European market, and hence for UK exporters, against what political objectives many who seek to leave the EU want (for example full control over immigration, not paying money into the European Union budget, not having to comply with European regulation).

In short, securing the best access to the European single market means giving up control of those things that are motivating people to vote to leave. This means that many of the options that are best for UK businesses may not have political support in a post Brexit UK renegotiation position. This uncertainty is compounded by the political uncertainty of who will lead the UK government in the event of a Brexit (and the possible resignation of David Cameron), along with the political uncertainty around how the remaining members of the European Union are likely to treat a Britain that has voted to leave. Opinion is sharply divided over the likely influence that the UK could wield over other EU members and the incentives those members would have for offering the UK an attractive deal.

2.2 How might the EU react to a vote to leave?

How other EU member states react to a UK exit is a critical, but unknown, factor in determining the prospects for the UK.

These political dynamics are hard to quantify in advance – and add to the general level of uncertainty for UK businesses.

Those in favour of leaving believe the UK’s economic size and stature guarantee that the EU would come to favourable terms with a departing Britain – and point out the EU’s trade surplus with the UK. The UK earns £222 billion a year through exports to the EU, but the EU earns £267 billion a year exporting to the UK.⁶

Others fear that the political dynamics of Brexit are likely to increase the political and economic incentives for remaining EU members to ‘punish’ the UK with an ungenerous exit deal. This view asserts that the EU would be more likely to turn inwards and would want to give the UK ungenerous terms to discourage other EU members from leaving.

This cautious view is also wary of the UK’s economic strengths in post Brexit negotiations. The UK’s exports to the EU are worth 14% of UK GDP, but the EU’s exports to the UK are worth only 2.5% of EU GDP.⁷ The UK’s trade deficit is also concentrated in two of the larger EU member states, Germany and the Netherlands, yet the terms of any final UK-EU deal would be decided by all 27 remaining EU member states who may have less economic incentive to offer the UK a favourable agreement. Any one of these remaining member states could veto a final deal. The EU without the UK would also find that the balance of power with the remaining EU member states was more protectionist, given that the UK has been one of the driving forces of further EU liberalisation.

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How individual EU member states would react and what their domestic economic lobbies would do is hard to second-guess in advance – would French farmers and Italian manufacturers campaign for trade barriers to be raised against the UK? To what extent would Germany place the interests of its exporters above its major foreign policy objective of securing the stability of the European Union? Would the UK government be prepared to raise tariffs on EU exports to make its negotiating power as a net importer meaningful?

Article 50 – the only established legal way to leave the EU – is a major issue here. The dynamics of Article 50 are inherently biased against the country leaving. There is no guarantee the UK would find the proposed terms acceptable.

Businesses might also question whether the climate for doing business with Europe following Brexit is likely to be as favourable as it is now.

“To withdraw would be very damaging. It would cause a backlash from Europe and create a bad feeling which would make it tougher to do business”. BOXARR

“The EU promotes its own interest, so if the UK were outside, we would probably find trading with them more difficult. From the perspective of our European customers, not being in the EU would just be another reason not to buy from us.” Foundrax

“I fear that if we leave the EU our customers will just see it as being that bit harder to do business with the UK and so will opt to use EU suppliers wherever possible. Anything which makes the UK less easy to deal with from the perspective of Europe may be the difference between us getting a contract or not.” Biral

Other businesses, however, remain confident that healthy trading relationships will persist irrespective of Britain’s membership of the EU:

“Trade does not depend on belonging to the EU. Supply and demand will rule and rise above such matters.” Printing forme manufacturer, Bristol

“The UK is a unique trading nation and one that is technically and financially inventive. This is valued by both Europe and the world at large. Although there will be a minor risk in leaving Europe initially, and some work to do in re-negotiating some trade arrangements with other countries, our resourcefulness should not be under-estimated.” Engineering business, Bristol

2.3 The process of leaving the EU

There is no relevant precedent that can be used to understand exactly how the withdrawal process would work or how the EU might treat an exiting country.

The legal basis for the UK leaving the EU is set out in Article 50 of the Lisbon Treaty. Article 50 states that the terms of departure are decided by the remaining members of the EU, without input from the departing member. On paper, this means that the UK will have a very limited say on the terms of its exit. Once Article 50 is triggered there is no turning back, it excludes the UK from key decisions as well as the final vote and it leaves the EU in charge of the timetable during two years of negotiations, following which the UK could be presented with a ‘take it or leave it’ deal.

There are however disagreements about whether Article 50 would be triggered immediately after a Brexit vote (David Cameron says it will, Michael Gove says it won’t) and what pre-negotiation might happen if it isn’t triggered immediately. Supporters of Brexit say that the UK could use its broader diplomatic influence to improve its negotiating position after a vote to leave.

During the negotiation period, EU laws would still apply to the UK.

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2.4 What would ‘Brexit’ look like?

Three versions of ‘out’ are commonly put forward:

2.4.1 Membership of the EEA – ‘The Norwegian Model’

This option would see the UK leave the EU but become a member of the European Economic Area (EEA). Under this scenario, the UK would largely retain access to the single market and thus maintain most of its economic and trading relationships with the EU. Norway, for example, has extensive access to the single market through its membership of the EEA.

In return for this access, however, Norway remains bound by the four EU freedoms of goods, services, capital and labour, and is obliged to observe all EU regulations relating to the single market. The UK – including small companies only selling on the UK market - would still have to comply with EU regulations, although it would lose any formal ability to influence the making of these regulations. Norway makes a contribution to the EU budget estimated to be 91% of the UK’s current net payment per head⁸, and cannot vote on legislation in the European Council or European Parliament.

The UK would, under this scenario, no longer be bound by the Common Agricultural and Fisheries Policies, and would no longer have to conform with the rest of the EU in areas such as regional policy or judicial co-operation. It would no longer be party to the EU’s trade deals with the rest of the world.

In terms of economic impact, the Norway option would give the UK a lower but reasonable level of market access into Europe, but it could have negative consequences for UK companies over the medium term.

Outside the customs union, UK firms exporting to the EU would face additional administrative costs, with all goods entering the EU needing to be declared to the customs authorities. The relevant customs form has more than 50 boxes requesting information, and the guidance is 78 pages long. It may involve providing documentary evidence proving that products are either made inside

the EEA, or that they comply with product-specific rules. Depending on the nature of the goods in question, additional documents such as customs value declarations or inspection certification might also be required. As a consequence, UK firms in this scenario would likely incur both time delays and costs.

With its complex supply chains cutting across borders in both manufacturing and services, the impact of not being a member of the customs union is likely to be more significant for the UK than for Norway, which relies more heavily on exports of raw materials and other primary products, notably oil, gas and fish.

A lack of influence over EU regulations may give rise to discrimination against UK goods via ‘non tariff barriers’, in which EU member countries design regulations to favour their own companies over UK companies. For Norway and its primary goods exporters, regulatory discrimination is not such a problem. For the UK, however, whose exports tend to be in sophisticated manufacturing, services and financial products, this form of discrimination poses more of an economic threat.

The Norwegian option would also mean that the UK would lose the ability to continue to promote the implementation of a single market for services. As services dominate the UK economy, this would forgo the future economic opportunities associated with this. It is also unclear whether the Norway option would include full access to the single market for UK financial services – there is likely to be a tough negotiation with remaining EU members to try and secure continued ‘passporting’ rights for the City of London.

Although the Norway option would give the UK the best alternative level of market access into the single market outside of EU membership, having to continue to comply with EU regulations, contribute to the EU budget and allow free movement of labour for EU citizens would make this option politically unpopular. Both Nigel Farage and Michael Gove have said they would not favour a ‘Norway’ option.

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2.4.2 Bespoke bilateral deals – ‘The Swiss or Canada model’

A number of countries have negotiated bilateral trade agreements with the EU. Two of the most developed agreements are those of Switzerland and Canada.

The Swiss Model

Switzerland is not a member of the EU or EEA, but through a complex set of over 120 sectoral agreements has tariff and quota-free trade with the EU on most goods, with the exception of agriculture. In return for tariff-free access to the EU goods market, it has to ensure domestic legislation is appropriately aligned with that of the EU and it adopts many of the rules governing the single market (though it is not bound by social and employment regulation). Like Norway, it has very limited influence over the single market rules to which it complies. Switzerland accepts the free movement of people and contributes to the EU budget, estimated to be 45% of the UK’s current per capita contribution.⁹ It is able to pursue its own trade agenda with third parties outside the EU.

Switzerland and the EU have not reached a comprehensive agreement covering trade in financial and other services. This would be a concern for the UK if it were to pursue this model, given the importance of this sector to our economy. Swiss banks have such large operations in London because it is the only way they can offer their services across the continent without the ‘passport’ conferred by EU membership. The research firm Capital Economics estimates that “without passporting rights, it is conceivable that exports of financial services to the European Union could fall by half, or about £10bn.”¹⁰

The EU has also expressed dissatisfaction with the nature of its relationship with Switzerland, where agreements are concluded on a case-by-case basis as the internal market is extended. The EU Council has said this approach has become “unwieldy to manage and has clearly reached its limits”.¹¹ A post Brexit deal of this variety is likely to take a long time to negotiate, prolonging the period of uncertainty for UK businesses.

The Canada Model

An alternative bilateral model is that of the EU-Canada free trade deal, known as the Comprehensive and Economic Trade Agreement (CETA), agreed in September 2014 though yet to be ratified.

This is based on a single comprehensive agreement instead of many sector-by-sector agreements, and offers tariff-free access to the EU market in industrial and fisheries products and the majority of agricultural products. The CETA does not involve Canada paying into the EU budget or accepting the free movement of people. As the most comprehensive free trade deal the EU has negotiated to date, it has been cited by the ‘Leave’ campaign as a possible template for the UK to follow. It is still some way, however, from replicating the level of access to the single market that the UK currently enjoys as a member of the EU.

Free Trade Agreement rules set by the WTO allow countries to protect 10% of trade from liberalisation – which means that in most Free Trade Agreements many of the most politically sensitive products are exempt. This often includes many agricultural or processed food and drink products or politically sensitive manufactured products. It is unclear which products European countries would seek to protect in a future UK-EU FTA.

Permanent exclusions exist in the Canadian agreement for key agricultural products such as eggs and chicken, while duty-free access for a number of other farming products will only be guaranteed up to certain quantities. Tariffs for goods such as car exports will also remain in place for up to seven years.

Canadian exporters are also required to comply with EU product standards and technical requirements, over which they have no say, and the Canadian authorities lack the ability to block measures that put its companies at a disadvantage.

A traditional FTA would also exclude sectors of particular importance to the UK economy – most notably services and financial services. Like the Swiss case, the EU-Canada deal only grants limited services liberalisation, which does not include passporting provisions for financial services.

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As with Norway, outside the customs union, both Swiss and Canadian firms exporting to the EU face bureaucratic customs checks and rules or origin stipulations.

2.4.3 A ‘WTO’ scenario

Here the UK would revert to conducting trade with the EU under the rules of the World Trade Organisation (WTO). These rules represent a minimum threshold; a deal of this nature would be the least integrated economic relationship the UK could have with the EU.

Leaving the EU in this scenario would see the UK lose access to the single market, with exporters becoming subject to the EU’s common external tariff. Customs procedures and rules of origin requirements would come into force, and the UK would be likely to face non-tariff barriers in the cross-border provision of goods and services. For foreign investors, the UK would also have no better access to the EU market than the other 162 WTO members, so would lose much of its attractiveness as an investment destination based on a desire to access the EU single market.

Under this scenario the UK would no longer be bound by the four EU freedoms and would no longer have to make fiscal contributions to the EU budget. The Government would gain greater control over regulatory policy and external trade policy, free to pursue its own trade deals with other economies.

There are disagreements over what the WTO option would mean for UK trade policy. Some economists supporting Brexit, such as Patrick Minford, argue that this option would allow the UK the freedom to lower all its external tariffs to zero and implement complete free trade – which would benefit UK consumers with lower prices. However, this would have a negative impact on some UK producers – notably UK farmers who would have to compete with the world’s cheapest producers – and is likely to encounter significant UK domestic political opposition.

WTO freedoms would therefore come at the cost of inferior EU market access for UK exporters. The UK government estimates that the WTO option would be the most damaging for the UK economy.

***

According to the respected Eurosceptic research body, Open Europe: “From a purely trade perspective, EU membership remains the best option for the UK. All the alternatives come with major drawbacks and would all, except for the ‘WTO option’, require negotiation with and the agreement of the other member states, which would come with unpredictable political and economic risks.”¹²

2.5 What would Brexit mean for the UK’s global trade agreements?

In trade negotiations with the rest of the world, the UK faces a trade-off between greater negotiating control and greater negotiating power. Brexit would give the UK greater flexibility to strike new trade deals with non-EU countries, but would diminish its power to drive better market access into foreign markets for UK companies.

A Brexit would allow the UK to negotiate its own trade deals with non-EU countries, and to seek trade agreements tailored to the interests of UK businesses and consumers. It would no longer have to negotiate as part of a wider EU bloc. This would give the UK greater flexibility in trade negotiations and allow it to strike deals with faster growing economies across the globe. It may, however, need to renegotiate some 30 existing preferential trade deals which the EU currently has with over 50 partners. The EU has preferential trade agreements with 53 countries, covering 45% of world trade, and it is actively negotiating with China, India and the USA.

Like many other areas of the EU referendum debate, there is sharp disagreement as to the degree of influence the UK would have globally following a vote to leave the EU.

Those who advocate Brexit point out that the UK, on one measure, is the fifth largest global economy, and would be able to command favourable trade terms with its global partners. Many others, however, believe that the UK would have less bargaining power on its own (with a population of 64 million) than the EU enjoys as a market of 500 million.

In trade negotiations, smaller market power is likely to mean that the UK has narrower ‘offensive’ negotiating objectives (concentrating on winning market access

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in some of its key sectors, such as financial services) and has to give more ground in its ‘defensive’ position (giving greater market access to global manufacturers or agricultural producers, or giving global companies greater rights to compete in public services for example). This may mean greater benefits for some UK sectors, but greater costs for others.

The UK already has low tariffs and is a major net importer, which may reduce its negotiating leverage and mean greater concessions and lower levels of market access are likely if major markets are to negotiate with us.

The rise of other regional trading blocs such as NAFTA, ASEAN and MERCOSUR mean that the trend in global trade has increasingly been towards bloc-by-bloc negotiations. This could make it difficult for the UK to promote individual negotiations with major economies. There is also a question mark as to the appetite of other countries to start new negotiations, given the rise in protectionist sentiment in many countries. President Obama has stated that Brexit would put the UK at the “back of the queue” in new trade negotiations with the USA.

2.6 What would Brexit mean for regulations affecting business?

As the ‘out’ scenarios above indicate, the extent to which the UK would be bound by EU regulation following Brexit will be bound up with the nature of the trade deal negotiated. What seems clear is that continued access to the single market will require continued adherence to its rules.

EEA membership with its comprehensive market access would require the UK to implement all internal market legislation, meaning small UK firms selling only on the domestic market would still have to comply with EU regulations. In a Swiss or Canada-style FTA arrangement, EU product standards would be retained for exporting companies, though social and employment regulation could be dropped. A deal of this variety would allow the UK to legislate independently on employment law, potentially reducing the burdens on employers caused by EU legislation such as the Working Time Directive and Agency Workers Directive. In the EEA, FTA and WTO

scenarios, the requirement to comply with new customs checks and EU rules of origin would introduce a new administrative burden to businesses which export to the EU.

In any event, to trade with the EU the UK would still have to conform to all its technical standards (an increasing number of which are being adopted by other countries around the world). Crucially, it would be very difficult for the UK to have any influence over these regulations if it were not a member of the club.

Overall, the extent to which the burden of regulation on UK business could be reduced following a Brexit is unclear.

According to the OECD, the UK currently has one of the least regulated enterprise sectors and labour markets in the world. Many of the regulations that cause most harm to economic growth and businesses are actually home grown – for example our planning laws greatly inflate the cost of doing business in the UK, and the new Living Wage is an entirely domestic policy. Many British companies also blame excessive ‘gold plating’ of EU regulation, whereby the UK government serves to strengthen EU directives when incorporating them into domestic law.

“The only problems we have with standards are gold-plating in the UK administration of European standards. We shoot ourselves in the foot by over-egging our application of the standards.” Seetru

In the event of a Brexit it is also hard to know what the political and business pressures will be for retaining or removing certain regulations. UK unions will campaign to keep labour market protections, for instance, and UK politicians may be reluctant to remove legislation on equal pay or environmental protection.

According to the LSE’s Centre for Economic Performance, “It is unclear whether there are substantial regulatory benefits from Brexit. The UK already has one of the OECD’s least regulated product and labour markets. ‘Big ticket’ savings are supposedly from the abolition of the Renewable Energy Strategy and the Working Time

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Directive – both of which receive considerable domestic political support in the UK.”¹³

Ultimately, the UK civil service will either have to keep, remove or reinvent all the regulations currently originating in Brussels.

“It is a mistake to think that we could escape EU regulations if we want to continue supplying into Europe. The danger is that regulations would actually become more complicated.” Biral

“As manufacturers we are a heavily regulated industry, but if we left the EU we would still have to meet EU regulatory requirements.” ACP Solutions

“We are overburdened with EU involvement and incessant red tape increases. The sooner we leave the better.” Snows Commercials

2.7 What would Brexit mean for labour & migration?

The implications of Brexit for the free movement of people between the EU and UK will depend on the nature of the divorce package negotiated. Under a Norway-style deal, largely preserving access to the single market, the UK would continue to accept the free movement of people from the EU. A Canada or WTO scenario, with their associated restrictions in market access, would not oblige the UK to accept this principle. In this scenario, advocates of the Leave campaign have suggested that an Australian-style points based immigration system would be favoured. Such a system would severely restrict the ability of UK employers to hire lower skilled workers from the EU (according to Oxford University’s Migration Observatory, three-quarters of EU citizens living in the UK would not meet current visa requirements for non-EU overseas workers¹⁴). By introducing the need for work permits, this system would increase the cost and paperwork associated with hiring EU nationals for UK businesses. If the UK chose to restrict European immigration in this way, it is highly likely that EU member states would in turn place comparable restrictions on British citizens seeking work within the EU.

It remains unclear what the status of those EU migrants already working in the UK would be under a FTA/WTO arrangement where the UK government chose to place restrictions on European immigration. It has been suggested that EU nationals would be given indefinite leave to remain within the UK, though this has not been guaranteed, and raises questions as to the status of these workers should they leave the UK for any period.

2.8 What would Brexit mean for inward investment?

Access to the European Single Market has consistently been identified as an important element of the UK’s overall attractiveness by foreign investors.¹⁵ As such it seems very possible that a decision by the UK to leave the EU could, if it changes the terms of access to the single market for UK-based businesses, potentially impact the UK’s future FDI performance. Many analysts have suggested that any increase in trade barriers would likely have a knock-on impact on FDI, as EU market access restrictions serve to lower the returns to investment in the UK.¹⁶

Those in favour of Brexit, however, emphasise other factors which make the UK attractive to international investors independent of its access to the single market, such as its competitive business regime and deep integration within global supply chains. They maintain that the UK’s strong record of attracting inward investment would continue post-Brexit.

“Brexit would create profound uncertainty and companies would see investment drying up from Europe and elsewhere. Why would you invest in the UK with such uncertainty?” BOXARR

“The UK is currently a launch pad for investment into Europe. If we left the EU, the long-term incentive to invest in the UK would be weakened.” Foundrax

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2.9 Uncertainty and Brexit

In the short-term following a vote to leave the EU, there is likely to be significant political and economic uncertainty around the UK’s future relationships with other EU countries as new rules are negotiated on trade, regulation and other matters.

Under the rules set out in the Lisbon charter, the official period in which a new relationship would be negotiated is two years. This period can be extended only if all remaining nations unanimously agree – otherwise the UK would revert to WTO rules, with their associated tariffs.

It took Greenland three years to withdraw from the European Community after electing to leave in 1985 – with a population of little over 50,000 and a relatively unsophisticated economy. Canada’s recently-completed free trade deal with the EU took seven years to negotiate and is yet to be ratified by the European Parliament. It took Switzerland and the EU around ten years to put in place the agreements that currently exist between them.

In the short and medium term, such a period of uncertainty during negotiations could manifest itself in increased financial market and exchange rate volatility within the UK, higher risk premiums in credit and equity markets, and reduced business confidence. Uncertainty is likely to impact upon decisions about future investment and business growth, from both local and international investors.

Given the high level of the UK’s current account and budget deficits, there are risks to the UK economy from uncertainty among global investors. Investors may postpone foreign investment in the UK, whilst uncertainty could worsen the ability of the UK government to sell gilts (UK government debt). Mark Carney, the Governor of the Bank of England, has warned of financial instability, higher interest rates and capital flight if Britain voted to leave the EU, saying the country could not depend on “the kindness of strangers” to fund the country’s deficits.

Others believe that this uncertainty has been exaggerated, claiming that business would continue as normal while new arrangements are negotiated. They suggest that it would be in the interests of both the UK and the EU to

strike a post-Brexit trade deal swiftly:

“We have a £50 billion-plus trade deficit with the European Union – they sell far more to us than we sell to them. They lose out - their jobs and their businesses are in danger if we do not sort it out quickly.” Chris Grayling MP

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References

1 Business West QES Survey Results 2014

2 Business West QES Survey Results 2014

3 CEP, 2016. ‘Brexit and the Impact of Immigration on the UK’.

4 Ernst & Young, 2016. ‘UK Attractiveness Survey’.

5 www.parliament.uk/briefing-papers/SN06091.pdf

6 Open Europe, 2015. ‘From a Reluctant European: A memo to the Prime Minister’.

7 Open Europe, 2015. ‘From a Reluctant European: A memo to the Prime Minsiter’.

8 Centre for European Reform, 2014.

9 Centre for European Reform, 2014.

10 www.investmenteurope.net/regions/brexit-loss-of-passporting-rights-could-halve-uk-exports/

11 EU Council of Ministers, 2010. www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/118458.pdf

12 Open Europe, 2012. ‘Trading places: Is EU membership still the best option for UK trade and what are the alternatives?’

13 CEP, 2016. ‘The consequences of Brexit for UK trade and living standards’.

14 Oxford University Migration Observatory, 2016. ‘Potential Implications of Admission Criteria for EU Nationals Coming to the UK’.

15 Ernst & Young, 2014-16. ‘UK Attractiveness Survey’.

16 CEP, 2016. ‘The consequences of Brexit for UK trade and living standards’; PwC, 2016. ‘Leaving the EU: Implications for the UK economy’.

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At a glance...

of business people plan to vote to

remain in the EU

Over a third of businesses feel they need more information before making an informed decision

The majority of firms believe that leaving the EU would pose a risk to the UK economy.62% 78%

39%