9 March 2015

Based on interviews with businesses, trade associations and additional research, Open Europe’s new report – featured in the Financial Times today – looks at eight of the UK’s key exporting sectors, covering half of the UK’s exports to the EU.

The table below sums up our assessment of the initial disruption a Brexit could cause to individual sectors and the chances of these industries gaining similar access to EU markets under a preferential trade agreement as they do now.

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Initial disruption from Brexit would be high for all sectors

All the exporting sectors we assessed would experience initial disruption and uncertainty in the event of UK withdrawal. The 35% of the UK’s goods exports to the EU that could be subject to high tariffs (above 4%) upon exit – such as cars, chemicals and food – and the highly regulated financial services sector would be particularly vulnerable. It is likely that this would spill over to a short-term negative impact on foreign direct investment (FDI). Around half of UK FDI inflows are in financial services, some of which could be at risk, at least in the short term, if market access to the EU is reduced.

Major incentive to conclude a trade agreement covering goods sectors

However, our assessment illustrates that, in the context of a trade negotiation, there is a big incentive for the UK and the EU to conclude an agreement for all the goods sectors we assessed.

For example, for the car industry, leaving the EU’s customs union would be a challenge as it would mean adjusting to new administrative procedures at the EU border and could lead to uncertainty over EU-wide supply chains – on average, only 37% of the value of the supply chain that goes into a UK manufactured vehicle originates in the UK.

But the UK runs a trade deficit with the EU in cars of £13.9bn, of which Germany accounts for £10.85bn, which the EU would clearly wish to maintain and the experience of auto supply chains in the US, Canada and Mexico under the North American Free Trade Agreement (NAFTA) illustrates a customs union is not a prerequisite for an integrated, cross-border car industry.

It should be noted that in all goods sectors UK firms would face new administration costs at the EU border, due to rules governing foreign content in their products and, in the case of chemicals and food, a deal would potentially come with strict conditions such as adhering to the EU’s high regulatory costs or maintaining tariffs with the rest of the world to the cost of consumers – negating some of the potential benefits of Brexit, such as cheaper food prices outside the Common Agricultural Policy.

Services sectors such as finance could be more exposed

The story is different in the financial services sector – where the UK runs a major surplus with the EU of £19.9bn. Not only the trade surplus changes the incentives on the EU side, the EU has an established policy of only offering firms in non-EU countries – including Switzerland – limited cross-border access to EU markets predicated on strict conditions. Only European Economic Area membership (the Norway position) offers full access, but also involves accepting all the EU rules without votes.

Post-Brexit, the centre of gravity within the EU may shift towards a tougher regulatory regime for accessing the single market. The European Parliament’s hostility to Anglo-Saxon finance, in particular, could prove a major stumbling block.

All sectors would suffer from the UK’s loss of voting rights in the EU, but for industries such as the financial sector the impact could be greater since the barriers to entry could be increased by new EU regulations over which the UK has no votes.

Benefits of Brexit?

At the same time, there clearly are potential benefits. Outside the EU, Britain would be nimbler and would regain control over trade policy and, possibly, a whole range of regulations. The chemicals sector would, for example, hugely benefit from a more cost-effective emissions reduction policy, currently impossible due to EU rules. Car manufacturers could benefit from a trade deal with China (unlikely to happen in the EU). The Scotch whisky industry, accounting for 25% of UK food and drink exports, could really do with a trade deal with India  – a big consumer of whisky – where it currently faces a 150% tariff.

Meanwhile, the future of financial services inside the EU is shrouded in uncertainty as well, with the risk of the single market becoming increasingly dominated by Eurozone interests at the expense of vibrant financial markets. Brexit could potentially offer the opportunity to reduce or better tailor regulation so as to increase the sector’s competitiveness in global markets.

Exactly what would happen to these sectors will depend on the precise terms of any exit agreement and new UK-EU relationship. However, equally important, it would depend on decisions the UK itself would make. For example, to date, the UK has been going further than the EU norm on climate change. And would Ukip voters, and others in favour of Brexit, really be keen on striking a comprehensive trade deal with India with all the implications for ‘cheap, foreign competition’ that could imply?

To this we will turn our attention in our forthcoming comprehensive reports on the macroeconomic and regulatory implications of Brexit, so watch this space.