Economic Consequences of Brexit for the UK and the EU L

Università degli Studi di Modena e Reggio Emilia D

Corso di Laurea Magistrale in

L ANGUAGES FOR COMMUNICATION IN INTERNATIONAL ENTERPRISES AND ORGANIZATIONS

Economic Consequences of Brexit for the UK and the EU

Prova finale di:

Marco Daneri Relatore:

Fabrizio Patriarca

Correlatore

Giovanni Bonifati

Anno Accademico 2018/2019

Abstract

Italiano

A seguito del referendum del 2016 che ha sancito l'uscita del Regno Unito dall'Unione Europea, UE e Regno Unito stanno lavorando alacremente per raggiungere un accordo reciproco che dovrà regolare i rapporti futuri tra le due controparti. Ad oggi, però, la strada da percorrere per ottenere una comunanza di intenti sembra impervia.

Nella prima parte della tesi viene delineata la situazione attuale che sta emergendo dai negoziati tra UE e UK. Passando in rassegna i possibili scenari futuri, si nota che è probabile che il dialogo tra UE e UK si concluda con un nulla di fatto, che culminerebbe nella cosiddetta no-deal Brexit. Nonostante la soluzione maggiormente auspicata sia il raggiungimento di un accordo di libero scambio, il primo ministro britannico Boris Johnson sembra fermo sulla sua convinzione e i mesi futuri saranno decisivi per capire le sorti dell'Unione Europea e del Regno Unito.

Date queste premesse, l'elaborato prosegue con l'analisi delle conseguenze economiche di una Brexit senza accordi tra le parti. L'uscita degli UK dal Mercato Unico Europeo potrà avere esiti negativi sia per l'UE ma soprattutto per l'economia britannica. Gli UK dovranno rinunciare alle quattro libertà fondamentali dell'UE, che permettono a persone, merci, capitali e servizi di circolare liberamente.

L'assenza di tali libertà fondamentali e l'imposizione di barriere tariffarie e non tariffarie inficerà il libero scambio tra le due e accrescerà gli oneri burocratici e i costi delle transazioni. A pagarne dazio saranno soprattutto le piccole e medie imprese e i lavoratori, i quali subiranno limitazioni negli spostamenti verso il Regno Unito.

In seguito sono analizzate le ripercussioni subite da alcuni dei settori principali dell'economia britannica, con le conseguenze che ne derivano per gli stati europei.Tra i settori analizzati, un focus particolare è stato posto su quello automotive, agroalimentare, farmaceutico e finanziario, mettendo in rilievo i principali lati negativi di una no-deal Brexit, tra cui l'introduzione di regole di origine, interruzione della filiera produttiva e dislocazione di complessi industriali.

Per concludere, è stata condotta un'analisi documentale di alcune previsioni fatte nel periodo immediatamente successivo al referendum del 2016, rivelatesi ampiamente errate. Alcune istituzioni avevano infatti predetto conseguenze catastrofiche per l'economia britannica in seguito al trionfo del

"leave". Confrontando le previsioni con i dati effettivi attuali, è possibile giungere alla conclusione che, ad oggi, il dissesto economico e finanziario preventivato da istituzioni del calibro di Credit Suisse e Goldman Sachs non si è assolutamente verificato.

English

After the 2016 referendum that sanctioned the UK's exit from the European Union, the EU and the UK are working hard to reach a mutual agreement that will shape future relations between the two counterparts. To date, however, the road to achieve a common goal seems hard to follow.

The first part of the thesis outlines the current situation that is emerging from the negotiations between the EU and the UK. Looking at the possible future scenarios, it can be seen that it is likely that the dialogue between the EU and the UK will come to nothing, which would culminate in the so-called no-deal Brexit. Although the most hoped-for solution is a free trade agreement, British Prime Minister Boris Johnson seems firm on his conviction and the months ahead will be decisive in understanding the fate of the EU and the UK.

Against this background, the paper continues with the analysis of the economic consequences of a no-deal Brexit between the parties. The exit of the UK from the European Single Market may have negative outcomes both for the EU and especially for the British economy. The UK will have to give up the four fundamental freedoms of the EU, which allow people, goods, capital and services to move freely.The absence of these pillars and the imposition of tariff and non-tariff barriers will undermine free trade between the two and increase bureaucratic burdens and transaction costs. The absence of these fundamental freedoms and the imposition of tariff and non-tariff barriers will affect free trade between the two and increase bureaucratic burdens and transaction costs. Small and medium-sized enterprises in particular will suffer the most from this, as will workers, who will be restricted in their travel to the UK.

This is followed by an analysis of the repercussions suffered by some of the main sectors of the British economy and the consequences for European states. Among the sectors analyzed, a particular focus was placed on the automotive, agri-food, pharmaceutical and financial sectors, highlighting the main negative aspects of a no-deal Brexit, including the introduction of rules of origin, disruption of the supply chain and relocation of industrial plants.

To conclude, a documentary analysis was carried out of some forecasts made in the period immediately following the 2016 referendum, which turned out to be largely wrong. In fact, some institutions had predicted catastrophic consequences for the British economy following the success of the "leave" party. Comparing the forecasts with the current actual data, it is possible to conclude that, to date, the economic and financial collapse predicted by institutions of the calibre of Credit Suisse and Goldman Sachs has by no means occurred.

Deutsch

Nach dem Brexit-Referendum von 2016 arbeiten die EU und Großbritannien hart daran, ein gegenseitiges Abkommen zu erreichen, das die künftigen Beziehungen zwischen den beiden Partnern regelt. Bis heute scheint es jedoch sehr komplex, eine Gemeinsamkeit in der Zielsetzung zu finden.

Der erste Teil der Arbeit skizziert die aktuelle Situation, die sich aus den Verhandlungen zwischen der EU und dem Vereinigten Königreich ergibt. Eine Analyse der möglichen Zukunftsszenarien zeigt, dass der Dialog zwischen der EU und dem Vereinigten Königreich wahrscheinlich ohne eine Einigung enden wird, und wir werden einen "No-Deal" Brexit erleben. Obwohl die am meisten erhoffte Lösung ein Freihandelsabkommen ist, scheint der britische Premierminister Boris Johnson fest überzeugt zu sein, und die kommenden Monate werden entscheidend für das Verständnis des Schicksals der EU und Großbritanniens sein.

Vor diesem Hintergrund setzt das Papier die Analyse der wirtschaftlichen Folgen eines Brexit ohne Vereinbarungen zwischen den Parteien fort. Der Ausstieg Großbritanniens aus dem europäischen Binnenmarkt könnte sowohl für die EU als auch insbesondere für die britische Wirtschaft negative Folgen haben. Das Vereinigte Königreich wird die vier Grundfreiheiten der EU aufgeben müssen, die den freien Verkehr von Personen, Waren, Kapital und Dienstleistungen ermöglichen. Das Fehlen dieser Grundfreiheiten und die Auferlegung von tariflichen und nichttariflichen Barrieren wird den freien Handel zwischen den beiden durch eine Erhöhung des bürokratischen Aufwands und der Transaktionskosten beeinträchtigen. Die Arbeitnehmer werden ebenfalls bestraft, sie werden in ihren Bewegungen nach Großbritannien eingeschränkt.

Es folgt eine Analyse der Auswirkungen, die einige der wichtigsten Sektoren der britischen Wirtschaft erleiden, mit den daraus resultierenden Konsequenzen für die europäischen Staaten. Unter den analysierten Sektoren wurde ein besonderer Schwerpunkt auf den Automobil-, Agrar-, Lebensmittel-, Pharma- und Finanzsektor gelegt, wobei die wichtigsten negativen Aspekte eines "No- Deal-Brexit" hervorgehoben wurden. Insbesondere die Einführung von Ursprungsregeln, die Unterbrechung der Produktionskette und die Verlagerung von Industriekomplexen.

Abschließend wurde eine dokumentarische Analyse einiger Prognosen durchgeführt, die in der Zeit unmittelbar nach dem Referendum von 2016 gemacht wurden und die sich als weitgehend falsch erwiesen haben. Tatsächlich hatten einige Institutionen nach dem Triumph des "leave" katastrophale Folgen für die britische Wirtschaft vorhergesagt. Vergleicht man die Prognosen mit den aktuellen Ist- Daten, so kann man feststellen, dass der von Institutionen wie Credit Suiss und Goldman Sachs vorhergesagte wirtschaftliche und finanzielle Zusammenbruch bis heute keineswegs eingetreten ist.

Index

1 Introduction

2 Brexit: an overview 2.1 Backstop

2.2 Possible trade scenarios between the EU and the UK

3 The economic consequences of no-deal Brexit 3.1 Tariff barriers and non-tariff barriers 3.1.1 Tariffs and their effects 3.2.2 Non-tariff barriers 3.2 Ecomomic growth

3.3 Foreign Direct Investments

3.4 Immigration and low-skilled workers 3.5 Small and medium-sized enterprises

4 Sectors most affected by Brexit 4.1 Automotive sector

4.2 Agri-food and retail sector 4.3 Pharmaceutical sector 4.4 Financial sector

4.4.1 Will London still be the financial capital?

5 Predictions about Brexit that didn't turn out to be accurate

6 Conclusions 7 References

7.1 Bibliographic references 7.2 Sitography

1

1 – Introduction

In my dissertation I focused on Brexit, making an in-depth analysis of the implications that it may have for the UK and the European Union. The exit of the UK from the European Union has set a precedent, whose resolution seems to be complicated. Numerous institutions and research centres have conducted surveys on the subject, making assumptions of the likely economic and financial effects of Brexit. These findings have been the pillars on which my research has been built. By analysing these data, it was possible to outline how Brexit will affect the status quo of the European economic scenario.

The results must be interpreted with caution because, at the time of writing, the political-economic context regarding Brexit is rapidly assuming various shapes. Negotiations between the EU and the UK are underway and their outcome is very tentative. The sources of the data are governmental institutions, think tanks and research centres that have carried out analyses and surveys adopting current figures with the aim of examining the potential outcomes that Brexit will have on the UK and the EU.

First of all, in the first chapter I analysed the current scenario, making a brief excursus of recent events that have exacerbated relations between the UK and the EU. At the moment the two counterparts are trying to find a common ground on future trade policies but they are experiencing a stalemate: it seems difficult for them to come up with a resolution anytime soon and a "hard Brexit" is looming.

In the following chapter I devoted particular attention to the possible economic consequences emerging from a hard Brexit, also called no-deal Brexit. There are many factors at stake, including the introduction of tariff and non-tariff barriers and the implications for foreign direct investment, small and medium enterprises and labour migration to the UK.

After this analysis, I have decided to focus on a number of economic sectors which, according to experts, will be most affected by a hard Brexit. The automotive, agri-food, pharmaceutical and financial sectors are the ones I have taken into consideration.

To conclude, I selected some statements that were made by banking and government institutions in the period following the Brexit referendum in 2016 and compared them with current data. These gloomiest predictions envisaged catastrophic outcomes of Brexit but, actually, the current situation has not turned out to be as disastrous as expected.

2- Brexit: an overview

Four years after the referendum that saw the "leave" prevail over the "remain", the UK has agreed to a definitive separation from the EU.

After many vicissitudes, on 23^rd January 2020 the British Parliament signed the Brexit Withdrawal Agreement, sanctioning the withdrawal of United Kingdom from the European Union. The treaty was then ratified by the Council of the European Union on 30^th January, date from which UK is officially no longer part of the EU.

In addition to a substantial economic contribution to be paid into the EU coffers by the UK, the Withdrawal Agreement provides for a transitional period until 31 December 2020 in order to foster a smooth exit of the UK from the EU. In this period UK will still be part of the EU Customs Union and the European Single Market, enjoying exemption from duties, but it will no longer be a member of the European institutions. Furthermore the UK will also have to comply with the “Community acquis”, following legal rights and obligations common to the members of the EU.

2.1 The backstop

Another crucial element that was taken into account when drafting the Withdrawal Agreement between the UK and the EU is the border separating Ireland from Northern Ireland which, after Brexit, will be the only land border between the UK and the EU. For this reason, the agreement enshrines the so called “backstop”, a kind of “emergency brake” whose aim is to avoid the creation of a physical border between Ireland and Northern Ireland. Such an “insurance policy”¹ should only be used in the event that the UK and the EU do not reach a mutual agreement at the end of the transition period.

According to the Boris Johnson’s new protocol, Northern Ireland should stick to certain regulations of the European Single Market at least until 2024, aligning with laws on goods, health regulation, VAT and many more. After 2024 the Irish Assembly will be able to vote to remain bound by or distance itself from European laws. The first draft of the agreement signed by the former British Prime Minister Theresa May, instead, did not provide for any expiry date and Northern Ireland was to remain in the EU customs union indefinitely. Northern Ireland will therefore be part of the UK customs union but will have to collect taxes on behalf of the European Union, so as to avoid the establishment of customs controls with Ireland. As a result, a customs border will be established in the Irish Sea as

1 Irish Times www.irishtimes.com/news/politics/brexit-explained-why-does-the-border-matter-and-what-is-the- backstop

the whole island of Ireland will remain in the single European market. In this way the Irish economy is safeguarded and at the same time the Good Friday Agreement, which brought to an end the political conflicts between Ireland and Northern Ireland in 1998, is not undermined.

2.2 Possible trade scenarios between the EU and the UK

Another pivotal element on which the future of the UK and the EU will depend is whether or not they will reach an agreement outlining future trade relationships. The two parties are making an effort to negotiate the terms of the trade policy coming into force after the transition period ends but, after much debate, it seems difficult to agree on this issue. One of the possibilities, which to date seems to be very unlikely, was an agreement based on the Norwegian model. Together with Iceland and Liechtenstein, Norway is a member of the European Economic Area (EEA). The EEA members belong to the European Single Market but are not bound by the Customs Union, which allows them to enter into trade agreements with other countries. In addition, they are obliged to comply with European regulations. It is precisely the observance of these rules that turns the nose up at the United Kingdom, which has no intention of becoming a "law-taker" state, thus losing its right of representation in the European institutions.

Although complicated, the hoped-for scenario is the signing of a free trade agreement (FTA) between the UK and the EU, which would entail the reduction of trade barriers, quotas on imports and tariffs.

The UK Prime Minister, Boris Johnson, is fighting for a total departure from the rules imposed by the EU and fiercely advocates the establishment of a free trade agreement similar to that between the EU and Canada. The agreement between the EU and Canada, known as CETA (Comprehensive Economic and Trade Agreement), is not a zero-tariff and zero-quota agreement, so there would still be duties in trade between the EU and the UK if such an agreement were signed. Moreover, CETA does not provide for measures affecting trade in services and finance, which are crucial for the UK.

Therefore the road to commonality of purpose seems to be a very arduous one: Boris Johnson is pushing for a 'zero tariffs' agreement and has no intention of complying with EU rules, saying that if

“other countries like Canada, Japan and South Korea, with which the EU has FTAs, do not have to abide by EU laws, so why should Britain?”². The answer to this question is stated in the "Political

2 The EU and Britain start negotiating a post-Brexit trade deal, The Economist. 1 march 2020.

Declaration setting out the framework for the future relationship between the European Union and the United Kingdom", which explains that the UK will have to conform with a set of common rules and standards concerning “state aid, open and fair competition, social and employment standards, environmental standards, climate change, and relevant tax matters”³ since the deep economic interconnection between the UK and the EU and their geographical proximity. These regulations are

“level playing field requirements” that the UK will have to meet regardless of which trade agreement it enters into, so as to avoid unfair competition towards the EU. This issue has caused a lot of controversy between the parties, as the UK is not willing to meet the requirements set out by the EU after Brexit. In other words “if the UK wants a trade deal that involves zero tariffs (no taxes on goods crossing borders) and zero quotas (no limits on the amount of goods that can be traded), the EU will expect it to sign up to stricter rules than those set out in other recent EU trade agreements with countries such as Canada or Japan.”⁴ Other controversial matters involve financial services, fishing grounds in the UK, security and data protection.

“At the end of the transition period on the 31st of December, the United Kingdom will fully recover its economic and political independence. We want the best possible trading relationship with the EU, but in pursuit of a deal we will not trade away our sovereignty,” as stressed by the Minister for the Cabinet Office Michael Gove, thus marking an increasingly clear-cut distance from Brussels.

In view of this, it seems that the UK is willing to take the hard line, choosing the so-called “Hard Brexit” (or No-deal) option. Boris Johnson, who is a strong supporter of the “Hard Brexit”, has no intention of extending the date of the end of the transition period and is aiming straight for this solution.

3 General Secretariat of the Council of the European Union, Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom, 22 November 2018.

4 Morris, Chris; Brexit: What is a level playing field? BBC News, 21 January 2020.

https://www.bbc.com/news/51180282

3 - The economic consequences of no-deal Brexit

In the event that the UK and the EU fail to reach a mutual agreement, the so-called Hard Brexit will take place (also called no-deal Brexit). Given the geographical proximity and the economic sizes, trade relationships between the UK and the EU have always been strictly entwined but with the advent of a no-deal Brexit and everything it entails, their interconnection is doomed to decline.

Most of the literature adopted makes statistical predictions about the future of the British and European economy, using empirical models to assess the effects of a no-deal Brexit. Researchers adopt different approaches and economic models, the findings of which are estimates of how Brexit will impact both in the short term and in the long term. Therefore, the diversity of approaches adopted by the multiple research centres and institutions leads to different results but the common denominator of the models that have been created so far addresses slower growth and a decrease in the UK GDP.

The implications of a no-deal Brexit, although not easy to interpret, will have a negative impact on trade, people, businesses, finance and the economy in general. First of all the UK will have to leave the European Single Market and the Customs Union, with the result that goods traded between the EU and the UK will no longer be able to move freely, but will have to be subject to duties in accordance with WTO rules. The exit from the European Single Market will result in the UK giving up the free movement not only of goods and services, but also capital and labour. The effects will be particularly negative for the UK economy, as the EU is by far the UK's main trading partner and the value of products imported into the UK from the EU amounts to around £300 billion annually.

The UK will then be free to sign trade agreements with other countries but, conversely, it will give away the benefits of all the agreements the EU has signed with other countries, including Canada, Japan and Mexico. In fact, over the years, the EU has concluded several free trade agreements on behalf of all Member States, including the United Kingdom. In particular, 40 trade deals have been signed with 70 countries around the world. With a Hard Brexit, all these privileges will be lost. The UK will have to quit these agreements and renegotiate new trade deals with other countries. This path will be a long and arduous one.

3.1 Tariff barriers and non-tariff barriers

As far as trade is concerned, with a no-deal Brexit the UK will no longer enjoy preferential access to the bloc, taking advantage of the absence of tariffs. Instead the UK will fall under the rules imposed by the World Trade Organization, which regulates international trade between nations, implementing tariffs and quotas for trade in goods and services. Hence, the UK will be treated as a third country by the European Union and duties will be imposed on goods. According to the principle of the most favoured nation (MFN), trading conditions are the same for all members, with the same import and export tariffs between WTO members. Since all countries are treated equally, the EU and the UK cannot give each other special treatment. In this way, the tariffs applied by the World Trade Organization will replace the current no-tariffs regime in the UK and in the short term the economic

consequences will be harmful.

“According to the Confederation of British Industry, that means Britain’s importers would face a trade-weighted average tariff of around 5.7% for stuff coming in from the EU. Goods going the other way would face an equivalent tariff of 4.3%.”⁵

Border controls will thrive and delivery times for goods will increase dramatically. In addition to these measures, non-tariff barriers will also be introduced, such as import quotas which will limit the quantity of goods that can be imported in a given period of time.

3.1.1 Tariffs and their effects

From an economic point of view, tariffs are restrictions on the import of goods which lead to higher import prices. Leaving non-tariff barriers aside for a moment, most tariffs are "ad valorem tariffs", calculated as a fixed percentage of the commercial value of the goods. This percentage varies according to the type of product.

The introduction of tariffs will affect the prices of goods that will be imported in the UK: there will be an increase in prices in the UK and a decrease in prices in the EU. Such increase in prices will mean that British companies will produce more and even less efficient firms will be able to prosper in the market as they will be less affected by foreign competitors. Whereas in the EU, low prices will bring about a decline in supply and increase in demand, inducing smaller export supplies. Thus, with

5 What would a no-deal Brexit mean for trade? The Economist. 20 February 2020

https://www.economist.com/britain/2019/02/15/what-would-a-no-deal-brexit-mean-for-trade

a tariff, producers gain in the importing country and lose in the exporting country, at least in the short term. In the long term, domestic firms may be less efficient, as the lack of competitors will not give them an incentive to produce, and new surrogates will emerge.

Consumers, on the other hand, will be worse off as prices rise and their surplus will decrease.

Effects of tariffs on importing country (Source: econonoblocks.com)

In the figure above we can notice a price increase due to tariffs (from P* to P1) with the consequent shift of the World Supply line to WS+tariffs. This leads to a decrease in the amount of demand on the demand curve (DD) up to Qw and, instead, an increase in the amount of supply on the supply curve (DS) up to Qd, increasing the surplus for producers and causing a worsening of consumers' living standards.

Copyright: economicshelp.org

The graph above instead shows the costs and benefits of tariffs for consumers, producers and the government in the importing country (in our case the UK). Areas 1-2-3-4 show the price increase from P1 to P2 and corresponds to the net loss of the consumer surplus.

As far as the increase in the producers' surplus is concerned, it is indicated by the area 1, which is equivalent to the increase in the quantity of goods supplied by domestic firms after tariffs have been introduced. Eventually, the revenue made by the government by collecting tariffs are shown in area 3.

All things considered we can say that the net effect of tariffs on national economic well-being “can be separated into two parts: On one hand is an efficiency loss, which results from the distortion in the incentives facing domestic producers and consumers. On the other hand is a terms of trade gain, reflecting the tendency of a tariff to drive down foreign export prices.”⁶

6 Krugman, Paul; Obstfeld Maurice; Melitz Marc; International Economics, 2013

3.1.2 Non-tariff barriers

Non-tariff barriers are policy measures that cause restrictions on the import and export of goods and services through regulations that go beyond the application of duties.

These restrictions can take various forms: the main ones are import quotas, namely reductions in the quantity of goods that can be imported; others relate to specific requirements such as phytosanitary and environmental conditions that the goods must meet, rules of origin, certificates of authenticity and packaging, labelling and product standards. These restrictions will lead to border controls and documentation requirements which, in turn, will cause bureaucratic delays and additional costs.

One implication that should not be underestimated is the import of fresh produce such as dairy products, fresh fruit and vegetables into the UK. The slowdown due to non-tariff barriers will have a negative impact on the movement of these products, as there will be delays in delivery and a consequent devaluation of the product.

According to UNCTAD (United Nations conference on trade and development), in the event that hard Brexit scenario occurs, with the subsequent introduction of tariffs and Non-tariffs measures, the potential economic losses for the UK and the EU will be worrying. In the research paper entitled "

Brexit Beyond Tariffs: The role of non-tariff measures and the impact on developing

countries", economists at UNCTAD pointed out that the export losses due to tariffs for the UK will be around 5-7%. If non-tariff measures are also taken into account, the loss will be doubled to around 14% of current exports.

Analysing these figures, it can be noticed that non-tariff barriers amplify the effects of tariffs, leading to losses of up to $32 billion of UK exports to the EU.

“The losses would deal a major blow to the UK’s economy, as the EU market accounts for 46% of the UK’s exports. Mounting trade costs due to non-tariff measures and potentially rising tariffs would more than double the adverse economic effects of Brexit for the UK, the EU and developing countries, the study notes.”⁷

On the other side of the coin a no-deal Brexit could bring benefits for developing countries, as the establishment of ad-valorem tariffs and non-tariffs barriers under WTO guidelines will slow down

7 United Nations conference on trade and development, Brexit Beyond Tariffs: The role of non-tariff measures and the impact on developing countries. 25 February 2020.

trade between the UK and the EU and stimulate new trade relations between the UK and suppliers from developing countries, which will benefit from this situation.

UNCTAD has also carried out an analytical study that demonstrates how tariffs will affect trade flows in certain sectors of the economy. In order to do this, it has adopted the Gravity Model, which calculates the trade integration between two countries, taking into account their economic size (GDP) and the distance between them. In particular, the result obtained will be directly proportional to the GDP of the two countries and inversely proportional to the distance.

GDPa × GDP Gravity Model Ta,b =

DISTANCEa,b

where Ta,b is the result of trade flows between two countries (a and b).

UNCTAD, as other associations such as OECD, Oxford Economics and Treasury, have carried out analysis based on a Gravity model, whose cornerstone is empirical evidence. The model takes into account data related to trade flows between countries on a long-term basis. The aim of such model is to “estimate how changes to trade barriers are likely to affect trade flows, investment and productivity in the UK alone. Then, it feeds these estimates into a model of UK and world economic activity.”⁸ Together with the Gravity Model, many studies have adopted the National Institute Global Econometric Model (NiGEM) as a pivotal point. This is an additional econometric tool to assess the impact of Brexit, comparing data from more than 60 countries worldwide to obtain economic forecasts.

Agriculture Electrical and Machinery

Fishing Food and Beverages

Mining and Quarring

Textile and apparel

Transport equipment

Wood and paper

Metal products

Decrease in trade

-0.855 -3.721 -1.704 -0.830 -1.927 -1.476 -2.681 -3.103 -3.584

Computations by UNCTAD

8 Stojanovic, Alex; Tetlow, Gemma; Understanding the economic impact of Brexit, Institute for Government, October 2018, p.26

Examining these gravity mode-based data released by UNCTAD we can infer that almost every sector analyzed will be affected by the introduction of tariffs, as there will be a decrease in products traded between EU and UK.

Another model used is the computable general equilibrium (CGE) model, which, through equations describing how global economies interact, allows to calculate how an economy will face changes on various fronts. “For example, the models contain equations describing how an increase in tariffs leads to a rise in prices and consequent changes in the supply of a particular good, and the knock-on effect on demand and trade flows.”⁹ Considering current data, this model has predicted three main consequences of Brexit: first, the increase in prices due to trade barriers will affect companies' production costs and consequently consumers' welfare. Second, Brexit will lead to a decrease in capital investment in the UK and, finally, it will cause upheaval for workers, especially those coming from the EU.

One of the institutions that have chosen to embrace the CGE model to make predictions about Brexit’s outcomes is RAND Corporation, a think tank dealing with public policy. RAND has analyzed the shares of the tariffs that will be applied on different goods and services and has estimated what the future scenarios for UK and EU will be, focusing on the influence that tariffs will have on the GDP trend in the two countries.

According to this research, the percentage of tariff barriers and non-tariff barriers will amount to 14.3% for goods related to the automotive sector, 12.1% for pharmaceutical goods and 24.1% for food and agriculture. As mentioned above, it is the non-tariff measures that have the highest percentage weight in the total calculation.

In fact, according to RAND's estimate, taking into consideration food and agricultural sector, non- tariff barriers will amount to 21.7% while tariff barriers will only amount to 2.4% (for a total of 24.1%).

9 Stojanovic, Alex; Tetlow, Gemma; Understanding the economic impact of Brexit, Institute for Government, October 2018, p.26

RAND – Calculating the economic consequences of Brexit on GDP

Calculating the influence these tariffs will have on GDP, the data obtained seem incontrovertible: the UK will be heavily penalised, while the EU's GDP will fall slightly. The figure for the US will not change as it is not directly affected by the imposition of duties.

3.2 Economic Growth

An open economy based on free trade in goods and services can achieve gains from trade. The Single Market allows all member states to achieve a high level of economic and trade integration and benefit from it. Free trade between countries focuses on specialisation in the production of goods where a country has a comparative advantage, thus achieving "static" gains from trade. Moreover, countries can achieve "dynamic" gains from foreign trade, namely an increase in economic growth and productivity.

The advantages obtained from static gains are few, while dynamic gains provide further benefits in terms of a better placement of resources within the country. Free trade within the EU guarantees dynamic gains for the UK and other member countries, as increased competitiveness makes companies more efficient and prices will be lower. In addition, economies of scale can flourish by exploiting low production costs.

"A country engaging in international trade uses its resources more efficiently. Businesses in search of profits will naturally move resources such as labour and capital into industries with a comparative advantage. The resources employed in the industry with a comparative advantage can produce more output which leads to a higher real GDP. A higher real GDP tends to lead to more saving and therefore more investment. The additional investment in plant and equipment usually leads to a higher rate of

economic growth"¹⁰. This sentence explains what is meant by dynamic gains and what the effects on economic growth are.

Taking these assumptions into account, it can be argued that there is a close correlation between trade opening and growth, so the introduction of tariffs will lead to a decline in trade relations between the EU and the UK and consequently a slowdown in economic growth for the UK, at least in the short term. Indeed, the initial impact with tariffs could be detrimental to UK productivity and growth, whereas once the UK has settled down with higher tariffs, growth could resume at a normal pace.

Although major studies of dynamic gains have focused on the positive effects of free trade for developing countries, "there are several reasons to worry that the UK is vulnerable to dynamic losses from higher trade barriers, in some ways more than other advanced economies. First of all, higher barriers to trade will lead to a lower presence of European competitors in the UK market. Companies will have less incentive to invest in innovation and their products may suffer a decline in quality.

In addition, the UK may suffer from a slowdown in Foreign Direct Investments by companies and multinationals around the world. The UK is a region that attracts many foreign investors, both in the financial and manufacturing sectors, acting as an attractive location for research and development operations. Foreign companies account for a quarter of British output and trade barriers will discourage investment in the UK, thus limiting economic growth.

The dynamic benefits of participation in the Single Market will also be reduced with respect to the UK workforce. The number of European migrant workers in the UK has increased enormously in recent decades. The UK attracts a large number of both highly educated and low-skilled workers who increase the pool of skills in the UK labour market, contributing to economic growth. Preventing or limiting labour immigration from the EU would make it difficult to recruit and relocate workers to the UK, leaving jobs vacant and jeopardising UK productivity.

10 Sawyer, Charles; Sprinkle, Richard; Applied international economics, Routledge, 2015

3.3 Foreign Direct Investments

Foreign direct investments (FDI) are investments that a company makes in another country. Such investments may take the form of acquisitions of other companies through mergers or acquisitions, obtaining shares or assets of foreign companies, setting up new subsidiaries or expanding existing firms.

FDIs are divided into horizontal FDI and vertical FDI. Horizontal FDI is when a company replicates the same business process abroad, while vertical FDI is the acquisition of a foreign firm that will function as a supllier or distributor.

FDI flows bring various benefits in the country where the investments are made. In fact, FDI increases productivity and, in turn, output increases as well as salaries. In addition, FDI can generate indirect advantages, as domestic firms can benefit from knowledge spillovers and know-how provided by foreign companies. In this way, competitiveness is increased and domestic firms' performance grows.

But what drives a company to invest in a foreign country? Engaging in foreign direct investments in a foreign country means exploiting a gateway to a foreign market and, in turn, this means being able to enter further markets with which the host country is connected. Being able to enter the value chain of a foreign country through a share of FDI means deriving benefit from the comparative advantage that the country has in certain sectors and specific production phases.

As regards the comparative advantage that foreign firms can exploit by making foreign direct investments, it can be said that "FDI inflows are concentrated in industries in which the UK has clear comparative advantage: the financial sector, mining and transport equipment, as well as sectors with high local demand (food and beverages). Much of this FDI is a consequence of mergers or acquisitions between pre-existing UK firms and foreign firms." ¹¹

The UK is the largest European beneficiary of FDI coming from the EU and the rest of the world:

British FDI accounts for 6% of the total stock of FDI in the world. Only the US and China are ahead in this ranking. FDI in the UK amounts to around £1 trillion, and such profitable FDI activity is also one of the reasons for the UK's great economic strength.

11Dhingra, Swati; Ottaviano, Gianmarco; Rappoport, Veronica et al. UK trade and FDI: A post‐Brexit perspective

Share of World FDI – OECD, 2014

"The UK is a net exporter of services (financial, IT and media) and sophisticated goods (pharmaceuticals and cars), but these exports are made possible, in large part, by using imported capital, inputs and technical know-how.”¹²

Reaping the benefits of the European Single Market, the UK has always been an appealing platform for FDI flows from multinationals, which can easily access European markets without the burden of tariff barriers. In the case of a no-deal Brexit and the UK's exit from the Single Market, the UK would lose its attractiveness and inward FDI flows would decline and be diverted to other European countries. According to the report "The impact of Brexit on foreign investment" carried out by the Centre for Economic Performance, the share of foreign direct investment in the UK will decrease by 22% if it leaves the European Single Market.

"Even though the factual conditions for trade and investment have not yet changed, merely the uncertainty about future border and tariff arrangements between the UK and the EU has adversely affected inbound FDI flows.”¹³ The concerns of investors and multinational firms are reflected in the performance of inward FDI flows in the UK, as shown in the chart below.

12 Dhingra, Swati; Ottaviano, Gianmarco; Rappoport, Veronica et al. UK trade and FDI: A post‐Brexit perspective

13 Romei, Valentina. Brexit has chilling effect on UK inward investment, Financial Times https://www.ft.com/content/bdc9f940-bb92-11e9-b350-db00d509634e

To conclude we can say that, following the exit of the UK from the European Single Market and the advent of a hard Brexit, FDI flows are destined to decrease relentlessly.

“This would weaken fixed investment, reduce export capacity and hit innovation and productivity (technical progress) over time. Managerial quality would also decline, given the evidence that management quality is higher in foreign multinationals in the UK than in domestic firms, damaging organisational efficiency and further hitting overall productivity.”¹⁴

14 OECD Economic Policy Paper, The economic consequences of Brexit: a taxing decision, 2016, p.25

3.4 Immigration and low-skilled workers

One of the crucial issue in the debate on Brexit was the end of the free movement of people and the possibility of autonomously managing the state borders and jointly controlling the flows of people and workers to the UK. Now that Brexit is in force, the British Government is ready to tighten up on immigration of workers from the EU and non-EU countries, introducing more stringent immigration policies.

As can be inferred from the figure 1, since the fear of Brexit began to materialise in 2015 the UK is slowly losing its appeal. In fact, it can be inferred that in recent years, the fear of an abrupt exit from the EU has caused a decrease in the number of flows of workers to the UK and an increase in the share of those who leave the country.

Priti Patel, Secretary of State for Home Affairs of the United Kingdom, has recently announced the introduction of a new system to regulate the immigration of workers, called 'points-based'. After 31 December 2020, workers who wish to enter the UK for work purposes will be required to meet certain requirements to obtain a visa. Currently, workers from the EU do not have to meet any kind of requirements to work in the UK.

A policy paper drafted by the UK government sets out the UK's intention to end the free movement of people and introduce the points-based immigration system: "From 1 January 2021, EU and non- EU citizens will be treated equally. We will reduce overall levels of migration and give top priority

to those with the highest skills and the greatest talents: scientists, engineers, academics and other highly-skilled workers".¹⁵

Therefore in the future there will be several factors that will determine whether a worker will have the opportunity to work in the UK. For instance the minimum wage threshold will have to be £25,600, the job offer will have to meet certain skill levels and the worker's English level will have to be very good. If the candidate reaches 70 points in this assessment system, the doors will be open to work in the UK.

The aim of these limitations is to reduce the entry of low-skilled workers to favour mainly high- ranking workers. By curbing the threshold of cheap labour from abroad, the UK intend to invest in the local workforce and give a boost to technological automation.

"However, by deliberately focusing on limiting low-skilled migration, the scheme is likely to have a significant negative impact on staffing levels in many industries, including the care system, construction and hospitality, especially in the short-term.”¹⁶

Many jobs will be vacant, especially in those jobs that guarantee low to medium wages. To overcome this problem, Priti Patel has put forward the idea of recruiting "inactive" workers, investing and bringing them to the labour market. According to the Scottish National Party, this idea will turn out to be harmful as many of these potential workers suffer from illness or injury and it is not certain that everyone is willing to accept the job offered.

Although mistreated by the British government, low-skilled jobs are essential to each country's economy and GDP. According to economists, the measures the government will take to counter the shortage of low-skilled workers will not be enough and the suspension of the free movement of people, in favour of controlled and limited immigration "will likely to cause an enormous strain on businesses in the U.K."¹⁷

Also the OECD, in an economic policy paper, expressed doubts about the possibility of limiting the immigration of low-skilled workers, giving priority to more proficient workers: "the effect of higher quality would likely be offset by the effect of lower quantities, resulting in an overall reduction of the

15 The UK's points-based immigration system: policy statement. Policy paper, Gov.uk. 19 February 2020

16 Castle, Stephen. U.K.’s New Immigration Rules Will Restrict Low-Skilled Workers, NY Times. 19 February 2020

17 Lindsay, Fray. Low-Skilled Workers Need Not Apply In Post-Brexit Britain, Forbes. 19 February 2020

pool of skills which could efficiently be combined in the production process. In turn, this could increase skill mismatches".¹⁸

All things considered, a restriction of immigration to the UK could have negative consequences for the country. Empirical studies show that the presence of workers from EU and non-EU countries is a benefit for the UK, since they contribute to increase the country's welfare by paying taxes and

"bringing extra resources that could be used to increase spending on local health and education for the UK-born. In other words, reducing EU immigration would generate the need for greater austerity".

19

3.5 Small and medium-sized enterprises

The outcomes of a no-deal Brexit will particularly impact on small and medium-sized enterprises in the UK and elsewhere. Small and medium-sized enterprises are the backbone of national economies and many of them are struggling to find their way around, as impending economic changes could hamper their growth process. Many companies are not ready to deal with Brexit's forthcoming implications for trade and the economy. In light of the UK withdrawal from the Single Market, in fact, SMEs will face higher costs due to customs duties and border taxes, numerous bureaucratic and administrative burdens and the disruption of their export supply chain.

According to the Customs Agency, thousands of SMEs still lack the EORI number, a code without which it is not possible to carry out customs operations to and from abroad. This data is the touchstone that makes us understand how many companies are still unprepared for this new course of events.

18 OECD Economic Policy Paper, The economic consequences of Brexit: a taxing decision, p. 28

19Dhingra, Swati; Ottaviano, Gianmarco; Van Reenen, John, Wadsworth, Jonathan. Brexit and the impact of immigration on the UK. Centre for Economic Performance.

Figure A – Type of SMEs most affected by Brexit

Surveys carried out by researchers at the University of St. Andrews and the University of Essex show that the small and medium-sized British companies most affected by Brexit will be those with the highest levels of innovation and export relations (Figure A). Therefore, the SMEs that are deeply rooted in an international trade fabric will be harmed. British companies and European companies trading with the UK will be forced to make changes to their organizational strategies in order to overcome the problem linked to the end of the free movement of goods and people. This scenario could have negative outcomes on supply chain management. The supply chain is at the heart of SMEs and companies should be able to ensure its proper functioning in order to maintain a competitive advantage. It consists of very complex and articulated systems that require

coordination between people and activities in order to provide goods and services to the supplier or to the final customer. Brexit may cause interruptions and slowdowns in the supply chain of SMEs and may even lead to its disruption with harmful consequences. According to research carried out by Aldermore bank, "over half of UK SMEs (51%) rely on the EU in their supply chain"²⁰, which implies that most SMEs in the UK will face significant problems in organising their supply chain.

Another key point that could be crucial for the future of European SMEs is the tax burden that businesses will face if the UK's financial contribution to the EU is lost. In fact, each state is required

20 One in 10 UK SMEs would not survive disruption to their supply chain. Aldermore, 23 January 2020

https://www.aldermore.co.uk/about-us/newsroom/2020/01/one-in-10-uk-smes-would-not-survive-disruption-to- their-supply-chain/

to pay a fee into the EU coffers in proportion to its GDP. If the UK stopped paying this fee, it would have to be shared between the Member States and would weigh on European companies.

The Brexit is therefore already wreaking havoc on small and medium-sized enterprises, which very often do not have the adequate means to cope with the new macroeconomic scenarios that are emerging. Furthermore, "Brexit is likely to impact on the future strategic intentions of SMEs via lower levels of capital investment, reduced access to external finance, lower levels of growth and innovation"²¹ and it will mainly be at expense of manufacturing, retail, ICT and professional services sectors.

21 Brown, Ross; Zegarra, Jose Liñares; Wilson, John O.S. The Impact of Brexit on the Future Strategic Intentions of UK SMEs

4 - Sectors most affected by Brexit

If no agreement is reached between the UK and the EU, the cost of trade for both export and import will soar, bureaucracy will increase dramatically and customs checks will slow down or even prevent the arrival of goods and essential parts. In recent years many companies are already limiting capital investment (including FDI) in the UK and relocating their subsidiaries and warehouses elsewhere.

Without the free movement of goods, capital, services and labour, cross border transactions will be hampered, triggering a series of reactions in many companies, which will be severely limited in their ability to deliver products effectively and on time. The supply chains of many European and global companies (above all in the manufacturing and agri-food sectors) are strongly interconnected with the UK and uncertainty about the future trade policy between the UK and the EU could impact the supply chain management of many firms forcing them to redesign logistic and transportation networks.

"In value chain transformation, not only the supply chain of source-make-deliver, but also enabling functions such as sales, marketing and R&D will be considered when evaluating the most cost effective and most strategic locations for trade to and from the EU."²²

Furthermore difficulties in costs management and organization between headquarters and branches will arise.

Assuming that the UK will leave the European custom union, there is another issue that may have a negative influence on the trade of goods between UK and EU, i.e. "rules of origin".

Rules of origin are requirements that exported products must comply with in order to be introduced into the foreign country. They are important for trade because they determine the level of tariffs to be applied depending on the origin of the product. In the case of a no-deal Brexit, if a British product doesn’t conform with such criteria, a higher tariff will be applied to the export as the product will be subject to "non-preferential rules of origin".

Exporters will have to prove that the product has been wholly or for the majority manufactured in the country of origin, otherwise the importing country may deny entry or impose an additional tariff on the product as it is considered potentially harmful to local producers. Exporters must therefore guarantee the "economic nationality" of the exported good. However, the rule of origin may cause troubles for exporters, both in terms of costs and in terms of administrative and bureaucratic burdens.

22 Brexit Monitor The impact of Brexit on (global) trade, PricewaterhouseCoopers, 2016

Very often a finished product has undergone various transformations and is made up of parts from different countries. For this reason, the automotive, textile, mechanical and manufacturing sectors will suffer the greatest disadvantages.

A no-deal Brexit may lead to negative implications for the economy and trade between the UK and the EU and consequently different sectors will be worse off following the withdrawal of the UK from the EU.

In this chapter, I have chosen to analyse the outcomes that Brexit will have on some sectors, in particular the automotive, agri-food and retail, pharmaceutical and financial sectors. European companies operating in these sectors are strongly rooted in the UK, where they have set up branches, replicated the production chain and made FDI investments.

If the UK fell under the rules set by WTO, the introduction of most favoured nation tariffs and non- tariff barriers would be inevitable. The figure below shows in detail the tariff rates that will be applied to imported goods (both into the EU and into the UK) according to the different sectors.

Estimated MFN tariff levels by sector, in percentages

Sector Uk Imports EU Imports

Agriculture 4.517 2.564

Primary energy and mining 0.003 0.001

Energy 1.568 0.988

Processed foods 7.848 7.075

Low-tech manufacturing 4.692 6.672

Metals and minerals 1.639 1.523

Chemicals, rubber and plastics 2.800 2.890

Motor vehicles and parts 7.200 7.369

Electronic equipment 0.840 0.9010

Source: Central Plan Bureau

4.1 Automotive Sector

The British automotive sector is ranked fourth in Europe in terms of size. It has a significant influence in British manufacturing, accounting for 8% of all output. Around 80% of the cars produced are exported and Europe is the main destination.

The various facets of a no-deal Brexit would severely jeopardize the automotive sector in many ways.

The EU has concluded several Free Trade Agreements with several countries, with which the UK trades daily, benefiting from zero or limited tariffs. With the exit from the Single Market, the UK will be excluded from agreements with third countries and will be forced to roll over new ones. However, the timeframes are very long and such a scenario would imply considerable difficulties for the UK automotive industry in finding materials and exporting its products to countries with which it does not have an FTA, since tariff costs and customs barriers will represent a considerable drawback.

The introduction of tariff and non-tariff barriers will make the UK a less attractive country to locate production plants. In fact, European companies settled in the UK will face high costs to ship components in Europe and, equally, will increase the costs related to the management of the relationship between headquarters and subsidiaries.

According to the British government, at the end of the transition period, the zero tariff regime will be maintained on the import of car components, allowing free cross-border transactions to thrive. A 10%

tariff will be introduced instead on the import of finished cars, whose aim is to act as a shelter for local car manufacturers.

For the export of car components to the EU, it will be applied a tariff of 4.5% imposed by the WTO Most Favoured Nation. Cars exported to the EU will be subject to the 10% tariff, as is the case for imports into the UK. Along with automotive companies, consumers will be at a major disadvantage as well. The Society of Motor Manufacturers and Traders (SMMT) argue that “these tariffs would damage the competitiveness of UK-built cars by adding an average of £2,800 to the cost of a UK- built car sold in the EU, if the impact of the tariff was passed directly onto consumers.”

As already explained, the supply chains of European companies are complex and interconnected mechanisms whose efficiency is guaranteed by the constant exchange of components throughout the production chain thanks to cross-border transactions. The introduction of barriers to trade may lead to the disruption of the supply chain of many companies, which will have to find out effective solutions on how to access their customers' markets, how to obtain materials and components and optimize operations and relations with suppliers and intermediaries.

In the case of a no-deal Brexit, manufacturers operating in the automotive sector, as well as in other sectors, will be called upon to reconfigure the supply chain according to the macroeconomic scenarios that will arise. But operations of this kind may require high costs and a very long time. Many components cross the borders many times, for this reason further documentation will overload the supply chain system.

A pivotal element for the automotive sector lies in the so-called "just-in-time” system (JIT), which is based on a "socio-technological" concept developed by the Japanese company Toyota, which aims to optimize production, limiting material waste and avoiding waste of time. This methodology focuses on the production only of goods that have already been sold or whose sale is imminent, curbing costs and maximizing efficiency. Nowadays most of automotive companies rely on just-in-time systems but border delays and restriction on free trade of goods may cause havoc in the management of this delivery system for companies.

"Car factories are conceived, designed and built to use parts that flow in regularly on lorries. If one lorry fails to arrive and a car cannot be completed the line grinds to a halt; there is no space to leave half-assembled cars hanging around the factory until vital parts appear.”²³

Another crucial issue for the automotive and manufacturing sector in general concerns "rules of origin" criteria, whose aim is to define the origin of a product. According to the guidelines of the rule of origin, at least 55% of the components used in the assembly of British cars must have been produced in the UKin order to obtain favourable export tariff treatment. Car components are usually produced in different parts of the world, where car manufacturers have relocated production to exploit lower plant and labour costs. As a matter of fact, currently only 25% of car components are produced in the UK, and if no preferential trade agreement is put in place between the UK and the EU, the UK will face "non-preferential rules of origin", which will lead to high export costs for manufacturers.

“It is not just UK exporters who have to be concerned regarding this change - in cases where European producers are using components of UK origin, their final products may no longer satisfy the percentage required.”²⁴

Against this worrying background, many automotive companies operating in the UK have already taken action to assess the possibility of a no-deal. Many companies have closed factories in the UK

23 What would a no-deal Brexit mean for cars? The Economist, 19 February 2019

https://www.economist.com/britain/2019/02/19/what-would-a-no-deal-brexit-mean-for-cars

24 Brexit Industry Insights – Automotive Deloitte, September 2019

and relocated their subsidiaries to other countries. In addition, according to The Guardian, in 2019 there has been a dramatic 70% drop in investments made by carmakers in the UK.

"Some carmakers have already made plans to shut up shop around Brexit day, in anticipation of likely disruption. Temporary suspensions are one thing. But if a no-deal Brexit were to add permanent costs to carmakers, firms would have to reconsider their positions. Reconfiguring supply chains to circumvent hold-ups and tariffs would take years, if it is possible at all."²⁵

In such an uncertain situation it is also difficult to attract new automotive companies willing to set up plants and operations in the UK, as it is difficult to predict long-term economic stability.

Many of the world's leading carmakers, including Nissan, Toyota and BMW, own assembly plants in the UK. In recent years some of them have decided to move production of some parts outside the UK.

In particular BMW decided to redirect the assembly of some engines from the Hams Hall factory in the West Midlands to Germany. The engines produced in the UK plants were destined for South Africa, where they would undergo further rework, but after Brexit, engines produced in the UK would lose their tax-free import status in Europe, so BMW production chief Oliver Zipse preferred to relocate production to Germany.

The BMW Group also owns the MINI brand and has production subsidiaries for the Mini line in the UK, located in Oxford, and the Netherlands. In January 2020, BMW decided to postpone the launch of the new generation Mini, waiting for governments to shed light on the future of negotiations between the UK and the EU. Should export tariffs to and from the UK exceed 5%, BMW is ready to move production operations to the Dutch plant.

In November 2019 Elon Musk, CEO of the American electric car manufacturer Tesla, announced that Berlin has been selected as the next European city where to build a battery factory, preferring the German capital to the UK because of the Brexit uncertainty.

In addition to BMW and Tesla, other automotive companies were also affected by the turmoil. Honda, a Japanese multinational company that manufactures cars and motorcycles, has expressed its concern about the scenario that will emerge in the near future. No deal Brexit would undermine frictionless trade, which is the bedrock to ensure that key value chain operations can be carried out successfully.

Honda said that 15 minutes of customs delays would cost manufacturing companies £850,000 a year.

For Honda, as well as other companies, this would be a serious challenge as around 350 trucks arrive

25 What would a no-deal Brexit mean for cars? The Economist, 19 February 2019

https://www.economist.com/britain/2019/02/19/what-would-a-no-deal-brexit-mean-for-cars

daily from Europe to Honda's plant in Swindon. For Honda, as well as for other companies, this would be a serious challenge as around 350 trucks arrive daily from Europe to Honda's plant in Swindon.

"In short, No Deal is likely to mean short term disruption in the sector as firms run out of components after a few days. Stop-start production is likely, with rising costs and a hit to efficiency and profits."²⁶

4.2 Agri-food and retail sector

Brexit will have similar damaging effects for most British sectors. The imposition of tariffs in trade with the EU, border checks and customs, the supply chain disruption and new immigration policies that will be implemented by the UK government are only few of the issues that may affect the UK and, albeit to a lesser extent, the EU economy.

Among the various sectors the agri-food sector and the retail sector, which are strictly entwined with one another, will be particularly penalized by a no-deal Brexit.

The current economic and political integration between the UK and the EU is very solid. As far as the agricultural sector is concerned, there are many policies in place, aiming to harmonise agricultural activities and providing concrete guidelines and support for those working in the sector. The Common Agricultural Policy (CAP) is one of the main ones. It dates back to the 1957 Treaty of Rome and outlines economic and social objectives with the aim of defending the interests of farmers and consumers, by adopting rural development measures and market measures.

"Article 39 TFEU sets out the specific objectives of the CAP: to increase agricultural productivity by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour;

1 To ensure a fair standard of living for farmers;

2 To stabilise markets;

3 To ensure the availability of supplies;

4 To ensure reasonable prices for consumers.”²⁷

26 Bailey, David; No Deal Brexit and UK Automotive, Regional Studies Association, January 2019

27 The common agricultural policy (CAP) and the Treaty – European Parliament

https://www.europarl.europa.eu/factsheets/en/sheet/103/the-common-agricultural-policy-cap-and-the-treaty

In the no-deal Brexit scenario, however, the benefits that the UK currently obtains from this European body would be lost.

In fact, as net contributors to the EU budget, the UK could benefit from the subsidies that the EU provided to farmers through the CAP. Since the UK is no longer part of the EU, Britain will have to implement new agricultural policies and provide funds for farmers, drawing money directly from the state coffers. In a notice, the UK government has declared that it "has pledged to continue to commit the same total cash in funds for farm support until the end of this parliament, expected in 2022. This includes all funding provided for farm support under both Pillar 1 and Pillar 2 of the current CAP. "²⁸ Leaving the CAP, however, may not be as terrible for the UK as it seems. The CAP has been severely criticised for not having taken account of the environmental impact of agriculture but, above all, for the way in which it provides subsidies to farms. The distribution of direct payments to farmers is based on farm size, so large agri-food companies and multinationals (such as Nestlé and Kraft) are the most financially supported, creating unfairness in payments and widening the gap between small- medium and large companies. The UK government will need to implement agricultural policies that compensate for the CAP, providing more subsidies to small and medium-sized enterprises and ensuring greater benefits for farms and agricultural workers. Therefore, the biggest concerns facing the UK will not be the withdrawal from the CAP, but a disruption of its well-established economic and trade integration with the EU.

Each year the volume of agri-food products imported into the UK from the EU has a total value of around £30 billion whereas £12 billion of food products are exported to the EU. 60% of food and drink products made in Britain are destined for the EU market while imports from the EU accounts for 70%. These figures show how the British agri-food sector relies heavily on the European market and how the supply chains of many British and European agri-food companies are inextricably linked to each other.

According to data gathered by the European Commission, products that are widely imported into the UK are fresh and processed fruits and vegetables (20%), food preparations (18%), meat (18%), wine, spirits and beverage (12%) and dairy products (9%). Within the EU, the Netherlands and Ireland are

28 Farm payments if there’s a no-deal Brexit – UK Government – Gov.uk, 21 October 2019

https://www.gov.uk/government/publications/farm-payments-if-theres-no-brexit-deal/farm-payments-if-theres- no- brexit-deal