As the transition period nears its end, some industries are facing more disruption than others.
In just a few weeks, four years of intense yet sporadic negotiations between the UK and EU will draw to a close, signalling the end of the Brexit transition period on 31 December. The UK will likely leave the EU with only the thinnest of deals, or no deal at all.
Attention is now turning to the potential fall out – which areas and businesses will be lucky enough to scrape through, and which will be most impacted?
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According to Charles Brooke, Director at Poppleton & Appleby, failure to agree on a structured Eurozone Trade Agreement before the end of the year would create a ‘financially toxic cocktail’ of a so-called hard Brexit and fallout from Covid-19.
Most disrupted sectors
Last year, the Centre for Economics and Business Research (CEBR) and law firm Irwin Mitchell carried out a sector-wide analysis on the sectors most likely to be affected by Brexit based on three key indicators: free movement of labour, export tariffs and investment from the EU to the UK. The subsequent ‘Brexit Disruption Index’ (BDI) which bases predictions on the assumption that the UK and EU will eventually reach a trade deal, revealed that manufacturing would head the list of most-affected sectors:
- Wholesale, retail and vehicle repair.
- Business administration and support services (including employment agencies, security firms, travel agencies and other).
- Accommodation and food services.
- Transport and storage.
- Agriculture, forestry and fishing.
- Professional, scientific and technical.
- Information and communication.
- Financial and insurance.
Manufacturing was given a 90% disruption rating according to the BDI, while the public administration and defence sector, the least impacted of the predicted 18 industries, has just a 2% disruption rating.
“The Brexit Disruption Index looks at what we are set to lose,” says Josie Dent, an economist at CEBR. “There will be a weaker relationship due to the end of freedom of movement and fewer EU nationals coming over, and there will be a significant impact on trade.”
‘Double whammy’ for manufacturing
The manufacturing sector faces what Dent describes as a ‘double whammy’. Covid-19 hit the industry hard, with many manufacturers closing their doors for several months earlier in the year, followed by supply chain issues due to shutdowns in other countries.
“So while the sector’s exposure to Brexit has not changed – it’s still an extremely high risk – the industry is now in a much weaker position compared to other sectors. This adds further discomfort in certain UK regions which rely on manufacturing such as the Midlands and the North West, because they’ve been really struggling with Covid-19and harsher restrictions,” Dent explains.
Michael Gasiorek, Director of the UK Trade Policy Observatory (UK TPO) and Professor of Economics at the University of Sussex Business School points to increased tariffs for EU importers in the event of a no-deal scenario. This would affect some of the UK’s leading exports including textiles, chemicals, motor vehicles and machinery.
“We will see an increase in tariffs and non-tariff barriers as well as regulations and standards which British firms will have to adhere to,” Gasiorek explains. “This will happen even if we have a deal, so regardless of the outcome of trade talks, we will still be worse off. It’s just a question of how bad the hit is.”
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Increased tariffs, regulation and competition across most sectors
From an investment perspective, Gasiorek warns of the ‘longer-run impact’ of Brexit and questions the UK’s attractiveness as a location for foreign investment in the future.
“It’s well known that Japanese companies use the UK to enter the EU market. They won’t dump investments immediately, but over time, it’s logical that more investment will get shifted to the EU and away from the UK.”
Brooke predicts the most likely candidates to experience the ‘most dramatic impact’ of Brexit will be farming and agriculture, international freight and logistics, financial services, pharmaceuticals, heavy manufacturing, aviation and automotive. “They will experience tighter regulation, tariffs, currency instability, trade friction and competition,” he says.
Cross-border logistics too, would be ‘hit strongest’ by regulatory barriers, bureaucratic expense and fuel costs which, Brooke warms, may make their own customers’ goods ‘uncompetitive’ in the face of lower tariff transactions between other EU states.
Labour shortages and supply chain issues for agriculture, healthcare and construction
Mark Taylor, Head of International at Duncan & Toplis, believes healthcare, agriculture and construction are also likely to struggle. A no-deal Brexit would pose a ‘significant risk’ for healthcare in particular, due to the supply of medicines and medical devices to the UK and reliance on an international workforce.
“The EU has a harmonised approach to medicine regulation, and the UK will no longer be a part of this after Brexit,” he explains. “This could slow down the authorisation and importation process. Meanwhile, a lack of freedom of movement will impact the supply of healthcare workers from the EU and may also result in the current workforce leaving the UK.”
The agriculture sector, which is dependent on seasonal workers, will also be impacted. Taylor warns there will be a massive shortage of workers at all skill levels. He voices concerns too for food standards, citing existing ‘weaker’ standards for imported Argentine and Brazilian beef. Future trade agreements which protect food standards don’t cause unfair competition in the market nor create a drive to the bottom in quality is therefore essential.
Within the construction sector, labour shortages due to the cessation of freedom of movement will become an issue. According to the ONS, 7% of UK construction workers are EU nationals. In London alone, EU nationals account for 28% of construction workers. And as the sector has experienced ongoing difficulty with sourcing materials since lockdown in March, Taylor believes Brexit will add to this difficulty, impacting the free movement of goods which could cause material prices to increase.
Prepare for change despite uncertainty
Given that a considerable number of sectors are likely to be adversely affected by Brexit regardless of any future trade arrangements, what can be done to mitigate these concerns?
“Companies need to be prepared and ready as they possibly can,” Gasiorek advises. “That’s hard to do when no one knows the terms of trading, but just because there is uncertainty, doesn’t mean there aren’t ways of preparing.”
Taylor meanwhile, advises companies to look into export and import licenses, customs declarations and tariffs and be aware of which employees require visas or work permits. Materials necessary for projects should also be sourced well ahead of time.
Brooke however, is confident the Brexit fallout will last for just around eighteen months while the economic disruption ‘re-establishes itself’. As he puts it: “Industries will ultimately adapt to changes and actually, we may have the steep climb of covid-19 adaption to thank for that.”
Annie Makoff is AAT Comment’s news writer.