8. Impact assessment

UK economy

• Most economists agreed Brexit harms UK economy:
  • Continues to grow long-run, but more slowly than if UK had stayed in EU
  • Brexit already causing GDP to be 2.0 – 2.5% lower (loss of ~ £40 to ~£50 bn a year)
  • Current cost to public finances ~ £300 million a week (assuming 37% of GDP)
• Estimated long-run impact of Johnson’s shallow FTA on UK economy: 
  • OBR: loss of 4%  (~£80 billion a year or £1.6 billion per week)
  • NIESR: loss of 3.5% (~£70 billion a year or £1.3 billion per week)
  • LSE, with UKICE: loss of 5.5% to 7% (~£110 billion to ~£140 billion a year)
  • ‘No deal’ would have reduced GDP by a further 2.0% to 2.5%
• Brexit trade impacts include:
  • New barriers to trade and disrupted supply chains
  • Export of jobs and business activity to EU27
  • Reduced benefits from migration on work force (e.g. in farming)
  • Additional red tape, bureaucracy and costs
  • Impaired UK ability to compete in world markets
• Benefits of own trade deals and reduced regulation are small, uncertain and long-term
• Brexit impacts on public purse and services include:
  • Less tax take and contribution to public finances (about 37% of the GDP loss)
  • Poorer public services due to unfilled vacancies in e.g. social care and NHS
• Government (November 2018) assessed long-run annual losses to the UK economy would be:
  • 1.4% for an EEA-style agreement (~£0.5 billion per week)
  • 4.9% for an FTA (~£2.0 billion per week)
  • 7.7% for WTO option (~£3.0 billion per week)

EU27 economy

• Small overall economic impact
• Some countries could suffer a big impact, notably Ireland
• Trade barriers create opportunities for EU27 suppliers to replace UK exporters

UK sectors and regions

• 5 sectors bear most of the trade costs:
  • Financial services
  • Automotive
  • Agriculture, food and drink
  • Consumer goods
  • Chemicals and plastics
• 3 sectors have the most jobs at risk:
  • Administration and support services
  • Wholesale trade
  • Legal and accounting services
• Regions:
  • Least affected: London and South East 
  • Most at risk: Cumbria, Hampshire, Herefordshire, Gloucestershire, Lancashire, Leicestershire, East Riding/North Lincolnshire, Warwickshire and Wiltshire
  • High EU exports in vulnerable goods sectors:
    • Northern Ireland and Cornwall (food, live animals and manufactures)
    • Northumberland, Tees Valley and Durham (chemicals, machinery and transport equipment)
    • East Wales (manufactures, machinery and transport equipment)

Click here for summary of Brexit FactBase.

Introduction

Overview

This section describes the likely impact of Brexit on the economy, industry sectors and UK regions. It also considers impacts on the EU27 and the UK’s Crown Dependencies (the Channel Islands and the Isle of Man). For other impacts of Brexit, please see FactBase sections on education, health, science, environment, defence, security and Euratom.

This section describes the expected economic impact before leaving the EU, as opposed to the actual impact of leaving the EU. The full implications of the new UK-EU trading relationship are taking time to materialise. Please find an initial assessment of the EU-UK Trade and Cooperation Agreement (TCA) here.

All reputable economic forecasters agreed that Brexit would harm the UK economy compared to EU membership. And, the relative impacts of the main options for the future UK-EU relationship were well understood:

• EEA (like Norway) – low impact
• FTA (like Canada) – medium impact
• WTO (no trade agreement) – high impact

The economic impact of Johnson’s TCA falls between an average FTA and WTO. An FTA can be ‘shallow’ or ‘deep’. The shallower an FTA is, the higher the trade barriers and the smaller the economic benefit. The TCA is shallow because the government wanted freedom to diverge from EU regulation (but has not yet said how).

There were originally two WTO options: with a Withdrawal Agreement (WA) or without. As the UK has a WA, the analysis just looks at WTO with WA. Please see the FactBase section on No deal for a fuller discussion of a ‘WTO Brexit’.

Principal factors and impacts

The principal factors that would harm the economy after Brexit were:

• Reduced trade volumes due to new trade barriers
• Reduced EU migration due to government policy
• Lower productivity due to reduced trade
• Lower foreign investment in the UK due to reduced attractiveness

Regional impacts will vary, depending on the local industry profile and its reliance on the EU for trade, skills, workforce and investment.

The economy is complex and it will take a long time for the full effects of leaving the EU to work through. For example, manufacturers supply other manufacturers, and some service sectors depend on manufacturing or agriculture. Some service sectors depend on each other, for example, financial and professional services.

This section considers the expected sector-level effects for agriculture and food, financial and professional services, manufacturing, aviation and fishing. It concludes with the impacts of Brexit on the EU27 and on the Crown Dependencies. The section on immigration considers the impact of reduced migration of EU citizens on the UK.

Covid-19 damaged the economy severely in 2020 but most economists expect the sectors affected (such as hospitality, travel and other face-to-face services) to recover (though not fully). Unfortunately, Brexit harms sectors that have done relatively well during the pandemic (such as manufacturing, and financial and professional services). 

Economic impact

Introduction

Before Brexit, the consensus among reputable economic forecasters (including the Government, HM Treasury and others) was that Brexit would damage UK economic growth. The UK would be poorer with Brexit than it would have been without it.

The reason was simple. The UK could not forego the benefits of near-frictionless trade in the Single Market and the EU Customs Union and create new trade barriers without economic costs. The main consequences foreseen were reduced growth, trade, investment, migration, productivity and employment (or lower wages).

Economists’ approach

There are two economic impacts of Brexit – short-term and long-term. Economists estimate a ‘Brexit delta’: the difference between economic growth for the UK as an EU member and with Brexit. Uncertainties in any base-case forecast of the economy are less important than the reliability of the estimate of this difference. It’s essential to have a robust evaluation of the Brexit delta – the impact on the economy of trade barriers and other Brexit factors, such as immigration, foreign direct investment and productivity.

With Brexit, the UK economy was expected to continue to grow in the long term but more slowly. Most economists assess the economic impact over around 10 years. Shorter term impacts of major changes are more difficult to predict. The long-term estimates use well-tested models of the UK economy and extensive data on the economic effects of removing trade barriers. To model WTO terms or an FTA compared to EU membership, economists added back the economic effects of trade barriers.

Some of the predicted effects of Brexit (such as reduced foreign direct investment because of uncertainty) are already happening, resulting in muted economic growth (before the effects of Covid-19).  The section on economic context looks at the Brexit effects that have already reduced growth.

The switch to the TCA caused short-term disruption, costs and uncertainty. However, economists usually focused on the long-term steady state. Two notable exceptions were the Office for Budget Responsibility’s November 2020 evaluation and the Bank of England’s earlier assessment of ‘no deal’. The main difference between the TCA and ‘no deal’ is the absence of most tariffs and quotas. Most other trade barriers remain the same.

Even before Covid-19, economic forecasters expected the underlying rate of economic growth in the UK economy to be low. This meant that the UK economy would have low resilience to deal with the additional Brexit shocks. See the section on economic context for details.

There were three main possible types of trade arrangement for UK-EU trade:

• EEA (like Norway)
• FTA (which could have been deep like Canada, or shallow like the Johnson agreement)
• WTO (no deal)

The three options provided anchor points to consider the impacts of different levels of trade barriers. The TCA fell between an average FTA and WTO, whereas the Chequers proposal fell between EEA and an average FTA.

Short-term

Long-term

The economy performs worse in the long-run under Brexit due to reduced trade volumes, reduced migration, lower productivity and reduced foreign investment. Countering these effects, there are small benefits from: saving the UK’s contribution to the EU budget, future trade deals and reduced regulation.

In relation to a basic FTA, such as the TCA:

• OBR estimated a fall in GDP of 4% i (and WTO a fall of 6% reducing to 5.5% over the long run) – November 2020.
• NIESR estimated a fall in GDP of 3 – 4% (£60 – £80 billion a year or £1.2 – £1.5 billion a week), and that WTO would have led to an impact of 5-6%. This was slightly more optimistic than the averages below.
• LSE, working with UKICE, estimated a GDP impact of 5.5% to 7%.

The LSE took a simple view and compared the government’s view of the long-run impacts an FTA Brexit alongside the BoE’s view of the impact of Covid-19, summarised in Figure 8.1b. The LSE comparison assumed that the 1.7% drop in GDP from Covid-19 that the BoE expected for 2022 would continue permanently.

• LSE expected long-term scarring (the term economists use for permanent damage) from Covid and Brexit
• BoE expected economy will recover from Covid-19 reasonably quickly
• A basic FTA is better than ‘no deal’ would have been but still damaging (a long-run 4.9% GDP hit compared to 7.6%)

Figure 8.1b: Forecast shocks to UK GDP

The Office of Budget Responsibility estimate in November 2020 provided a range of outcomes depending on Covid and Brexit (see Figure 8.1c).  Their view was that a thin FTA would reduce long-run UK GDP by 4% (its November forecast) and that ‘no deal’ would have reduced UK economic growth by 6% in the short run and 5.5% over the long-run (compared to continuing as an EU member). Since then, the OBR has maintained its estimate of a 4% impact.

The OBR said the main difference between ‘no deal’ and an FTA, was the UK imposing its new global tariff (UKGT) on EU imports and EU imposing its Common External Tariff on UK imports. The other effects apply to both an FTA and ‘no deal’:

• Temporary physical border disruptions as traders and officials adjust to new administrative requirements and customs checks
• Ramp up of non-tariff barriers as the UK exits the Single Market without regulatory equivalence, public procurement and mutual recognition arrangements.

These and other effects of a no-deal Brexit would be on top of uncertain outcomes for Covid.

The next few years will see substantial reorientation of the UK economy due to Covid-19 and Brexit. This process is likely to expose regional, sectoral and income disparities. Detailed sectoral and regional assessments on the impacts of Brexit will be essential to inform policy responses (Centre for Economic Performance).

Figure 8.1c: Range of outcomes for UK economy

Sources:
Bank of England, EU withdrawal scenarios and monetary and financial stability, A response to the House of Commons Treasury Committee, November 2018
Letter from the Governor to the Treasury Select Committee regarding updated Brexit scenarios, 4 September 2019
Centre for Economic Performance, Covid-19 and Brexit: Real-time updates on business performance in the United Kingdom, Josh De Lyon and Swati Dhingra, July 2020
Bank of England, The Economy and Covid-19: Looking Back and Looking Forward, 4 September 2020
Dr Thomas Sampson, Associate Professor, London School of Economics, The UK Economy: Brexit vs Covid-19, August 2020 for UK in a Changing Europe
Office for Budget Responsibility, Economic and fiscal outlook, November 2020
National Institute for Economic and Social Research, Prospects for the UK economy, Hande Küçük, Cyrille Lenoël, Rory Macqueen, November 2020

Previous estimates

Before Brexit, economists agreed on the ranking of the economic harm of the potential Brexit options. Figure 8.1 show nine views of the impact on the size of the economy compared to staying in the EU. Small percentages involve large sums of money: a 1% reduction in UK GDP costs about £20 billion a year (about £400 million a week).

The predicted outcomes for the three main options were:

1. EEA: fall in GDP of 1.3% to 3.8% – average 2.2%
2. FTA:  fall in GDP of 1.2% to 6.2% – average 3.9%
3. WTO: fall in GDP of 3.5% to 8.5% – average 6.7% (excluding outlier)

The EEA option had the narrowest range of 2.5% indicating that its outcome was the most certain. The ranges for FTA and WTO were wider (at ~5%) indicating that their outcomes were less certain. There was one notable outlier – Economists for Free Trade – who believed that a WTO Brexit would benefit the economy. Other economists thought their assumptions were unrealistic (to put it politely).

(Note that different economists may consider different factors. For a thorough evaluation of studies, please see: Gemma Tetlow and Alex Stojanovic, Understanding the economic impact of Brexit, October 2018.)

Industry sectors

Introduction

This section addresses the impacts of Brexit rather than Covid-19 (apart from the overall economic impact on sectors  – see above). The pandemic creates most damage in different sectors to those most affected by Brexit, which means the UK is likely to be heading for a ‘double whammy’.

Brexit is damaging for almost all industry sectors according to the government’s analysis and other studies. We examine the implications for five key sectors:

• Agriculture and food
• Financial and professional services
• Manufacturing
• Aviation
• Fishing

Also, you can scroll down to Bloomberg’s analysis at company level by sector (as at October 2019).

For three graphic case studies on the impact of Brexit on SMEs, please see the appendices.

Most affected sectors

The government provisionally assessed the expected impact of Brexit using the proportion of sector exports that go to the EU (see Figure 8.2). They measured the impact on each sector’s contribution to the economy:

• Chemicals, food and drink, clothes, manufacturing, cars and retail would be worst affected.
• Small upside for agriculture under the FTA option, but harm under ‘no deal’ (WTO).
• WTO and FTA are much more damaging than the EEA option.

The government reported the results in its cross-Whitehall briefing, released in March 2018.

Figure 8.2 Expected sector impact of Brexit

Two other studies looked at the costs of trade and jobs at risk:

• Five sectors will bear most of the costs of trade effects (according to Oliver Wyman and Clifford Chance):
  • Financial services
  • Automotive
  • Agriculture, food and drink
  • Consumer goods
  • Chemicals and plastics.
• Three sectors have the most jobs at risk are (according to Birmingham University):
  • Administration and support services
  • Wholesale trade
  • Legal and accounting services

Source:
EU Exit Analysis, Cross-Whitehall Briefing, January 2018, published March 2018
Oliver Wyman and Clifford Chance, The Red Tape Cost of Brexit, March 2018 
University of Birmingham, An Assessment of Brexit Risks for 54 Industries: Most Services Industries are also Exposed, December 2017

Detail by sector and company

Agriculture and food

Pre-Brexit situation

The UK does not produce enough food to feed itself. Indigenous food production supplies 61% of consumption (Defra – 2015); 39% needs to be imported and most of it comes from the EU (see Figure 8.3).

Both agriculture and food manufacturing are major employers providing 440,000 and 400,000 jobs respectively.  See Table 8.2 for key industry statistics.

Imports exceed exports in each category of food, feed and drink – except ‘beverages’ which has a trade surplus largely due to Scotch Whisky. See Figure 8.4 for exports and imports by food category.

‘Fruit and vegetables’ has the largest trade deficit, followed by meat. Fruit and vegetable imports were £10.3 bn while exports were worth £1.1 bn, giving a trade gap of £9.2 bn (2016).

For analysis of the fishing sector, please click here.

UK relies on EU27

UK trade in food and agriculture is tied to the EU:

• UK agricultural and food production supply chains are integrated with the EU (particularly with Republic of Ireland, but also other countries).
• 94% of the UK’s food shortfall is imported from the EU or countries with EU trade agreements.
  • 70% of UK food imports come from the EU27.
• 60% of UK exports of food, feed and drink go to the EU27;
  • 80% of UK’s agricultural exports go to the EU
  • 97% of food exports go to the EU or countries with EU trade agreements.
• UK received c.€4bn a year in Common Agricultural Policy (CAP) payments (average of 2014-20 EU financial plan)

Duties raise prices for some imports from some third countries. However, EU trade agreements can mean that non-EU food imports are tariff-free. These include imports from most developing nations. Tariffs are often high for agri-food to protect domestic producers and allow them to charge higher prices to consumers.

The average tariff on EU food imports is 12.2%, but much higher for some, for example:

• Cereals 22%
• Cheese and wine 30-40%
• Dairy products 54%
• Some meats > 90%
• Sugar 31%

Expected impact of Brexit

The government intends to preserve the EU’s external tariffs in its own version with minor (but administratively tricky) differences. They believe that, without these tariffs for third countries, the level of UK agriculture self-sufficiency would plummet. In the words of the National Farmers’ Union (NFU):

“A potential unilateral lowering of British tariffs would be damaging”; “many UK farm businesses would be put at significant competitive disadvantage if current tariff barriers were removed or slashed without great care being taken to ensure a level playing field”.

“Any Brexit outcome that results in the UK importing cheaper food would be hugely damaging to the farming, food and drinks sectors of Scotland and the UK”

Under no-deal WTO rules, the UK could unilaterally reduce tariffs on EU agri-food imports. However, without a UK-EU trade agreement, it would need to do the same for all countries without a UK trade agreement. This would seriously harm and shrink domestic farming, and reduce the UK’s leverage in future trade negotiations.

The farming industry’s loss could be the food consumer’s gain. With lower tariffs, UK food imports would be cheaper. However the Brexit devaluation of sterling, already 10% or more and higher with ‘no deal’, has increased all import prices. This mutes (and may exceed) the impact of any tariff reductions on prices.

Any new non-tariff barriers reduce the efficiency of the food supply chain and create delays in its time-critical processes. As the House of Lords noted:

“It is imperative that a UK-EU trade deal should avoid the imposition of tariffs on trade in both directions, to minimise the potential for disrupting those supply chains. Non-tariff barriers could be equally if not more disruptive to trade in agricultural products and food”.

The government has said that it will maintain the equivalent of EU CAP subsidies to the farming industry until 2020. The government announced that it intends to phase out direct subsidies based on the amount of land farmed. It will shift funding to a new system called Environmental Land Management (ELM). This will reward farmers who prevent flooding, help landscapes recover by planting new woodlands and improve wildlife welfare. However, subsidy cuts will leave farmers in a precarious position if they do not qualify for ELM funding.

Source: House of Lords, European Union Committee, 20th Report of Session 2016–17, HL Paper 169, Brexit: agriculture, May 2017

Financial and professional services

Pre-Brexit situation

Financial services exports make a major contribution to the UK’s trade balance. The industry’s trade surplus was £50.8bn in 2016. Professional services had a further surplus of £14.7bn, making a total of £65.5bn. Table 8.3 gives some key statistics.

(The definition of professional services includes total legal, accounting and management consulting services. Part of these services does not relate directly to financial services).

The financial services industry also contributed GVA of £115bn (7.2 % of the economy). Professional services contributed a further £66bn (3.8% of the economy).

The tax contribution from financial services for 2015/16 was £71bn.

The UK industry has close links with the EU. For example:

• 5,500 UK-authorised firms hold passports to the Single Market;
• 8,000 EU-based firms use passports to access the UK market.
• Around 25% of UK financial services revenue is related to the EU (Oliver Wyman).
• EU workers account for 15% of the combined workforce in both industries.

Freedom of movement facilitates UK exports in financial and professional services to the EU27.

Source:
ONS employment statistics, ONS Pink Book 2017 (tables 3.5 and 3.8)
Oliver Wyman, The impact of the UK’s exit from the EU on the UK-based financial services sector, 2016

Expected impact of Brexit

Back in October 2016, an Oliver Wyman report concluded:

• The connections between activities and firms mean the effects of Brexit will be wider than simply reducing business with EU clients.
• Without regulatory equivalence granted by the EU, severe restrictions could limit the EU-related business that UK-based firms can do.
• Under a WTO Brexit, 40-50% of EU-related activity (about £18-20bn in revenue) and 31-35,000 jobs could be at risk, along with £3-5bn of annual tax revenue.
• Brexit will harm businesses that rely on firms that leave or close. This puts at risk an extra £14-18bn of revenue, 34-40,000 jobs and ~£5bn in annual tax revenue.

Banks have taken action

All major UK-based banks have prepared their plans for Brexit and many have implemented them. The banks could not delay because it takes a long time for regulators to  approve new EU-based entities and for firms to change operations and technology.

The Association for Financial Markets in Europe (AFME) detailed the complexities involved. As the two-year period to March 2019 was not long enough for many banks to make the necessary changes, AFME concluded that a further transition period of three years would be needed. The actual transition period was for only 21 months. Banks had to act.

When the UK leaves the Single Market, passporting for UK banks will cease. One option is for the UK and EU to recognise each other’s financial services regulation as equivalent. However equivalence is more restrictive than single-market membership and leads to additional costs through regulatory duplication. The EU has the power to revoke regulatory equivalence at short notice. This risk could force the UK to adopt new EU-equivalent regulation but with little or no say over it.

Jobs and assets are moving

For financial services businesses moving from the UK to the EU, Dublin is the favourite destination followed by Luxembourg, Frankfurt and Paris (according to an EY survey).  Some business activity (for example, the booking of transactions) has moved to the EU27 to keep things simple for customers and regulators. The Bank of England expects that in the long run (based on the banks’ own plans), the UK could lose up to 75,000 jobs as a result of Brexit. The European Banking Authority has moved from London to Paris with about 200 jobs.

Job losses are expected over an extended period to around 2024. Not all moves or job losses will be announced or visible. For example, the UK is likely to lose out on future new jobs being created in, say, Frankfurt or New York rather than London.

The EY survey reported:

• 7,500 jobs are leaving London because of Brexit.
• Since 2016, 40% of firms (88 out of 222 that EY monitors) have confirmed Brexit moves or potential moves to at least one EU location. Twenty-six confirmed multiple locations for relocating staff and operations.
  • 34 opted for Dublin
  • 26 for Luxembourg
  • 23 for Frankfurt
  • 20 for Paris
• £1.2 trillion of assets are moving (based on those that have declared the value publicly).
  • 24 of the larger firms (10 banks, 9 insurance providers, and 5 wealth and asset managers) have announced they intend to transfer assets out of the UK to Europe ahead of Brexit.

Sources:
AFME, Planning for Brexit – Operational impacts on wholesale banking and capital markets in Europe, February 2017
EY, Financial services Brexit tracker, October 2020

Manufacturing

Pre-Brexit situation

In 2016, manufacturing made up 9.8% of the UK economy. Manufactured goods accounted for 44% of UK exports, 58% of imports and directly employed 2.6 million people (see Table 8.4). Manufacturing is often closely linked with the provision of services, increasing its importance to the economy and international trade.

The EU is the UK’s biggest trading partner in manufactured goods (2016 figures).

• 47% of goods exports go to the EU (worth £134bn)
• 54% of goods imports come from the EU (worth £154bn)
• 300,000 workers in manufacturing come from the EU (11% of the workforce).

Manufacturing is R&D intensive accounting for 70% (£15 billion) of UK R&D spending, and has high productivity.

Three manufacturing sectors are crucial and make up half of non-food manufacturing:

• Transport equipment
• Chemicals/minerals
• Electrical/optical equipment

Within transport equipment, the automobile sector is a major employer, with about 169,000 workers in manufacturing. Over 800,000 work in the auto sector when related services and activities are included (Society of Motor Manufacturers and Traders). Over 50% of UK car exports go to the EU.

Benefits of Single Market

As a member of the EU Single Market and Customs Union, manufacturing gains important benefits.

• There are no tariffs on goods traded between member states.
• There are no quotas or limits on the quantity of goods that can be traded between member states.
• Non-tariff barriers to trade have been eliminated, which means that there are common technical specifications and labelling requirements throughout the EU.
• All member states set the same tariffs for goods imported into the EU from non-EU countries.
• Something manufactured in the UK can be shipped and sold in any EU country.

The UK’s manufacturing supply chains are often closely integrated with the EU. The UK imports intermediate goods (such as auto components) which go into UK goods (both finished and intermediate), often for export.

• Nearly half of the UK’s intermediate imports and exports are with EU countries. For example:
  • Around 60% of the parts that go into a UK-assembled car are imported and there is no domestic supplier.
  • 80% of UK-assembled cars are exported.
• Integrated supply chains are finely tuned to be as efficient as possible. They have limited tolerance for delays, extra costs, or additional process steps (such as new documentation of origin or customs checks).

Sources:.
Is the UK’s role in the European supply chain at risk?, Bruegel Institute, December 2016
What does Brexit mean for the UK’s automotive industry? Professor David Bailey, June 2016
House of Commons Library, Manufacturing statistics and policy, January 2017

Expected impact of Brexit

Brexit will be damaging for UK manufacturing, putting thousands of jobs at risk. An FTA is unlikely to address the non-tariff barriers that will appear as a result of Brexit. If the complexity of trading with the EU increases and profitability drops too much, UK-based firms are likely to move manufacturing activity, jobs and investment from the UK to the EU.

A study by the UK Trade Policy Observatory at Sussex University found that the implications of Brexit for different manufacturing sectors and regions varied considerably. The study concluded that high tech and medium-high tech sectors are more at risk of a decline than medium and medium-low tech sectors. They also predicted declines in textiles, clothing and footwear. On the other hand, they found that production in the food processing sector may increase.

The Brexit devaluation of sterling has assisted exporters because their products are cheaper for foreign buyers. However, devaluation raises the price of imports of goods (raw materials and intermediate goods) that feed into UK manufacturing processes. Some UK manufacturing exporters have had to raise prices as a result.

AS a practical example, here is link to a ‘Brexit myth-buster’ for the automotive sector.

View of supply-chain managers

The Chartered Institute of Procurement and Supply surveyed 2,204 supply chain managers in March 2018 on the impact of Brexit. They found:

• Two-fifths (41%) of respondents plan to increase their prices in the future to offset the potential costs of Brexit
• Almost a quarter (23%) said they planned to reduce the size of their workforce.
• More than one in 10 (11%) EU firms have moved some of their workforce out of the UK
• 9% of UK firms have lost contracts, or had them cancelled, as a direct result of Brexit.
• 22% of UK businesses with EU suppliers are having difficulty securing contracts that run after March 2019
• 14% of EU firms with UK suppliers have already moved parts of their business out of the UK to reduce exposure to Brexit risks.

New trade deals with non-EU countries might open up new markets for UK manufacturers. However, these deals currently simply replace EU deals.

New trade barriers

Tariffs will be particularly damaging for UK sectors with an integrated EU supply chain, such as the automotive, chemical and pharmaceutical sectors. Tariffs could be levied multiple times in the production process as sub-components and intermediate goods move back and forth across borders.

Non-tariff barriers would have an important affect on all manufacturing sectors. Compliance with rules of origin requirements would introduce a significant additional administrative burden, with a particularly for sectors in an EU supply chain.

Regulation is an important consideration in some manufacturing sectors. In the chemical sector common regulation and safety standards are critical facilitators of trade between the UK and the EU. In the automotive sector, the US and the EU are the major drivers of regulation. After Brexit, the UK will have a smaller voice in auto regulation and will have to follow the US and the EU. A similar pattern is likely in other sectors.

Sources:
UK Trade Policy Observatory, Which Manufacturing Sectors are Most Vulnerable to Brexit?, February 2018
CIPS, Firms raise prices in response to ‘crippling cost of Brexit’, 20 March 2018

Aviation

Pre-Brexit situation

Britain has the largest aviation network in Europe and the third largest in the world. The EU is the single biggest destination market from the UK, accounting for 49% of passengers and 54% of scheduled commercial flights.

The industry contributes £55bn of GVA and employs just under one million people (see Table 8.5). However a large part of the industry is exposed to Brexit (see Figure 8.5).

EU gives global access

Aviation is an EU success story. Traditionally, bilateral international aviation agreements are very restrictive e.g. specifying individual flight slots for specific airlines. By contrast, as a member of the European Common Aviation Area (ECAA), UK airlines currently have the right to fly to, from and within European countries.

EU arrangements are comprehensive and flexible. Any British airline can:

• Fly anywhere in EU;
• Sell tickets to anyone in the EU;
• Fly to another member state and within it.

In addition to market access, the UK participates in numerous technical programmes to facilitate the movement of both passengers and cargo.

Through the EU, the UK has secured deals with key countries across the world e.g. the EU-USA “open skies” agreement in 2008 enabling EU or US-based carriers to fly any transatlantic route between the two.

Safety

EU airlines adhere to common rules and safety standards. The Single European Sky is an EU initative that sets common rules for the ECAA, which includes 36 countries, including Iceland and Norway. The European Aviation Safety Agency (EASA) deals with the safe operation of civil aviation including air traffic management, and aerodromes. EASA, whose standards are recognised worldwide, sets regulations for safe flying in Europe. EASA’s approval is necessary for aircraft to fly and for airlines to operate. In 2015, the European Commission delegated greater powers to EASA to define regulation.

Consumers

EU consumers benefit greatly from these initiatives. Fares across Europe have fallen in real terms, with greater choice and competition and new routes across the EU. Consumers are protected through a common system of Passenger Rights.

• Airline passengers can claim compensation for delayed and cancelled flights anywhere in the EU.
• Airlines have a duty of care to delayed passengers, the needs of disabled passengers and others in need of assistance.

Sources:
http://www.richardcorbett.org.uk/brexit-and-aviation/, March 2017
IATA, The impact of ‘BREXIT’ on UK Air Transport, June 2016
CBI, Making a success of Brexit – Aviation
Bird & Bird, How will Brexit affect the airline industry from a regulatory perspective?, June 2017

Expected impact of Brexit

Aviation is outside the scope of the WTO and does not form a part of free trade agreements. Aviation has to be negotiated separately. The industry is governed by bilateral agreements, except within the EU, which has its own multilateral system.

Failure to secure a transitional deal with the EU for flying rights would incur significant cost for the aviation sector and the wider economy. This is critical because airlines, airports and passengers plan travel many months in advance. There would be some mitigation because Covid-19 has reduced travel significantly.

Airlines like EasyJet are establishing new and separate operations within the EU27 to ensure that they can continue to operate as an EU airline. This is an example of observable Brexit economic losses to the UK, similar to those caused by banks and manufacturers moving activities out of the UK.

Flights

UK-EU aviation
Unless the government negotiates a specific deal with the EU, the UK will be out of the European single aviation market at the end of  the transition period on 31st December 2020.  This would mean that there will be no legal right to operate flights to in the EU or anywhere else covered by the current EU-level framework.

Without a deal, the UK would no longer be a member of the European Common Aviation Area nor have an agreement with the EU covering safety and market access. As a result, UK airlines could not fly to the EU nor could EU airlines serve the UK. However, both the EU and the UK made no-deal contingency plans in 2019.

If these are repeated:

• Airlines would be able to fly between UK and EU but access would be significantly reduced.
• UK airlines would not be able to:
  • Fly between EU countries as they do now.
  • Operate services on domestic routes within the same EU country.
• EU airlines would be able to fly to the UK from any EU member state, but would not be permitted to operate domestic services in the UK.
• UK proposed to allow airlines to retain a UK licence if they were controlled by UK or EEA nationals.
• EU offered a sixth-month grace period for airlines that wish to keep the rights of an EU airline, but were not already owned and controlled by EU nationals

For consumers, Brexit will remove the right of British airline passengers to claim compensation for delayed and cancelled flights under EU legislation. The aviation minister has, so far, refused to pledge that the laws would remain in force after Brexit.

UK Non-EU aviation
International flights by UK airlines to non-EU countries should not be disrupted significantly. The UK has been putting in place replacement agreements, notably with the US. The new UK agreements are more limited than EU agreements, but they will let UK airlines to serve non-EU countries.

Exit EU systems

The UK would leave EASA and the regulatory and operational system, and would need to set up its own, unless it negotiates otherwise. There would also be significant implications for UK aerospace engineering and manufacturing, not least Airbus. The trade parts of the Brexit deal would be crucial for the UK.

Brexit is unlikely to have a significant effect on EASA or the current European aviation safety regime:

• EU proposed to extend the validity of aviation safety certificates issued by EASA to UK businesses for nine months, indicating that extensions could be granted.
• UK CAA said it would recognise EASA certificates, approvals and licences in the UK for up to two years.

The UK could be excluded from the Single European Sky and SESAR (Single European Sky Air Traffic Management Research) programmes, both of which seek to increase safety, efficiency and capacity while reducing delays within European airspace. Britain could lose its place at the negotiating table in shaping future regulation, undermining a sector where it enjoys international leadership.

• The UK could seek to remain a member of ECAA, to give access to the Single Aviation Market, but the UK would have to comply with the range of EU aviation law, with no role in shaping new legislation. Securing agreement to fly to other EU countries from the UK should not be a problem, but it may be more difficult to secure continued rights for UK airlines to operate between other member states, or within them.
• The UK could also seek to retain membership of the EASA. It is possible that only observer status will be on offer with diminished influence (although UK influence is likely to diminish anyway as a non-EU member). But the alternative – of the UK setting up its own separate agency and negotiating equivalency agreements, would be costly, needlessly duplicative and would take considerable time.

Sources:
House of Commons, Transport Committee, Impact of Brexit on aviation examined, 30 October 2017
House of Lords, Brexit: trade in non-financial services, March 2017
UK in a Changing Europe, What would no deal mean?, September 2020

Fishing

Pre-Brexit situation

The UK fleet has the second-largest total catch (in terms of landed weight) and the second-largest fleet size (in gross tonnage terms) in the EU. However, the UK fishing industry is a relatively small part of the UK economy.

There are two sectors: fishing, which includes aquaculture (mainly salmon and trout) and seafood processing. The seafood processing sector is complex, conducting both primary and secondary processing of fish caught within the UK and imported from elsewhere. For example, significant amounts of European cod are (amazingly) exported to China for primary processing (e.g. filleting) before being re-imported to the UK for secondary processing (e.g. breading).

Key statistics

Table 8.6 summarises the key statistics for 2016:

• Fishing accounted for £0.7bn or 0.04% of the UK economy (7% of the GVA of the agriculture and farming sector).
• Fishing employed 12,000 people, less than 0.04% of the UK 2016 workforce of 31.7 million
• Seafood processing employed 18,000 FTEs.
• The UK was a net importer of fish – trade deficit of £1.4bn. Non-EU countries such as Norway, Iceland, the Faroe Islands and China supply the vast majority of UK imports.
• The EU is the major market for UK exports of unprocessed fish (accounting for 67% of UK exports of £1.6 billion in 2016). The UK imported £3.1bn of fish (31% from the EU). Overall the UK had a small trade surplus with the EU of £0.1 billion.
• UK vessels land around 400,000 tonnes of fish each year in the UK, and between 200,000 and 300,000 tonnes abroad.

Positive trends in UK fishing

The UK is a leading aquaculture producer within the EU (top by value, second to top by production tonnage in 2015). Norway is a much bigger producer, producing more than the whole of the EU28 – mainly Atlantic salmon and trout. The EU has bilateral agreements with non-EU countries covering access and fishing opportunities. In the North Atlantic, the EU has fisheries agreements with Norway and the Faroe Islands.

As Table 8.7 shows, the fishing industry’s contribution to the economy has increased over the last decade while the landings were relatively stable but increased from 2014 onwards, but the fleet is now slightly smaller and fewer fishermen are employed.

Between 2012 and 2014, 58% of fish and shellfish caught in the UK’s water was landed by fishing boats from other EU countries.  This represented an annual average of about 650,000 tonnes of fish and shellfish. In the same period, UK fishing boats were estimated to have landed an annual average of 90,000 tonnes of fish and shellfish, caught in other EU member states’ waters.

The industry receives EU funding for science, enforcement and direct industry support. The UK was allocated €243m under the new European Maritime and Fisheries Fund for the period 2014-2020. In addition, UK research institutes and consultancies are also funded by the European Commission to carry out specific research projects or ongoing work focused on fishing or aquaculture.

Sources:
House of Commons, UK Sea Fisheries Statistics, December 2017
Seafish, 2016 and 2018 Seafood Processing Reports
Seafish, 2017 Provisional UK/EU seafood trade summary, February 2018
Marine Management Organisation, UK sea fisheries annual statistics report 2019, September 2020

Common Fisheries Policy

The EU has sole competence for the conservation of fishing stocks and the Common Fisheries Policy (CFP). (For more on competences, see sovereignty and law). The CFP came into being in the 1970s and has been through several updates, the most recent of which took effect on 1 January 2014. The 2014 reform changed the way in which the CFP is managed, giving EU countries greater control at national and regional levels

The objective of the CFP is for fishing to be environmentally, economically and socially sustainable. The impact of fishing on the fragile marine environment is not yet fully understood, so the CFP is cautious and recognises the impact of human activity on all parts of the marine ecosystem. It seeks to make fishing fleets more selective in what they catch, and to phase out the practice of discarding unwanted fish.

The CFP gives all EU fishing fleets equal access to EU waters and fishing grounds (treated as a common EU resource) and allows fishermen to compete fairly. The CFP provides a set of rules for managing EU fishing fleets and for conserving fish stocks. These include:

• Total Allowable Catch (TAC) and quotas for key fish stocks for each EU member to be agreed each December, as well as limits on days at sea (effort) for non-quota stocks;
• Directly applicable fisheries management legislation, including on detailed technical measures (for example, types of fishing equipment that can be used) and control and enforcement.

Each country’s quotas are based on historical catch records dating back to 1973. Member states distribute their share of the quota between fishermen using transparent and objective criteria. Defra allocates the UK quotas, and has allowed the sale of UK quotas to buyers from other EU countries. These sales increase the EU share of UK fish.

Other regulation

The fishing industry is subject to other pieces of EU regulation, for example, environmental rules:

• Habitats Directive provides for member states to create an EU system of protected sites, including in the marine area, and affords protection to certain marine species, such as cetaceans;
• Marine Strategy Framework Directive obligates member states to designate protected areas and requires member states to impose environmental controls to protect those areas; and
• Water Framework Directive requires integrated management of surface water bodies (rivers, lakes, streams, estuaries and coastal waters) and groundwater (water in aquifers) to protect and enhance the environment

Source: Committee for Exiting the EU, Sectoral Report – Fisheries, December 2017

Access arrangements

EU member states share access to one another’s’ Exclusive Economic Zones (EEZs) and territorial (inshore) waters. The EEZ is adjacent to the territorial sea (12-mile limit) and extends up to 200 nautical miles from a country’s coast. Where the EEZs of two adjacent countries overlap, a median line is defined equidistant from the two countries’ coastlines to separate their respective EEZs. Figure 8.6 shows the UK EEZ and those of neighbouring coastal states.

The Scottish fishing fleet depends relatively little on non-UK waters, but the English fleet traditionally catches its fish in Irish, French and Norwegian waters.

Access arrangements under the CFP are as follows:

• 0–6 nautical miles:
  • National vessels only unless permitted under voisinage (neighbourhood) agreements between adjacent member states. The UK has two voisinage agreements:
    • Granville Bay which allows French and Jersey vessels mutual access to each other’s territorial waters;
    • UK-Republic of Ireland which allows the Republic of Ireland and UK vessels mutual access to each other’s 0–6 mile limit.
• 6–12 nautical miles:
  • National vessels and vessels from Belgium, France, Germany, the Netherlands and the Republic of Ireland, have access to specified areas of the UK 6-12 mile zone, for specified species.
  • UK vessels have some reciprocal access to the 6–12 mile zones of France, Germany, the Netherlands and the Republic of Ireland. There is no third country access to the UK 6–12 mile zones;
• 12–200 nautical miles:
  • EU waters, shared access between all Member States. Norway and the Faroe Islands are the only third countries to have access to the UK 12–200 mile zone for certain species.
  • Reciprocal access for UK vessels into Norwegian and Faroese waters.

Source: Committee for Exiting the EU, Sectoral Report – Fisheries, December 2017

Source: House of Lords European Union Committee, Brexit:Fisheries, December 2016

Expected impact of Brexit

The Government announced its intention to introduce a Fisheries Bill in the 2017 Queen’s Speech, which will: “Enable the UK to control access to its waters and set UK fishing quotas once it has left the EU.” 

The House of Commons briefing paper identified the main issues that the Government will need to address:

• A new mechanism to enable the UK to negotiate and agree annual fishing quotas with the EU and other countries;
• Introduction of a UK fisheries management and enforcement system. This in many respects may mirror the existing arrangements for managing fisheries, albeit with additional resources required;
• Restrictions on EU market access for fishery products (depending on the outcome of negotiations) and less influence in discussions on determining EU market rules for fish;
• Less certainty around public funding of support for fishing communities or environmental sustainability;
• Issues related to possible changes to the protection of the marine environment.

It is deceptively appealing to think that the UK could simply reassert an exclusive right over the whole of its EEZ. However, trade with the EU is critical for the future of the fishing industry. As the Parliamentary Committee on Exiting the EU concluded:

“There is a likelihood that the Government may come under pressure to balance the negotiations over a future fisheries relationship, including quota shares and access arrangements, against the negotiations over trade in fish products with the EU.”

This and other considerations mean the fishing sector requires much more government attention than the size of the sector indicates:

• Value and growth potential of the marine fishing sector depends on the sustainable use of fish stocks.
• Need to maintain and sustain fish stocks.
• importance of the sector to coastal communities.
• Complexity of annual/periodic negotiations with the EU and other coastal states to determine fishing opportunities.

Tariff-free access is essential

Separately, the House of Lords took evidence from fishing industry and trade specialists. The vast majority of witnesses agreed that tariff-free access to the Single Market for fish and fish products was essential. Following Brexit, the UK may lose this.

The UK will need to reach agreement with the EU on quotas and access to each other’s waters. It will also need to minimise trade barriers and border delays, secure effective conservation of UK fisheries and avoid conflict at sea with its neighbours. The EU is likely to resist any attempt to reset the well-established basis for quota allocation. As a result, any agreed post-Brexit quotas are likely to be on terms close to the status quo. (However, given climate change and fish migration northwards to cooler waters, the allocations used since the 1970s are likely to be revised).

The UK would have to comply with EU market regulations to export fishery products to the EU. However, post-Brexit UK is likely to have little influence over any new regulations. 

International law

Brexit UK will continue to be subject to international law on fisheries management. These laws require coastal states to cooperate with neighbouring coastal states to manage and sustain fish stocks. They includes the United Nations Convention on the Law of the Sea (UNCLOS) and the United Nations Fish Stocks Agreement (UNFSA).

Under UNCLOS, coastal states have jurisdiction over their EEZs (up to 200 miles offshore or the median line between coastal states). A coastal state has the right to exploit, develop, manage and conserve all the natural resources (including fish) found in the waters of the EEZ, and on the ocean floor and in the subsoil of its continental shelf.

International law requires coastal states to cooperate with other states where stocks straddle two or more EEZs, the EEZ and the high seas, or where the stock is a highly migratory species. This is the case for virtually all stocks fished by the UK.

No-deal implications

‘No deal’ would give UK fishermen a greater share of fish in UK waters. However the UK would still need to cooperate with its neighbours, but under a looser legal framework than as an EU member. Against any benefits, the government would need to consider the consequences of ‘no deal’:

• Reduced access to other countries’ waters.
• Risk of overfishing and depletion of UK stocks.
• New tariff and non-tariff barriers which would impede UK trade in fish and seafood with the EU.
• For UK consumers, fish prices would rise and choice would shrink.
• Disruption at Channel ports, leading to transport delays for perishable products.
• Securing UK waters against fishing by EU states.

(For a closer look at possible Brexit scenarios for the fishing industry, please see New Economics Foundation, Not in the Same Boat, November 2017.)

Source:
Parliament, EU Select Committee, Fisheries and Trade, 2016
House of Commons Library, Brexit: What next for UK fisheries?, Briefing Paper, July 2017

Regions

Overview

The Cross-Whitehall briefing included a provisional view of the likely impact on the UK regions under three potential models for the UK-EU relationship (see Figure 8.7). The analysis considered each region’s dependency on exports and its risk from new trade barriers.

The provisional results show that all regions of the UK would be economically worse off as a result of Brexit. The worst affected regions are:

• North East
• West Midlands
• Northern Ireland
• North West

Those least affected are London, the South West and Yorkshire/Humber.

Other studies find that several regions have a high proportion of EU exports in the most vulnerable goods sectors. The most exposed regions with vulnerable goods sectors include:

• Northern Ireland and Cornwall (food, live animals and material manufactures)
• Northumberland, the Tees Valley and Durham (chemicals, machinery and transport equipment)
• East Wales (material manufactures, machinery and transport equipment)

Trade flow analysis

A simple measure of export dependency (such as the one above) can give a misleading picture of vulnerability to Brexit. A better view comes from considering trade linkages in more detail by looking at the flow of goods and services in each region and the linkage to regional labour income.

Simple measures like exports and imports hide the back and forth trade in raw materials, parts and components and business services typical of international value chains.  The World Input Output database has been extended to show this flow data for 245 regions within the EU.

University of Birmingham study

A recent study by the City-REDI Institute at the University of Birmingham  linked trade flows not just to regional GDP but also to regional labour income. This provides a more tangible and specific local measure of the risk of Brexit to the local economy than GDP or GVA which are more general and can seem remote.

The extent to which the trade risks will actually materialize, for example via tariffs and non-tariff barriers to trade between the EU and the UK, will depend on the final agreements reached.

The study looked at one principal feature of Brexit – trade flows of goods, intermediate goods and services – but ignored others such as the relocation of UK subsidiaries of multinational firms or the redistribution of subsidies to regions. Similarly it ignored the risks associated with reduced migration and foreign direct investment.

The study found (see Figure 8.8):

• Low levels of labour income exposure to Brexit in the Highlands and Islands (Northern Scotland), Northeastern Scotland, Merseyside and both Inner and Outer London (8% to 9%).
• High levels of exposure in Cumbria (17%), Lancashire, Leicestershire, Warwickshire, and East Riding/North Lincolnshire, which are located in the old British industrial heartland (14-15%).
• High levels of exposure in the west and south, including: Hampshire, Herefordshire, Gloucestershire, and Wiltshire.

Comparing the UK and the EU27, the study demonstrated:

• Overall, the UK is far more exposed to Brexit risks than the rest of the EU. As such, the UK is far more dependent on a relatively seamless and comprehensive free trade deal than the EU27.
• Almost all UK regions are systematically more vulnerable to Brexit than regions in any EU27 country.
• Irish regions have levels of exposure similar to the UK regions with the lowest levels of exposure, such as London and northern Scotland

The argument that the UK’s trade deficit with the EU27 implies that other EU member states will be eager to agree a free trade deal with the UK, is not correct. The study found the UK’s overall exposure to Brexit is about 4.6 times greater than that of the EU27 as a whole.

The UK regions are far more exposed to Brexit risks than EU27 regions, except for some in Ireland which have a high exposure within the EU27. See below for more details.

Sources:  
UK trade and the World Trade Organisation, Richard Barfield, September 2018
The Continental Divide? Exposure to Brexit in Regions and Countries on Both Sides of the Channel, W Chen, B Los, P McCann, R Ortega-Argilés, M Thissen and F van Oort (December 2017)
Exposure to Brexit in regions on both sides of the Channel, Wen Chen, Bart Los, Philip McCann, Raquel Ortega-Argiles , Mark Thissen, Frank van Oort, 19 December 2017

EU impact

Current situation

In March 2017, the European Commission prepared an assessment for the European Parliament of the economic impact of Brexit on both the UK and the EU. The assessment based its findings on a large numbers of existing independent studies. This section and the one that follows are based on this report.

The trade in both goods and services between the UK and EU27 is substantial (the EU report uses 2015 data):

• €306 billion of exports of goods by the EU27 to the UK, versus €184 billion of imports, and thus an EU trade surplus in goods.
• In terms of % shares of GDP, the EU27’s exports to the UK amount to 2.5% of GDP, whereas the UK’s exports to the EU27 amount to 7.5% of its GDP.
• The UK is the EU27’s second largest trading partner after the US. US-EU27 trade in goods is only about 20 % larger than UK-EU27 trade in goods.
• For services, the amounts are €94 billion of exports by the EU27 to the UK, versus €122 billion of imports, and thus a UK trade surplus.
• For both goods and services the degrees of dependence in % of GDP on the UK market is much higher for the smaller EU member states that have close ties to the UK of historical character and/or geographic proximity (Ireland, Cyprus, Malta, Belgium, Netherlands).

Foreign direct investments (FDI) are very large on both sides. The EU27’s stock of FDI in the UK is estimated at €985 billion, or 8.3% of its GDP, while the UK’s investment in the EU27 total is €683 billion but bigger in relation to its GDP (26.6%). However, there are indications that a significant proportion, maybe about one half, of this FDI represent financial operations.

The number of EU27 citizens living in the UK at the end of 2016 is estimated at 3.35 million. The largest number are workers (2,002,000), compared to pensioners (223,000) and the unemployed (102,000). The number of UK citizens living in EU 27 countries is substantially less: 1,217,000, of which 400,000 are pensioners, with remainder being workers and their dependent families, and students.

Impact of Brexit

The main finding of the report was that the available studies largely agree that Brexit will inflict losses on both sides. All studies agree that the losses will be considerably larger for the UK than for the EU27. Only in very pessimistic scenarios would the losses for the EU27 reach a significant size.

The economic losses are shared disproportionately in a ratio of around 1:2 or 1:3 for the EU27 and the UK, respectively. In terms of percentages of GDP,  the losses for the EU27 would be about 10 to 15 times smaller than those of the UK. The much greater size of the EU27 (five times as big in GDP as the UK) means that it is much better able to absorb the economic impact of Brexit than the UK.

For the EU27 the losses are virtually insignificant, averaging between 0.11% and 0.52% of GDP for the optimistic versus pessimistic scenarios respectively. These amounts are modelled as the totals cumulating up to 2030, so the annual average losses would be of the order of 0.011% to 0.052 % of GDP. (For comparison, average member state contributions are about 1% of GDP a year).

At a member state level (see Figure 8.9), the EU study notes that the aggregate results for the EU27 under the FTA and WTO scenarios are also roughly reflected in the results for the larger member states (Germany, France, Spain, Italy).

For several small member states, in particular those with close historic ties with the UK, the results are more damaging:

• Ireland suffers the same magnitude of losses as does the UK. This is explained by Ireland’s trade dependency on the UK being greater than vice versa, in roughly the same proportions that the UK has a greater trade dependency on the EU27 than vice versa.
• Malta and Cyprus are also among the most exposed member states (the acronym CCM combines Croatia, Cyprus and Malta ).
• A similar picture emerges for Belgium and the Netherlands, (there may be some upward bias as there is a lot of trade between the UK and the EU27 that transits through the seaports of Belgium and the Netherlands).

Figure 8.9: Losses in GDP (2030) by member state and type of Brexit scenario (%)

Source: European Commission, DG for Internal Policies, An Assessment of the Economic Impact of Brexit on the EU27, March 2017

EU regional impacts

The aggregate figures mask more dramatic impacts at regional and sectoral levels.

The Birmingham University study looked at the exposure to Brexit of EU27 based on trade flows. Figure 8.10 shows the share of EU27 regional income that is exposed to Brexit. (Note that the scale of percentages for the EU27 is half the scale for the UK in Figure 8.8).

The study found that north-western European regions are typically the most exposed to Brexit, while regions in southern and eastern Europe are mostly barely affected by Brexit (other studies identify Brexit exposures in Malta and Cyprus).

In terms of specific regions, the results indicate that:

• Irish regions face similar levels of exposure to the least exposed UK regions, namely London and parts of northern Scotland.
• German, Dutch or Belgian regions face Brexit exposures that are between one quarter and one half of those faced by UK regions.
• The most exposed EU regions are in southern Germany, but the levels of risk are at most half that of the most exposed UK regions.

The implication is that, on purely economic grounds, the Republic of Ireland, Germany, the Netherlands and Belgium, will have more to gain from a relatively seamless and comprehensive UK–EU free trade deal than will other EU countries.

Source: The Continental Divide? Exposure to Brexit in Regions and Countries on Both Sides of the Channel, W Chen et al (December 2017)

Crown Dependencies

Unique constitutional status

The Crown Dependencies (Guernsey, Jersey and the Isle of Man) are not part of the EU nor part of the UK. They have a unique constitutional relationship with the UK and, under Protocol 3 to the UK’s Treaty of Accession of 1973, with the EU. The Crown Dependencies’ constitutional relationship with the UK and the EU, is distinct from that of Gibraltar, which is the only UK Overseas Territory within the EU. (Sark, Alderney and Herm are part of Guernsey.)

Relationship with EU

Under Protocol 3, the Crown Dependencies are part of the customs territory of the EU and therefore EU customs matters, the common customs tariff, levies, the prohibition against quantitative restrictions and any measures having equivalent effect apply. There is free movement of agricultural goods and derived products between the Islands and the EU. Measures relating to trade in agricultural goods and derived products with third countries are also included.

The Crown Dependencies:

• Do not fall within the jurisdiction of, nor have representation in, the UK Parliament. They have their own legislatures to which their governments are accountable. The UK Government is responsible for their defence and international relations.
• Are not recognised internationally as independent sovereign states, but as territories for which the United Kingdom is responsible.
• Are part of the EU Customs Union and are in the Single Market for the purposes of trade in goods and agricultural products (including fish), but are third countries in all other respects.
• Voluntarily implement appropriate EU legislation or apply the international standards on which it is based.
• Together with the UK and Ireland, comprise the Common Travel Area (there is no immigration control within the CTA)
• Do not contribute to, or receive, EU funds.

For trade in services the EU treats the Crown Dependencies as third countries. Financial services are an important part of the economy for Jersey and Guernsey, but less so for the Isle of Man where e-business and manufacturing are more important.

The Crown Dependencies either choose to adopt relevant EU law and/or seek to achieve regulatory equivalence with the EU. Two recent examples are in relation to Alternative Investment Fund Managers Directive (AIFMD) and General Data Protection Regulation (GDPR).

The terms of each Dependency’s relationship with the UK and the EU differ in some respects.

• Isle of Man has a customs and excise agreement with the UK (signed in 1979), which provides for the sharing of VAT and other revenues between IoM and the UK. The IoM is part of the EU customs territory and fiscal territory. While the IoM is part of the UK’s membership of the World Trade Organisation (WTO), Guernsey and Jersey are not.
• Guernsey and Jersey do not apply VAT. They apply their own customs regimes set up in 1973 and the EU Common External Tariff by virtue of being part of the EU Customs Union for goods through Protocol 3. They are also part of the Common Commercial Policy for goods.

Impact of Brexit less severe than for UK

As the Crown Dependencies are not EU member states and are already third countries, but with a close relationship to the EU, the economic impacts of Brexit are unlikely to be as severe as they will be for the UK. The White Paper proposals (covered in the section on negotaions) adopt some of these features, for example near frictionless trade in goods with the EU but third-country status for services.

In its report, the House of Lords noted the important Brexit considerations for the Crown Dependencies would be their continued ability:

• To trade freely in goods, including fisheries, agriculture and manufacturing, both with the UK and the EU;
• For the financial services sectors to secure regulatory equivalence where appropriate;
• To attract EU citizens to live and work in the Crown Dependencies, in particular in sectors such as agriculture, health, financial services and tourism, while at the same time retaining the Common Travel Area between the Crown Dependencies and the UK;
• To maintain existing data protection cooperation, transport and communication links, and energy cooperation between the Crown Dependencies and the EU.

Legislative changes

The Crown Dependencies will need to prepare their own equivalents of what the UK Government has called the ‘Great Repeal Bill’. The Jersey Government is developing a draft bill. The Government of Guernsey had identified the necessity for a bill, but believes the quantity of legislation required will be less than that needed for the UK. The  Isle of Man’s customs and excise agreement with the UK (which provides for VAT and other revenues to be shared) will need to be looked at closely, as would policy areas including agriculture and animal welfare.

The House of Lords heard from Professor Sutton (Professor of economics at LSE):

“It is the same for the Channel Islands and the Isle of Man as it is for the United Kingdom. If we and they want continued access to EU markets, experience shows that you have to pretty much align your legislation on what is in force in the EU. If it is trade in goods under Protocol 3, the legislation that is now in force that allows free trade in goods with the Isle of Man and the Channel Islands will have to stay. If financial services is where we want access, we will have to replicate, for example, the AIFMD directive or the insurance directive. I do not see a great deal of scope for widespread repeals of legislation if the aim is to preserve access.”

He added that legislation would be needed subsequently to ensure that, where necessary, the Crown Dependencies stayed in line with future EU legislative developments.

There is, however, a wider concern that the UK government may not prioritise the tax and regulatory freedoms of the Crown Dependencies in the Brexit negotiations. Their interests could be compromised as part of the broader negotiations.

Sources: Brexit: the Crown Dependencies, House of Lords, 23 March 2017


UK Crown Dependencies and Overseas Territories – the impact of Brexit on financial services, EY, 2017

Last updated on 8th April 2023 by Richard Barfield