Should avoiding non-tariff barriers be a priority for the Brexit negotiations?

Non-tariff barriers are a major concern for businesses…

Much of the discussion about trade post-Brexit has focused on tariff barriers and access to markets, leading to a variety of proposals for the UK’s future trading relationship with the EU. In our discussions with the business community we have found that all sectors, not just the trading section of the economy, are most worried about the disruption to trade that non-tariff barriers, such as having to meet country or origin requirements at customs, could cause.

…and they are right to be concerned…

Our work to understand the economic framework of the Channel Tunnel has identified how integrated trade between the UK and the EU is, and as a result how expensive potential disruptions could be. Previous work by EY has shown the UK has off-shored a greater share of its productive capacity than any other major economy. Hence we are more dependent on trade than other European economies, with imports being very important for all UK businesses, not just the export sector.

The Channel Tunnel alone facilitated £91.4 billion of trade in 2014, representing 24.8% of the UK’s trade with the EU by value and 9.2% by volume. The £43.6 billion of exports supported 220,000 jobs to which tourism added another 45,000. All regions of the UK generated exports for the Channel Tunnel with the West Midlands being the largest contributor with 20% of the total. The Channel Tunnel also facilitated savings of 211,600 tonnes of CO2 in 2014.

…as the UK is fully integrated into European business models …

UK business has integrated its operations with its counterparts in Europe. Manufacturers in the UK operate with stock levels of two hours or less in many cases. Any delay in deliveries means that workers and machinery quickly become idle and the Channel Tunnel facilitates this modern business model. Users value speed above all else with 90% of the Channel Tunnel users we interviewed citing this as a reason for using it. Frequency of departures, flexibility and reliability scored reasonably high, but only 25% of users cited cost as a driver of their decision to use the facility. The value the Channel Tunnel brings to businesses is speed and reliability. Today’s manufacturers have their warehouses on the autoroutes, autobahns and autopistas of Europe.

…meaning disruption could be very expensive…

Non-tariff barriers would be a source of disruption to the Channel Tunnel and to UK trade more generally. Last year we saw disruptions to the operation of the Channel Tunnel which show how expensive delays to the passage of goods can be. The longer and more regular the disruption, the greater the opportunity and desire to reconfigure business models and to reallocate resources both within and outwith the UK Economy and hence the larger the reduction in output.

…with lessons for the Brexit negotiations…

Our work shows how integrated the UK and European economies are. This could be a benefit in the Brexit negotiations as it seems likely that companies in the EU will also want to avoid the costs of disruption.

Without doubt, non-tariff barriers need to be fully reflected in the exit negotiations and the objective must be to avoid these being introduced. If this approach fails, then there will be significant costs of disruption over time. If the UK is moving to a model of trade which incorporates an element of non-tariff barriers, then a transition agreement seems the minimum requirement to avoid a worst case scenario of an immediate major and permanent shock to trade. A transition agreement would provide businesses with some time to take measures to mitigate at least some element of the shock.

Our work has also identified why the UK has an urgent need for an industrial strategy. The UK economy is very integrated with the EU and as we change this relationship, especially if this means there will be a burden from non-tariff barriers, it will be vital to ensure that the UK has the skills, infrastructure, business networks and policy environment to support the adjustment.

Take roads as an example. Our research shows that they are the priority for manufacturers. It is clear that decisions on infrastructure must be taken in the context of  the sector and regional framework that is guiding overall policy. If we want industrial growth, we need better roads not just airports and rail investment. Certainly the Channel Tunnel is key for our manufacturers, online retailers and food industry.

An integrated economy requires an integrated strategy to have any chance of success. As we identify where Brexit will impact the economy, the UK’s industrial strategy must be designed to offset any downsides.

 


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