Project finish Thatcher’s work? The impact of Brexit on UK manufacturing

Many of the UK’s largest manufacturers by revenue tend to produce most of their goods, especially raw materials, abroad rather than in the UK. Firms like Rio Tinto (a large mining corporation, with £31.6 billion revenue per year), Anglo American (another mining company, £18.2 billion revenue) and British American Tobacco (£14.9 billion revenue). Those employed in the UK by these firms tend to be admin staff rather than traditional manufacturing jobs, which are usually based overseas where costs are lower.

Large manufacturing firms that actually employ UK workers include companies like Unilever, pharmaceutical giants GlaxoSmithKline and AstraZeneca and aerospace and defence companies BAE Systems and Rolls Royce. According to The Manufacturerthe UK is the world’s eighth/ninth largest industrial nation, and is set to be in the top five by 2021. The Manufacturergoes onto say that 44% of UK exports are manufactured goods and that the industry employs 2.6 million people, just under 10% of the UK workforce.

The UK’s largest exports may be services but manufacturing still plays a significant part in our economy. When it comes to goods, the UK’s largest exports are that of mechanical machinery, cars, electrical machinery, pharmaceuticals, crude oil and aircraft. However, out of all of these goods, the UK only has a trade surplus in mechanical machinery and aircraft. The most imported goods into the UK are: electrical machinery, mechanical machinery, cars, pharmaceuticals, clothing, crude oil, refined oil and aircraft, according to the ONS. So the UK imports far more goods than we export. Although this is not an innately bad thing for the overall UK economy, it is certainly negative for the manufacturing industry, but it’s a complex picture. This is because lots of manufacturing firms depend on imports, in order to export. For example, we have a surplus in exports of aircraft, but to build these aircraft we have to import steel and other resources. This also applies to our surplus in mechanical machinery; we export the finished products but have to import most of the raw materials. Consequently, any increase in import prices on the materials that we use to make aircraft could end up putting that surplus into a deficit. This could apply to most manufacturing industries in the UK.

Leaving the EU doesn’t automatically mean that there has to be an increased import price. While markets outside the EU wont be affected, most UK firms do import from within the EU. The UK is in an £80 billion trade deficit with the EU, mainly with Germany. The figures are disputed, but the UK has been said to make up 8-18% of the total EU export market, meaning that even at its highest figures, we still depend on the EU for goods far more than they depend on us. The UK is the second largest importer of EU goods outside of the EU, only 1% behind the United States. Within the EU however, the UK is the fourth largest buyer of EU goods. The UK has a trade deficit with most EU countries, with a few exceptions including Ireland.

The impact of Brexit so far

It is important to remember that we have not yet actually left the European Union. People from the leave camp like to boast about how well everything is going since “Brexit” even though we haven’t left yet, and many from the remain camp like to state how badly the economy has been performing and preach doom for the future even though we haven’t left yet. So far, the only tangible effects of “Brexit” are the effects caused by the vote to leave itself and the consequent actions of the UK government. When Britain voted to leave the pound plummeted. Many remainers hailed this as an awful occurrence while leavers hailed it as an amazing chance for British manufacturers. The drop in the pound had mixed effects: it became more expensive for British consumers/producers to buy foreign goods, and cheaper for foreign countries to buy British goods. For importers, a drop in the pound is a bad thing, because the goods that they need to buy in order to sell their own goods in the UK have become more expensive. A rise in costs for these firms could lead to workers being laid off, stores closing or at worst, moving their companies abroad. of this Unilever has already shut a factory in Norwich and is moving one of its headquarters from London to Rotterdam. Exporting producers would be very happy at this news. A drop in the value of pound sterling means that foreign consumers are more likely to buy their goods as they will be cheaper, and domestic consumers are more likely to buy their goods because their foreign competitors’ prices will have gone up.

Since the referendum, there have been effects other than on the value of the pound. Firstly, net EU migration has dropped, while overall migration into the UK has increased. Manufacturing industry benefits from higher migration figures due to a more competitive labour market. While most EU migration has gone to low-skilled work, migration from outside the EU is more likely to bring more highly skilled jobs. The manufacturing industry has jobs from all over the spectrum, from highly skilled to low skilled jobs, so the increased net migration into the UK is good for the manufacturing industry, although it is unlikely that this increased migration is a result of Britain’s vote to leave the EU, as since 2016 it has only been made harder for all migration into the UK and the environment for immigrants and minorities has also become more hostile. Another effect since the referendum has been speculation as to the future. Although it sounds abstract, it does impact on the economy. The bite of speculation is already starting to be felt, with multiple firms moving headquarters and manufacturing jobs abroad. The biggest betrayal being that of Dyson, who promised that after Brexit he would invest more in the UK, but instead, opened up new branches overseas. Others have also expressed concerns for the future.

What will happen to the UK manufacturing sector outside the EU?

Hard and Soft Brexit may sound like buzzwords, but are actually both very important differing outcomes. A Hard Brexit does not necessarily mean tariffs galore and economic hardship, but it certainly leaves that opportunity open. It is probably the best way to deliver Brexit quickly and in line with the wishes of the leave camp: controlled EU migration, more direct power over our laws and more say over our trade deals. Hard Brexit will almost certainly place the UK outside of the Common External Tariff (CET). The CET is a vast protectionist barrier surrounding the EU, consistsing of tariffs on different goods and countries. EU membership means that we will be inside of this barrier, with no barriers to trade with EU member-states. Leaving puts us on the outside, with higher costs for those both buying and selling British goods (in the EU and in the UK). A Soft Brexit would likely keep us inside the CET but could mean many other things. It could see the UK stay in the Single Market with its four freedoms, the Customs Union or even joining the European Free Trade Area (EFTA).

There are few benefits of being outside the CET, the biggest argument in favour 0is a market-liberal one which states that it is a significant barrier to the free market and unilateral free trade. Being outside the CET would cause issues for Britain’s manufacturing industry. Not only would it make the costs of importing and exporting higher, but it could also deter investment as businesses from outside Europe would want to invest in a country that is inside the CET, in order to avoid having to pay to access the EU market. The UK attracted so much investment from outside Europe, due to not only being a strong economy but also being within the CET. Being outside the tariff barrier means that businesses already in the UK might be incentivised to move their factories and headquarters to a place inside the barrier, or new companies looking to invest in Europe will instead set up in a country within the CET, such as Germany or the Netherlands. Therefore, leaving the CET is probably the biggest risk of leaving the EU for the UK manufacturing industry, and this is why the unions are starting to lobby behind the People’s Vote campaign for a referendum on the terms of Brexit.

However, those on the right would argue that leaving the CET is worth it, because in the long-run there will be less “red tape”. The EU is known for introducing regulations, not only to increase consumer safety but also to protect workers. These regulations have often been seen as too much of a burden for businesses big and small. Market-liberals argue that once we leave the EU, we no longer have to abide by these rules so businesses will be able to grow faster and at lower cost, especially manufacturers. However this argument is vastly flawed. Firstly, protected workers and consumers means happier workers and consumers which leads to a much more efficient economy. Secondly, just because we don’t have to abide by the regulations doesn’t mean that everyone else has to stop following them too. For example, if we were to no longer produce goods to the EU’s standards then we would not be allowed to sell said goods to them, just like the US is not allowed to sell chlorinated chicken to the UK while we are in the EU. Consequently, even if we were to drop the red tape that they argue is holding back manufacturers, it would be at the cost of selling to our biggest trading partner: the EU.

The greatest possible advantage Brexit could bring to the manufacturing industry is better trade deals. This is a completely hypothetical situation, based on many dependencies, however this is the argument put forward by the leave camp, which is a possibility. If the UK were to leave the EU, it could make trade deals with other countries without having to consult with 27 other member states. While in the EU, no single country can make a trade deal with another. The advantage Brexit brings is that the UK could strike a trade deal with whatever nation it wants, without having to take in considerations of other countries. The argument is that after Brexit, the UK can proceed to make trade deals that advance solely our interests, this could, in-turn advance the manufacturing industry’s interests. However, just like a trade deal could be held back by a Belgian region in the EU, a trade deal made by the UK could be held back by a surplus of factors too, such as a minister’s constituency links. Furthermore, the argument made by the remain camp was that in order to attain good trade deals with the likes of vast economies such as China, India and the US, we would need to approach them as a diverse economy of 500+ million people (the EU) rather than a narrow economy of 65 million people (the UK).

So how will the manufacturing industry be affected by Brexit? Probably badly, but at this stage it is still very hard to say, as there are so many different possible outcomes. The chances are that the real winners will be exporting manufacturers which would appear cheaper compared to their foreign competitors. It is fair to say though that importing manufacturers will certainly suffer and are already starting to do so. Only time will tell.

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