Theresa May’s Mansion House speech on March 2nd expressed her wish that the UK’s post-Brexit arrangements should “protect people’s jobs and security”. At the UK Trade Policy Observatory we have modelled the impact of Brexit on manufacturing output and jobs, so we can assess the likely effects of the Prime Minister’s decision that the UK should not remain in a customs union with the EU or in the single market, and instead have a bespoke trade deal with the EU to “deliver the ambition we need”.
Manufacturing accounts for about ten per cent of the UK’s GDP, and 44 per cent of the UK’s exports. The availability of disaggregated data on trade flows and trade barriers in manufacturing makes it possible to look at the effects of Brexit on UK manufacturing in a quite detailed way: our work is based on data for 122 manufacturing sectors. In our research, we’ve considered the possible effects of Brexit on UK manufacturing in three steps to a progressively “harder” Brexit.
First, we suppose that the UK leaves the EU customs union and is therefore able to make its own trade agreements with non-EU countries. Even with no tariffs on trade between the EU and the UK, border inspections will be needed to ensure that other countries do not import goods into the EU via the UK
to evade EU tariffs and trade restrictions. Such border inspections impose costs upon UK-EU trade. This is the “EEA” scenario, in which the UK would be like Norway, outside the customs union, but in the single market and in a free-trade area with the EU.
The second step is for the UK to leave the EU single market as well as the customs union and apply its own regulatory rules. This too will give rise to additional border costs as the EU will need to have mechanisms to ensure that imports from the UK satisfy EU rules, and vice versa. The UK remains in a free trade area with the EU in this “FTA” scenario.
Thirdly, we suppose that the UK fails to maintain free trade with the EU and with all the 67 countries with which the EU (including the UK) currently has free trade agreements. Now the UK trades on World Trade Organisation terms with all countries. This is the “WTO” scenario.
We have estimated the possible effect on UK manufacturing of these three scenarios, and in each case we found that Brexit leads to a decline in trade and a decline in output, with these effects being greatest in the WTO scenario in which, considering all 122 sectors together, exports fall by almost 20 per cent and output falls by almost 5.5 per cent. We estimate that in this scenario, up to 70,000 jobs could be directly at risk in manufacturing alone. In making such estimates, we have looked at the direct impact of changes in trade flows, sector by sector.
In practice, there might be labour market adjustments, changes in supply chains, and exits by some firms, so the actual number of jobs lost might be somewhat less or substantially more than predicted from the direct effects of changing trade flows. A good way of thinking about these results, therefore, is that they indicate how many jobs, and in which sectors, may be vulnerable following Brexit. Taking account of manufacturing and service jobs in manufacturing supply chains adds many more jobs to the toal number that are at risk.
The impact across sectors varies widely but, perhaps unsurprisingly, the sectors in which a high proportion of output is sold in the EU market are the most vulnerable as they face increased barriers to a major market. It turns out also that when we look at industries classified according to their “technological intensity”, it is the higher-technology sectors which are especially dependent on the EU market. Some 60 per cent of high-tech industries’ sales go to the EU. As a result, higher-tech industries are more vulnerable to Brexit. The government’s industrial strategy seeks to promote high-tech sectors, but Brexit will pull in the other direction.
If the UK manufacturing industry does less business with the EU, some have suggested that Brexit will open up opportunities to do more with the rest of the world, and this can compensate for the relative loss of the EU market. To explore this we have analysed the scenario in which the UK makes free trade agreements with every single non-EU country in the world, or that the UK unilaterally opens up its markets completely to the world. In the first case, manufacturing output falls by almost four per cent; while in the second the decline is 12 per cent. The reason for this is straightforward. Our trading arrangements with China and the USA are not going to reach as deep as the EU customs union and single market. Tariffs on most non-agricultural products are already quite low. Some further reduction in the external tariffs that apply to the half of our trade we do with non-EU countries will therefore not compensate the UK for the loss of the deep trading relationship with the EU which accounts for the other half of our trade.
Do Mrs May’s decisions on the customs union and the single market meet her objectives for employment, as stated at Mansion House? We fear not.
Michael Gasiorek, Ilona Serwicka, and Alasdair Smith work at the UK Trade Policy Observatory at the University of Sussex and are the authors of the recent UKTPO briefing paper:“Which manufacturing sectors are most vulnerable to Brexit?”