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13 January, 2021updated 12 Oct 2021 05:46

What the Brexit deal means for manufacturing

The widespread opinion among manufacturers was that any deal would be better than a no-deal Brexit. However, now that the trade deal has been secured, the negotiations are far from over.

By Ruth Strachan

Brexit-uk-manufacturing

British manufacturers were cheered by the news of a trade deal with the EU, but what will it mean in the long term for investments such as Nissan’s plant in Sunderland? (Photo by Christopher Furlong/Getty Images)

As the horror show of 2020 came to an end, the UK endured weeks of news that were a nightmarish blur, dominated by horrific coronavirus statistics, bleak lockdown restrictions and Boris Johnson’s race to the finish for a UK-EU trade deal. When Big Ben chimed at midnight, the UK cut the final ties of its membership with the EU and entered 2021 – with more of a fizzle than a bang – with a deal in hand.

For the UK’s manufacturing industry, the deal came nail-bitingly close to not materialising, with many in the industry expressing relief that the dreaded no-deal scenario was off the table.

Any deal will do for manufacturers

Stephen Phipson, CEO of Make UK, a body representing British manufacturers, says: “Having a deal is better than having no deal – no deal would have been catastrophic, there is no doubt about it. Despite what the government says, it would have been awful – and privately they do say that.”

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The main reason for the enthusiasm around any deal being made is the avoidance of tariffs. David Bailey, a professor at Birmingham Business School and a senior fellow for the UK within the Changing Europe programme, says: “No deal would have been devastating for certain sectors. Tariffs of 10% would probably have wiped out the mass automotive industry in the UK with a similar impact on chemicals. So having a deal and avoiding tariffs and quotas – if rules of origin rules are met – is good news.”

However, he adds: “I think that is as far as the good news goes; there is still going to be lots of extra costs for manufacturers.”

Uncertainty clouds the Brexit deal

There is the ambiguity of the deal itself, which casts doubt across the UK economy and therefore uncertainty for manufacturers, multinational enterprises and investors.

I am quite disappointed. It strikes me as though the timing was far more important than the substance of this deal. Dr Martin Kaspar, FDI specialist

Investment Monitor chief economist Glenn Barklie highlights problems with the accessibility of the deal report: “It is near impossible to read through it unless you have got a law degree. There is not absolute clarity, on anything.”

Phipson agrees: “I think I fell asleep after page 30.”

Dr Martin Kaspar, head of corporate development at a German Mittelstands company in the automotive industry and an FDI specialist, reports more success in reading through the deal, but with little prize for his troubles.

“I am quite disappointed,” he says. “It strikes me as though the timing was far more important than the substance of this deal. If you really read into it, there isn’t very much that has been regulated or sorted out.”

He continues to highlight the general vagueness and bare minimum explanation throughout the deal as a cause for concern, with only emergency measures being explained.

“No matter where you look, it explains things like ‘conflict resolution mechanisms, or there is a panel of experts, or we can take each other to court’,” Kaspar says. “OK, that is nice, but that is ‘if the baby’s falling out of the bath’ measures, but what is actually regulated?”

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The red tape burden of the Brexit deal

Alongside this murkiness, there are concerns over the additional time-consuming paperwork and increased red tape that the deal brings. What may have been saved in tariff costs could be transferred to costs more associated with time.

Barklie says: “The red tape will definitely be increasing. That is a big thing, especially to investors because it is still a cost to them – time is still a cost. Then there is also the fact that if the UK breaks any of these terms in any way, there is the option for tariffs to still be applied. So there is still that risk.”

The concept of ‘time is money’ is baked into the manufacturing industry in the form of ‘just in time’ manufacturing. When asked if these delays could be the kiss of death for this type of manufacturing, Phipson thinks that this remains unknown.

“[Just in time manufacturing] relies not just on companies filling out the right forms, but also the government systems being able to cope with it,” he says. “So far, we haven’t really tested that route. That is still to come.”

Paul Forrest, director of the West Midlands Economic Forum, makes the point that just in time manufacturing has already been under threat from the pandemic. “[The new trade deal] doesn’t necessarily signal the end of just in time manufacturing,” he adds. “There were already deficiencies in it.”

The Brexit deal comes at a time when the manufacturing industry, on a global scale, is already wounded and being forced to adapt to the impact of Covid-19 and reshoring trends. Now, as investors and manufacturers activate their 2021 strategies, the cloud of uncertainty over the UK appears to acting as a deterrent to them.

“Nothing is changing on day one, but in terms of new investors coming in, I think it is definitely going to make them stop and reconsider more,” says Barklie. “Investors hate uncertainty.

“There are still a lot of things that are uncertain and the deal is only for five years. So, for new investors coming in – let’s say there is a US investor looking to invest in a manufacturing facility – it is still probably going to be a safer bet to invest elsewhere in Europe. There they would have all this free access [to the EU market], with things as they were [in the UK before the Brexit deal], and no real risk of other new macroeconomic elements coming in, obviously disregarding the Covid-19 pandemic.”

Brexit negotiations are far from over

For those hoping that Brexit is now over, there is bad news. Phipson highlights how important continuous conversation and negotiation will be in the coming months and years.

“I think over the next three to six months there is a lot of work to do to try and fill in the gaps that aren’t really included in the deal as it stands, which is hard to say when you start reading through the 1,200 pages,” he says. “But there are some areas that are still not very clear, and need clarification.”

A couple of blind spots within the deal that manufacturing leaders are calling for more clarity on include customs paperwork, rule of origin regulations and more general regulatory practices.

Bailey gives a more specific example. “The annex, to the deal for chemicals, is a very short annex,” he says. “It is not at all clear that it gives chemical producers in the UK access to the Reach database, so they are going to probably have to incur lots of extra costs. So, non-tariff barriers, despite what the prime minister said, are coming back in a very big way.”

Can UK manufacturing be saved?

There are, of course, the pre-existing problems of a misunderstanding and lack of support between the UK government and the British manufacturing industry. Forrest explains: “Both the Labour and Conservative Party failed to take advantage of the [UK’s position within the EU]. So you would be forgiven for being a little bit sceptical that they are suddenly going to march up into some glorious hinterland now.”

He continues with advice for the government: “There needs to be a complete reappraisal of economic policy. For the past 30–40 years, we have had fiscal policy and monetary policy, but no industrial policy, and that needs to be tackled.”

The negative impact of Brexit, and indeed this deal, on the manufacturing industry – and others for that matter – may not be felt swiftly and instead may grow if the right steps are not taken now.

For the past 30–40 years, we have had fiscal policy and monetary policy, but no industrial policy, and that needs to be tackled. David Bailey, Birmingham Business School

Kaspar expands on this theory. “Somebody once described the situation very aptly as resembling a punctured tyre,” he explains. “Because as a manufacturer, you have a lot of sunk costs, you can’t shift an entire production plant tomorrow. The financial industry could shift a few hundred billion dollars into Paris or Frankfurt or Dublin and quickly relocate their assets, but a manufacturer can’t do that.

“What manufacturers will do is they are not going to be investing or reinvesting in the UK, and there will be a very gradual decline. I think the best example would be the automotive industry. Every four to five years you have a model change, and what I think is going to happen is that the UK plants simply won’t get the next model.”

An opportunity in renewable energy manufacturing?

Despite the perceived pessimism surrounding industry’s prospects, Bailey remains optimistic that there is an opportunity to be seized, particularly when considering renewable energy manufacturing.

“Net 2030 is a huge challenge,” he says. “It is also a massive opportunity, potentially, for our manufacturing base if we think about the green technologies, the green supply chains we need to set up.”

Bailey highlights that the government backing this is the only path to success, saying: “I would like to see the government really go for it in a big way [with regards to renewable energy manufacturing], with lots of funding, lots of support, working with investors to actually invest in the key technologies that we need to make them in the UK and build new electric vehicle supply chains. We could really go for it if we wanted to now – the government cannot claim to be constrained by Europe anymore. It is ultimately our political choice whether we want to do it or not.”

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