What if the UK leaves the EU – the business impact

21, Mar 2013

Will breaking a 40-year relationship with the EU leave Britain picking up the trade and investment pieces – or offering a safe haven from eurozone chaos?

We have a promise from Prime Minister David Cameron to let the public vote on whether the UK remains in the European Union, if his party wins the next general election.

It hardly seems possible that by the end of 2017 – the deadline Cameron has set for the vote – the UK could have decided to leave. Divorcing itself from such an intricate and complex relationship will take years as will determining the boundaries of its future relationship.

This article considers what the impact on investment and trade could be of leaving the EU, although the ramifications will much more far-reaching than this.

Arguments against leaving the EU

Numerous studies have shown that there has been significant foreign investment flowing into the UK as a direct result of its EU membership. Many of the large economies such as the US, China, India and Japan view the UK as their gateway into the EU. Indeed US officials have already responded to the possibility of the UK exiting by commenting that it wants the UK continue to have a strong voice at the EU table.

In the medium term there is a real danger that any uncertainty caused in the run-up to a referendum could lead to foreign companies diverting or postponing investment into the UK.

Longer term it is likely that business investment and production will shift away from the UK towards the EU. This could be driven in part by the attractiveness of free trade within the EU where goods are able to move freely with no border controls and no import VAT (a cash flow cost) and duties (a real cost).

Will overseas multinationals selling within the EU prefer to keep the rest of their supply chain in the EU as well, thereby encouraging EU businesses? It would certainly keep things simple for them from a compliance perspective, as well as offering financial savings.

Similarly UK businesses importing goods from the EU will be faced with additional costs and compliance to deal with. The knock-on implications could be extensive, for example, with less investment coming into the UK could this in turn lead to lower technical progress and less innovation?

Arguments for leaving the EU

There are some who argue that by leaving the EU it could actually attract business to the UK on the basis that many will want to steer clear of the crashing eurozone environment. (Although this seems unlikely if the intention is to access the EU markets.)

If the UK is regarded as a safe haven, this could strengthen demand for the pound. (Although if the markets view an exit negatively, in particular because lower investment could lower demand, it could significantly weaken sterling.) 

New negotiations and alternative roles

If the UK were to leave, there would of course be intense negotiations whereby the UK seeks to reach agreement with the EU, for example, on free trade – ideally seeking to retain some of the benefits already obtained with minimum regulation.

Those in favour of leaving point to Norway and Switzerland as examples of success stories.

It is true that these countries have made independent arrangements work for them. But it is doubtful that the UK would be happy with the Norwegian model – one where it continues to contribute significantly to EU programmes and be bound by regulations with no say or voting power. It would be an EU-influencer, not a leading player in decision-making. Unacceptable.

The Swiss model, although taking many years to negotiate, would seem preferable. Here the UK would negotiate separate arrangements with the EU, enabling it, within reason, to cherry-pick what it wants. Of course, this relies on Brussels playing ball. 

Impact on global positioning

Let us not forget that the world is much bigger than Europe and many other trade agreements dealing with the rest of the world will also need to be reviewed and negotiated by the UK.

In doing so alone, the UK will have less political weight around the table, which could impact its ability to get as good a deal.

It might consider joining another association such as European Free Trade Association (EFTA) and adopting its agreements, but it is doubtful the UK would be any happier accepting agreements that it was not involved in shaping.

Presumably as a precursor to all this, the Foreign Secretary launched a review last year to analyse what the UK's membership of the EU means for the national interest. The Government is clearly starting to collect the collateral to build its case for what will be a passionate, divisive and vocal debate.

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