New figures show
In a unique assessment of the business costs of Brexit, Oliver Wyman and Clifford Chance have partnered to calculate the impact of tariffs and non-tariff barriers on companies if the EU27 and UK reverted to a World Trade Organisation (WTO) trading relationship with each other.
The ‘red-tape’ cost of Brexit estimates that the direct costs will total around £31BN for EU exporters and around £27BN for UK exporters, with non-tariff barriers accounting for more of the effect than tariffs. The report focusses only on the direct impacts of the UK’s exit from the EU which are of immediate importance to companies for Brexit planning. It does not model additional impacts such as migration, pricing changes or third country Free Trade Agreements, which are likely to increase the overall impact.
In the EU27 the hardest hit sector will be automotive, where the direct impact will be around 2 per cent of current GVA. Country level differences will vary considerably, with Ireland’s agricultural sector’s exposure to UK consumers, for example, a particular pinch point. In Germany, four of the sixteen states – Bavaria, North Rhine-Westphalia, Baden –Wuerttemberg, and Lower Saxony – will shoulder around 70 per cent of the country’s direct impacts as a result of exports to the UK that arise from their leading global positions in automotive and manufacturing.
In the UK the Financial Services sector will take by far the biggest hit, incurring around a third of the extra ‘red-tape’ costs. However, there are very significant impacts in other sectors where firms are highly integrated into European supply chains – for example in the automotive, aerospace, chemicals and metals and mining sectors.
Kumar Iyer, Partner, Oliver Wyman, says: “There will be both winners and losers from Brexit. In order to navigate the uncertainty companies should be thinking about impacts under different scenarios both operationally and strategically. We see the best prepared firms taking hedges now based on the direct impacts on themselves, their supply chains, customers and competitors. Unfortunately we see that small firms are least able to take these steps at present.”
The impact assessment also reveals that the ability to mitigate the impacts of post-Brexit trade barriers will vary by sector and company size. Before designing their response, firms need to think through the impact on different levels: operations, supply chains, customers and competitors. Small firms will find this particularly challenging especially where they have no non-EU trade experience and may be rendered uncompetitive as they seek to make the changes needed. Automotive and aerospace industries will be able to localise supply chains and take advantage of domestic suppliers in some areas but with the loss of “passporting” financial services will require relevant front and back-office staff to relocate to the EU. However, even within each industry individual impacts and the appropriate response are highly variable. The differences will depend on things like the mix of goods and services the business sells, where it is based, where its customers are, and how complex its supply chain is.