DCBC CHAIRMAN’S NEWS STATEMENT
“BREXIT – The South West and those new global trade deals”
In the current uncertain environment, information is in short supply about what the effect of Brexit could be on the South West export market. This statement attempts to pull together an initial analysis of some of these facts.
The South West exported approx. £21.5bn globally in 2016 of which £14.9bn was machinery and transport equipment. Of this total, 41% was with the EU (£8.9bn).
According to the latest “Centre for Cities” report (2017) the most dependent centres in the UK, because of their current share of trade with the EU, are No 1. Exeter with 70% share of EU exports and No 2. Plymouth with 68%.
U.K. trade overall with the EU accounted for 45% of exports and 53% of imports of goods and services in 2014, (House of Commons report). More than three million jobs are linked to exports to the EU.
In the South West this represents approx. 275,000 jobs linked to EU exports - around one in ten. These include some of the largest engineering companies in the UK, such as Rolls Royce and British Aerospace, major automotive business with Honda in Swindon, key financial and business services, food and drink production, creative industries and the critical tourism sector.
Now that the UK has triggered article 50, this poses a myriad of challenges and potential new opportunities.
According to a report (The City UK), Brexit is an opportunity to create a new trade policy which focuses on emerging markets outside of Europe, free from the “strait-jacket of EU policy”. Half of the world’s GDP is made up from high-growth market economies and these can now be targeted by our government’s strategy for growth. The report estimates that 90% of economic growth in the next 10 to 15 years is expected to be generated outside of Europe, making alternative markets part of an important long-term investment strategy for international businesses. In leaving the European single market, securing a wide range of trade deals outside of Europe will be vital to the success of Britain's post-Brexit economy. ”For the first time in decades the UK will be able to pursue an independent trade policy based on our interests alone”.
Fine and bold words but how easy will this be to achieve?
Doing business in the high-growth markets of China, India, Latin America and Southeast Asia offers enormous potential opportunities for British companies to expand their global reach, and attain new customers. Markets such as Brazil, China and India, however, are extremely large and complex. They each boast a series of interconnected regional markets where the legislative and investment climate may change from one state to another. There are also the different language and culture considerations and diverse regulations and variable production/quality standards to be taken into account as market entry barriers.
Where are the winner and losers?
If we are to contrast threats and opportunities then two sectors can be highlighted.
Grave concerns have been voiced about the vulnerability of the SW rural economy. The rural economy represents:
•Economic output £1.4 billion or 1.2%
•27,300 employees or 1.2%
•8,800 businesses or 7%
Current CAP payments to farms in South West England, (House of Commons Library analysis of DEFRA data), are a vital part of supporting both sustainable farms and our world class environment. Farmers in the South West received £427m under the Common Agricultural Policy in 2015. This includes £337m under the Basic Payment Scheme, and £90m under the Rural Development Programme. The industry contributes more to the regional economy than the national average. The agricultural industry contributed £1.4 billion to the South West’s economic output, 1.2% of the total. This compares to 0.7% of UK output.
In looking for winners and opportunities then the education sector provides an interesting case study.
The UK is a world leader in higher education and UK institutions are a premier destination for overseas students as well as providing high quality education abroad.
• Total UK education exports were estimated to be £20.2bn in 2013, making education the fifth largest services export sector in the UK, ahead of both insurance services and computer and information services.
• Higher education and further education exports are significant, estimated to be c. £14.4 billion in 2013. Around £4.9 billion is from tuition fee income, with a further £8.3 billion from other student expenditure in the UK (Figures are updates to the International Education Strategy).
• In 2012, Oxford Economics on behalf of Exeter University estimated that the direct benefits of non-UK students to South West England were around £88 million - £17.5k per student. (The Economic Impact of the University of Exeter’s International Students, 2012).
• International students also bring a number of indirect economic benefits, contributing to the UK’s ‘soft power’ by strengthening the quality, diversity and reputation of the HE sector; and improving overseas business, research, social and cultural links (The wider benefits of international higher education in the UK, 2013).
So who are these new trading partners outside the EU and how do we access them?
This is a market of proportions unseen in the West with over 1.2bn citizens and 50 cities with populations in excess of 1m people. “Tech” is at the heart of their success with the latest Government initiative being the creation of 100 smart cities designed to integrate ICT and the internet-of-things to create advanced and efficient urban hubs.
India’s burgeoning middle class is hungry for consumer goods. It has just taken over from China as the world’s fastest growing economy and should be an ideal place for UK SME’s to do business. This is, however, a market which requires extreme patience and a long term strategy to be successful. It is well known for its tangled web of bureaucracy, with each state having differing regulatory constraints, local sourcing requirements and import tariffs. In short a plague of red tape, paperwork, complex banking and finance structures and taxation issues.
Currently the UK exports goods worth £6.35bn and services worth £2.24bn. This represents about 1.7% of our total exports and is a fraction of the trade links we had in the height of the colonial era (a negative memory for India). We do more export trade with Sweden and this is a fraction of our EU trade (44%).
Numerous trade missions have taken place with successive UK Prime Ministers. These have all failed as have trade missions with the EU. India has never signed a free trade deal. The latest hope is that the UK can focus on financial services and fin-tech growth. A major barrier is the tough stance the UK Government has taken on immigration including insistence that students be counted in net migration figures. In the last 12 months the number of Indian students studying at UK universities has fallen by 10% because of fears over immigration, figures which are likely to fall further and which are described as “alarming” by the British Council.
An example of how difficult this market can be is the Scotch Whisky Industry which accounts for 25% (by value) of the UK drinks exports. India is a huge consumer of whisky but currently sets a 150% tariff on Scotch whisky imports.
Current export trade from the South West to the USA is around 18% of our total (£3.8bn). Given historic links and cultural ties, North America currently forms another key region for exports from the UK. Although culture is not a significant barrier in exporting to North America, differences in regulatory requirements and standards provide the largest single barrier, with the impact felt particularly by those operating in industries such as manufacturing, finance and IT & telecoms. Cost of transport is also a major issue. In food and drink markets it should be remembered that it has taken US regulators 20 years to reopen beef exports from the UK following the BSE crisis. The experience of some South West businesses breaking into the retail sector is that the layers of negotiation are also highly complex with at least 3 barriers (the distributors being the most difficult) before getting goods onto a retailers shelf. Invariably these negotiation then have to be repeated on a state by state basis (52 times potentially)
THE ASIAN/PACIFIC REGION.
This is home to a host of countries that have undergone a prolonged period of relatively rapid growth. For instance, the world’s second largest economy, China, has enjoyed economic growth of over 6% year-on-year for over two decades. Not only, however, has this region seen economic success in recent years, its central outlook also looks bright. The overall level of UK exports to Asia has more than doubled over the past decade and there is an opportunity for a greater share of SMEs to take advantages of the markets offered across the Asia-Pacific region.
In truth, however, a range of barriers exist – those most regularly cited being that of language, with almost a quarter (23%) of SMEs put off due to lack of language skills applicable to markets. This was closely followed by unsuitable products/services (21%) and transport costs (20%). The UK as a whole and the SW currently exports more to Ireland (population 5 m) than to this region.
This is an unlikely trade partner for the UK due to current economic sanctions and its deteriorating relationships with the west and NATO. The potential, however, could have been significant not just as a trade partner but as a bridge between east and west. It is known that Russia’s domestic consumer market is eager for goods and agricultural products from the UK with 50% of their consumption of fish, milk, beef and cheese dependent upon imports. Furthermore, there could be a huge potential for UK investors and businesses in upgrading Russia’s outdated manufacturing parks, building new logistics hubs and benefiting from its still highly educated and low wage workers. An even greater area is the financial services sector (a great UK export) into the banking sector which is immature and largely controlled by state-owned banks.
Russian imports from the UK grew by 75% between 2009 and 2012 positioning Russian right behind the US, China and the EU among the UK’s top trade partners. This situation dramatically changed in 2014 with a deep slowdown of bilateral trade and a breakdown of the overall political relationship.
This should be a potential target, however, its economy is suffering a severe recession and there are significant barriers to new market entrants. There are dangers also of Brexit allowing much easier access into the UK of Brazilian Beef than is currently the case.
An area where to South West has strong links. Their economy is struggling in a period of political uncertainty as the power of the ruling party is eroded.
This has historically been a strong export destination with over 53% of its agri-foods coming from the UK. The potential for having a customs barrier into this market would be highly disruptive.
AUSTRALIA & NEW ZEALAND.
Clearly there are good cultural and language links here, but cost of transport is a major factor. The big danger here is to our food and drinks industry. Currently Australia has an EU quota of imports set at 20,000 tonnes. Annually they produce 7,000,000 tonnes of sheep meat products. A free trade deal could be a disaster to the South West Agricultural industry.
In event of a Hard Brexit this is a huge and complex equation. Take, however, just one area – food. Exports from the South West to the EU currently worth £8.2bn. This is 73% higher than to anywhere else in the world with 93% of our beef going to the EU, 64% of our fish and 73% of our vegetables with no tariffs or quotas. Tariffs imposed by the EU are highest in the food sector potentially 30--40%. Competition with the EU could therefore be significant factor with 70% of South West imports coming from the EU.
The South West is entitled to start asking some searching questions about our export future. We have had a Government department working on these opportunities for years – what progress have they really made, are they currently fit-for-purpose, are they tuned into the opportunities of the SW market or are we effectively starting from scratch? It seems very likely that we should urgently, as so often in the past, be plotting our own destiny (rather than waiting for Whitehall) in this bold adventure.