14.The principal message conveyed by businesses was that by committing to a free trade area for goods that provides no tariffs or quotas, combining a regulatory and customs relationship, the Political Declaration delivers welcome intent and aspiration.38 However, they were clear that it does not provide the detail or clarity to enable businesses to plan confidently for the future.39 The regrettable absence of a common rulebook for goods and an assurance of frictionless trade in the Political Declaration means that businesses cannot rule out increased bureaucracy and costs.40 Witnesses signalled that they expect such burdens to be bearable,41 but reiterated that in a highly competitive market, small margins could weigh heavily on UK industry’s ability to compete for investment.42
15.Mike Thompson, Chief Executive of the Association of the British Pharmaceutical Industry (ABPI), summarised the general sentiment of businesses:
“If you look at the outline Political Declaration, it is essentially trying to get us back to where we were […] because we work in a completely integrated supply chain within Europe, and a completely integrated regulatory system, that makes enormous sense from our perspective.”43
Mark Hicken, Chair of the American Pharmaceutical Group and Managing Director of Janssen UK, concurred “[w]e are trying to rebuild what we may have taken apart.”44 Paul Everitt, Chief Executive of aerospace trade body ADS Group, stated:
“We cannot dispute that there will be additional costs once we are outside of the EU, irrespective of the type of deal we get. The only comfort that we have is that, with a deal or an agreement, there is the opportunity for us as an industry to use our own creativity, inventiveness and hard work to minimise impacts […]. In the no-deal scenario, that opportunity is taken away or taken out of our control.”45
16.Businesses welcomed the language in the Declaration around zero tariffs and streamlined customs procedures,46 for the automotive sector it represents a clear “call for ambition”.47 The food and drink industry were pleased with references to retaining geographical indicators that will protect the integrity of scotch, gin, Irish cream and other products they sell around the world.48 Businesses in the pharmaceutical industry valued the Political Declaration’s efforts in trying “to maintain a degree of collaboration across scientific discovery, which is not the purview of one geography, one university or one organisation”.49 A good deal for the aerospace industry would ensure: remaining part of EASA50 and the European Chemicals Agency; no friction at the borders; participation in major EU research and development programmes; and access to the right pool of skills.51 The sector’s assessment was that against most of those measures there was language in the Declaration to reflect their priorities.52
17.While welcoming the intent behind the declaration, businesses expressed caution. Ian Wright, Chief Executive of the Food and Drink Federation, told us:
“the Political Declaration is aspirationally excellent but it is really a list of new year’s resolutions. We do not know whether they will still be there come the end of January.”53
“As soon as you write down what your aspiration is and you accept that you have to negotiate it with 27 different leaders, you know immediately that they are going to say, “You can have that if I can have this” […] I simply do not see how it can be delivered in its totality. Much of what is attractive about it is the totality of the narrative it produces.”54
18.The sectors expressed disappointment that the Political Declaration did not include an explicit commitment to pursue frictionless trade, retreating from the Chequers agreement.55 The need for frictionless trade is particularly important for the automotive and aerospace sectors because they operate just-in-time supply chains.56 The World Trade Organisation [WTO] Agreement on Trade in Civil Aircraft eliminates tariffs on aircraft and most aircraft components, so the possibility of non-tariff barriers between the UK and EU remains the aerospace sector’s primary concern.57 The industry estimates that a default third country position would add around 10 per cent to aerospace supply chain costs.58 Paul Everitt told us that “[w]e do not yet know, in the Political Declaration, how much of that cost we can eliminate.”59 If businesses can minimise the added costs ADS Group would not expect to see huge shifts in the supply chain,60 but warned that Brexit creates a “higher hurdle” for the UK to jump to secure investment.61 There is:
“a future emerging and those future products could be built anywhere. There is very aggressive international competition, whether it is from India, China, Singapore or Thailand. Everybody is keen to have a slice of a global industry that is growing and that generates high-value, long-term jobs.”62
19.Simon Henley, President of the Royal Aeronautical Society, cautioned about walking on a “tightrope”, the more a nation wishes to diverge from EU rules set, the more barriers to frictionless trade businesses will have to overcome.63 Our earlier inquiries found that in an era of increasingly global standards regulatory convergence is a welcome trend. The Political Declaration leaves this question open. Ian Wright noted:
“A common rule book was talked about at the time of Chequers. The rule book seems to have been put away now, and we are now using another set of words.”64
Regardless of what is eventually agreed on our future relationship, we heard that—for these four sectors at least—most businesses will continue to align with EU rules. Regulatory divergence would lock businesses out of international markets, increase bureaucratic burdens and drive up costs.65 Costs which are likely to be passed on to consumers.66 The pharmaceutical sector told us:
“if you are dealing in a single market with a single set of regulations, a single approach and a single set of packaging, that is going to be less expensive than if you have to have two sets of packaging, two sets of licences and two sets of regulations to respond to or to obey. The more the market breaks apart, the more expensive and complicated it becomes for any business, inevitably.”67
20.The automotive industry’s biggest exporting market is the EU. 54 per cent of exports go to the EU, compared to 15 per cent for the United States, the second biggest exporting market, so the sector needs harmonisation and regulatory alignment.68 Tony Walker, Deputy Managing Director at Toyota Motor Europe, emphasised that the company does not view complying with EU rules as a negative thing: “[w]e have had no difficulty in Toyota, or I think in the wider car industry, in being innovative or being compliant with EU regulation in the past and no reason to think we would have difficulty in the future either.”69 He dismissed claims that EU regulation stifles innovation: “I really don’t think so, look at the German car industry. There is hardly a more innovative car industry.”70 Similarly, the aerospace sector warned:
“The danger for the UK outside of the EU, it seems to me, is that the US and Europe are where international rules will be developed, or the leading edge of those, and we have to sell into those markets. Irrespective of our position, we have to meet whatever the regulatory requirements are to sell into Europe, the US or other global markets.”71
21.During our visit to Northern Ireland, we were reminded that one of the main reasons for the recent economic progress on the island of Ireland has been the successful implementation of the Good Friday/Belfast Agreement and subsequent agreements, which have enabled businesses to flourish by trading freely across borders.72 We heard that the introduction of new regulatory or customs checks, however minor or remote from the border itself, would risk unsettling the political context in which businesses have been able to thrive. On our visit to the border town of Newry we heard that for many, the border is psychological more than physical and that the reference to a “hard border” can be misleading. We were told by the Police Service of Northern Ireland that organised criminals, including paramilitary elements, would seek to exploit increased regulatory or financial divergence across the border to illegally profit. This would undermine fair competition and reduce revenues to the Treasury, as well as increasing the pressure on enforcement agencies. The enforcement of new regulatory checks by the relevant authorities would risk rekindling the latent tensions which have been so effectively contained in recent years, to the benefit of businesses and the economies of both the UK and Ireland.
22.While supporting the Government’s announcement to invest in a UK version of Galileo,73 the aerospace sector expressed reservations about the lack of clarity provided by the Political Declaration on space cooperation.74 It was emphasised that in response to UK companies being blocked from bidding for future work on the European Galileo satellite navigation project, European countries are taking on work that the UK would have otherwise been expected to win.75 Airbus has moved 80 jobs to continental Europe to complete its final Galileo contract.76 Katherine Bennett, Senior Vice President of Airbus UK, cautioned that British industry risked missing out on a possible €1 billion benefit if it was unable to take part in the next stage of the EU’s Copernicus earth observation programme.77 Airbus is now bidding to participate in the next phase of the venture through its Portsmouth, Newport and Stevenage sites.78 However, under existing rules, non-EU nationals are prohibited from working on the project, suggesting that Airbus’ UK sites may be unable to take part from March next year.79
23.Businesses agreed that a reduction in access to EU labour would create new skills shortages and exacerbate existing workforce gaps.80 The Food and Drink Federation noted the sector’s dependence on European labour “from farm to fork”,81 and raised concerns that it would be difficult to replace these workers, citing the sector’s ageing labour force and the time it takes to train new workers.82 Diageo said that it would be a particular problem for its suppliers and the hospitality industry because the sector is already short of 40,000 to 60,000 workers.83 For the automotive sector, SMMT, Toyota and Applied Component Technology told us that some companies in the supply chain sourced up to 80 per cent of their workforce from the EU.84 There was evidence that, as some EU workers returned home because of uncertainty over Brexit, labour shortages were appearing.85 Witnesses urged that the overdue immigration white paper should be linked to skills not salary, avoiding those paid under £30,000 being automatically classed as low skilled workers, and thereby limiting the industry’s access to a range of vital skill sets.86 Several companies we spoke to in Northern Ireland were particularly concerned that uncertainty over Brexit or a ‘no deal’ might lead to employees being attracted to work in the Republic of Ireland.87
50 The European Aviation Safety Agency (EASA) is responsible for developing technical aviation rules, issuing initial and ongoing type certification of aircraft and components, harmonisation in aerospace across the EU and EASA’s non-EU members, and engagement with international stakeholders. EASA also has responsibility for aviation licensing, air traffic management and aerodromes.
72 For an overview of these agreements see: House of Commons Library, Brexit negotiations: the Irish border question, (July 2017).
87 We spoke to a range of companies in Northern Ireland, including those close to the Republic of Ireland, that spanned a range of sectors.
Published: 10 December 2018