Chapter 4: Wales
The political context
100.The Welsh Government, together with a majority of members of the National Assembly for Wales (including Labour Party, Plaid Cymru and Liberal Democrat, and some Conservative, AMs), supported the UK remaining in the EU. A substantial minority of Assembly members (all UKIP and some Conservatives) supported the UK leaving the EU.
101.The referendum result in Wales resulted in a majority of votes (52.5%) cast for leave. Turnout was 71.7%, which, while lower than in England, was the highest of any of the devolved nations. Wales was the only one of the three devolved nations where a majority voted to leave.
102.In response to the result, the First Minister of Wales, Rt Hon Carwyn Jones AM, outlined “six priorities [for Wales] arising from these changed circumstances”:
- Protect jobs and economic confidence
- Play a full part in discussions on EU withdrawal
- Retain access to the European Single Market
- Negotiate continued involvement in major EU funding programmes, such as for farming and poorer areas
- Revise the Treasury’s funding formula for the Welsh Government budget
- Put the relationship between the devolved administrations and the UK Government on an “entirely different footing”.86
103.On 23 January 2017 (six days after the Prime Minister’s Lancaster House speech), the Welsh Government and Plaid Cymru published a joint White Paper entitled Securing Wales’ Future.87 The White Paper described itself as “not just a shopping list of demands from Wales, but a pragmatic starting point for negotiations that can deliver for all parts of the United Kingdom”. It set out six key priorities:
- Continued participation in the Single Market to support businesses, and secure jobs and the future prosperity of Wales
- A balanced approach to immigration linking migration to jobs and good properly-enforced employment protection
- On finance and investment, UK Government assurances that Wales would not lose funding as a result of the UK leaving the EU
- A fundamentally different constitutional relationship between the devolved governments and the UK Government, based on mutual respect and consent
- Maintenance of social and environmental protections and values, in particular workers’ rights
- Consideration of transitional arrangements to avoid a ‘cliff edge’ in the UK’s economic and wider relationship with the EU.
104.The Welsh Government Cabinet Secretary for Finance and Local Government (with responsibility for Brexit-related issues), Mark Drakeford AM, told us that, while the Welsh Government’s mind was “not closed on differentiated solutions”, its White Paper “provides for a single UK proposition”, rather than different terms of the relationship with the EU for the nations of the UK.88 He said that the White Paper was “essentially focused on Welsh priorities, but we have tried to frame them within what we believe will be a successful outcome for the whole of the United Kingdom. In many ways, the primary purpose of our paper has been to try to help shape the UK’s negotiating position as Article 50 is triggered.”89
Wales and the Single Market
105.Mr Drakeford stressed that the Welsh Government’s “overriding priority is to secure full and unfettered access to the single market post Brexit”:
“We say that because we believe that free and frictionless trade, free of tariff barriers, non-tariff barriers and with regulatory equivalence, is in the best interests of Welsh businesses and the Welsh economy. Two-thirds of exports from Wales go to the European Union. We think anything that makes that trade more difficult will be damaging to the Welsh economy.”90
106.Leanne Wood AM, Leader of Plaid Cymru, which co-authored the White Paper, said that membership of the Single Market was important for Welsh jobs and its economy.91 While Plaid Cymru sought membership of the Single Market, the Welsh Government had called for full and unfettered access to the Single Market. The White Paper was a compromise between these two positions: the priority was to “try to keep that relationship as close to what it is as at present”.92
107.Andrew RT Davies AM, Leader of the Welsh Conservatives, agreed that a good trading relationship with the EU was important both for Wales and the UK, but argued that membership of the Single Market was incompatible with the referendum result. He said that the authors of the White Paper had been unable to explain what “participation” in the Single Market meant—everyone had access to the Single Market, but “it just depends on what rate you have to pay to get into that market or whether you are an actual member”.93
108.The former leader of Plaid Cymru, Lord Wigley, argued that the EU Single Market was more important to Wales than to the rest of the UK. He noted that the EU accounted for 67% of all Welsh exports, and that, in 2016, Wales had a £2.25 billion trade surplus with EU countries and a £2.3 billion trade deficit with non-EU countries. A failure to reach a comprehensive free trade agreement with full participation in the Single Market, in particular for US companies operating out of Wales, would be disastrous for Welsh manufacturing, which was worth £9 billion to the Welsh economy. The alternative of trading under WTO terms would be equally disastrous for Welsh exporters, as food exporters would face a tariff of 15% on exports to the EU, while car manufacturers would face a tariff of 10%.94
109.Dr Rachel Minto, Research Associate, Cardiff University, agreed that “Wales has a particular relationship with the single market. It is a small nation, and for small nations the single market has particular importance for securing foreign direct investment.”95
110.Sir Emyr Jones Parry GCMG, Chancellor of Aberystwyth University, and former UK Permanent Representative to the UN and to NATO, believed that Single Market access for Wales was crucial, but added that the problem with the language of “unfettered access to the Single Market is that the conditionality attached to it immediately hits the very things you do not want to accept”, such as free movement.96 While he could conceive of different arrangements for access to EU research programmes, or freedom of movement in certain sectors, more broadly he argued in favour of a United Kingdom position “that reflects as much of the interests of everyone as possible”.97
111.Dr Victoria Winckler, Director, Bevan Foundation, added that businesses that did not export might still be affected because they were part of supply chains which relied on exports, or were beneficiaries of a multiplier effect from those businesses.98 She was concerned about the impact of Brexit on jobs and social protection, environmental protection and community relationships.99
112.The leader of UKIP in the National Assembly for Wales, Neil Hamilton AM, also believed that membership of the Single Market was out of the question. In his view:
“Wales is part of the United Kingdom, and this is a United Kingdom negotiation. Eighty per cent of the people of Wales would not vote for independence from the rest of the United Kingdom and so we have to see this in the United Kingdom context.”100
The Welsh farming and manufacturing sectors
113.We heard broad agreement that the Welsh economy, thanks to its reliance upon manufacturing and agriculture, was particularly reliant upon tariff-free access to the EU Single Market. In the words of Mark Drakeford AM:
“Our emphasis on the single market is because of the Welsh economy. We have a larger proportion of manufacturing in the Welsh economy than other parts of the United Kingdom, and those manufacturers’ goods pass across the border absolutely routinely.”101
114.Neil Hamilton AM also acknowledged the importance of the Single Market to these sectors, noting that a large proportion of lamb exports from Wales went to the EU, and that automotive manufacturing was a big part of the Welsh economy.102 This was borne out by economist Gerald Holtham, who pointed out that the Welsh economy was comparatively small, and was not as diversified as the UK economy as a whole, specialising in areas dependent on European trade, notably the automotive industry, the aerospace industry and farming.103
115.Professor Scully agreed that Wales depended heavily on a small number of export-oriented manufacturing businesses and livestock agriculture.104 The economic implications of a loss of Single Market membership were thus “profoundly concerning for Wales”.105
116.Mary Williams, Acting Political Officer, Unite Wales, said that tariff-free access to the Single Market was a priority for its members across the automotive, aerospace, and steel and metal industries. She cited the Ford plant in Bridgend, which produced engines which were shipped to Cologne as part of the Ford Fiesta—the number one selling car in the UK. The imposition of tariffs on shipments to Cologne and back could thus put jobs at risk. Likewise, Airbus in north Wales had a workforce of 6,000 creating wings for the A380 aircraft, which were transported to Spain and then to France for assembly.106
117.Mr Holtham noted that there were two engine plants in Wales that exported between 80% and 90% of their product to the EU, and imported about 70% of parts or material used in the construction of engines from the EU. There was also a “very tangled supply chain in that industry, which is absolutely dependent on being able to shuffle stuff back and forth across the border without bureaucracy, as well as without tariffs”. He suggested that long-term investment in the automotive sector would suffer if Wales no longer had free access to the Single Market.107
118.Although the farming industry was less significant in GDP terms, Mr Holtham cited its cultural importance, in particular as a bastion of the Welsh language, and the potential impact on dependent and economically vulnerable rural communities.108 The consequences of a disadvantageous trade deal for Welsh agriculture would be catastrophic, and could lead to the depopulation of rural areas.109
119.Sir Emyr Jones Parry agreed that agriculture in Wales was precarious, with “almost subsistence economy in the upland areas”, and noted that 92% of its exports went to the EU. Wales’ climate and topography meant that it was highly dependent on sheep farming, which had benefited from CAP funding—serious thought needed to be given to the post-Brexit support system for farmers.110 Nicholas Fenwick, Head of Policy, Farmers’ Union of Wales, pointed out that 80% of Wales was an EU-designated Less Favoured Area,111 and that the risks for Welsh farmers were correspondingly greater than for English farmers.112
120.Witnesses also raised a longer-term issue, namely the impact of future free trade agreements on Wales, and on the Welsh farming sector in particular. Mr Drakeford stressed Wales’ distinct interests in any future free trade agreements with non-EU countries:
“We would need to have a differentiated approach to it. We wince a little bit every time we hear a UK Minister say in a throwaway remark how great it would be to have a free trade deal with New Zealand, for example. If we get the wrong free trade deal with New Zealand, it will be the end of Welsh hill farming and sheep farming.”113
121.Mr Fenwick noted concerns about the standards applied in countries with which the UK may seek to reach trade agreements, as well as the additional competition that would be introduced.114 Sir Emyr Jones Parry warned that “if there were a free trade agreement that brought in New Zealand lamb, the impact on Wales would be disastrous”. He said that trade negotiations with non-EU countries on agriculture, as well as automobile, aeronautics and steel, should not proceed if the impact on Wales was disproportionate and there was no consultation.115
Access to EU labour
122.Several witnesses stressed the importance of EU labour to the Welsh economy. Dr Minto pointed to data indicating that EU citizens made a notable contribution to the agrifoods industry and the healthcare sector in Wales.116 Leanne Wood AM drew on the same data, saying that there were 79,000 EU nationals living in Wales, a relatively low figure, but concentrated in the NHS, agriculture, tourism and some manufacturing sectors. She feared the “dangers to those sectors if freedom of movement was suddenly completely ended”. She cited the experience of firms such as Airbus, which relied on freedom of movement to move its workers between Wales and France, often at short notice. That was why the White Paper had advocated a “compromise to continue with freedom of movement but link it more to work”.117
123.Neil Hamilton AM called for a UK-wide solution to the free movement issue:
“If it is true, as Leanne says, that we need specific types of skills in Wales that would not be available without immigration from other parts of the EU, let us identify those areas and needs, and feed that into the Government’s decisions, which they will have to make, on the kind of immigration policy that we want for the United Kingdom.”118
Andrew RT Davies AM also did not think it was in Wales’ interests to have a separate immigration policy from the rest of the UK.119
EU funding
124.Several witnesses were concerned about the impact on Wales of the loss of EU funding. Mr Drakeford pointed out that, while the UK as a whole was a net contributor to the EU, Wales was a net beneficiary:
“It would be a very difficult message to give to people in Wales that they are going to do less well out of their membership of the United Kingdom than they would have done out of their continuing membership of the European Union. We say that funds flowing into Wales today as a direct result of our EU membership must continue to flow, and to flow in full, to Wales once Brexit is accomplished … Simply putting into the baselines of the devolved Administrations the sums that currently come through EU membership would be a pragmatic and practical way of addressing this issue.”120
125.Mary Williams gave the example of £350 million of EU funding available for regeneration in Ebbw Vale. Of this, £33.5 million went towards Coleg Gwent, which contributed to 29,000 Welsh apprenticeships, and £111 million for transport and infrastructure projects. She wished for such investment to continue after Brexit.121
126.Leanne Wood AM noted that, while the UK Government funded Wales on the basis of population, EU funding to Wales was on the basis of need, “so there is a question there about how that money would be allocated post-Brexit”.122 Neil Hamilton AM said that UKIP argued that “every single penny of British taxpayers’ money that is currently spent in Wales ought to come to Wales after Brexit”.123
127.Mr Holtham noted that the allocation of EU funding was on a needs-based formula, whereas “the Barnett Formula answers with a shrug if you ask whether it is fair”.124 Lord Wigley agreed that the Barnett Formula was “singularly inappropriate” to support the specific needs of Wales (such as highland farming or tackling poverty in the old industrial areas) post-Brexit, because “any formula that is not needs-geared is going to lead to a significant loss”.125
128.Lord Hain stressed that there should be no shortfall in funding for Wales as a result of Brexit, and argued that the Barnett Formula as presently constituted was inadequate.126 Dr Winckler agreed that the prospect of Brexit exposed the inadequacies of the Barnett Formula as a means of allocating funding, and it was “time to bite the bullet” and address the issue.127
129.Mr Fenwick told us that 80% of Welsh farm income also came from EU funds—application of the Barnett Formula to farming subsidies would be extremely disadvantageous.128 He added that businesses that were supported by EU funding in turn spent over £1 billion in their wider communities: “We are looking at complete rural collapse if funding is not maintained, including structural funds as well.” This could lead to depopulation and would have a significant negative impact on the Welsh language: “In large areas of Wales, [farming] is the one industry within which Welsh is used almost at 100%”.129 Professor Scully agreed that the loss of CAP subsidies, structural funds and other EU funding could have an impact on rural and valley communities.130
130.Looking to the future, Dr Minto suggested a model whereby an amount of money could be added to the block grants by calculating how much Wales would have received were it to continue to be part of the European Regional Development Fund and the Common Agricultural Policy.131
Reflecting Wales’ interests
131.Lord Hain, a former Secretary of State for both Wales and Northern Ireland, noted the different political imperatives, given that Scotland and Northern Ireland voted to remain and Wales voted to leave:
“We have an asymmetric structure of devolution in the UK. It is very different in each of the three cases. I do not see why there could not be different solutions for each of Wales, Northern Ireland and Scotland appropriate to their interests and their needs … I think we should start from the presumption that there is not a uniform, one-size-fits-all approach to this. It has to be tailored to the particular needs of each of the nations.”132
Lord Hain also argued that it would be in Wales’ interests to have some form of special arrangement.133
132.Another former Secretary of State for Wales, Lord Hunt of Wirral, urged respect for the overall referendum result. Nevertheless, he too thought that it was possible to have different terms across the constituent parts of the UK. He cited Wales’ distinctive culture, language and economy, and its character as an “outward-looking place”.134
133.Dr Hunt contrasted the Scottish Government’s approach of “asking for things that will be incredibly difficult to deliver legally, politically and economically”, with Wales, which “tended to take a more collaborative and co-operative line on this and has not pressed itself. It is seeking positions where it can come together with the UK Government.”135
134.Dr Hunt said that “legally, politically and economically, it is incredibly difficult to see how” different arrangements for future relations with the EU between the nations of the UK would work, but saw potential for continued participation in various international networks, to the extent that Wales (or the other devolved administrations) had the capacity to do so. She suggested that the National Assembly could seek to legislate in devolved areas according to EU standards, for instance on the environment.136
135.Lord Wigley called for a “willingness to avoid a one size fits all model”, but was concerned that the Prime Minister had not shown sufficient sensitivity to the different needs and aspirations across the nations of the UK.137 Sir Emyr Jones Parry went further, commenting that “it is difficult for little old Wales with 3.2 million [people] to imagine that it can be the tail to wag the larger dog”. Nevertheless, he told us, “if you want to preserve the unity of the kingdom, due regard has to be given” to the views and interests of the devolved nations.138 Echoing witnesses from Northern Ireland, he worried that fears in Whitehall about the political situation in Scotland prejudiced Wales’ relationship with London.139
136.Gerald Holtham was concerned that “the brute political fact is that we just do not matter … We do not have an oilfield and we do not have a successful national party threatening to secede.” He feared that “the Welsh interest will be overridden. That is the basic fact of life.”140 Professor Scully agreed that, from a political point of view, “Wales is possibly the least problematic of the devolved nations in the sense that it has nothing that it can credibly threaten London with”.141
137.Dr Winckler summed up the political challenge facing Wales as follows:
“Wales is in a different and difficult position in that it has very limited leverage over the UK Government. It is not in the same position as Scotland; it is in a different position economically. It will be very difficult for Welsh representatives to make their voices heard, particularly if decisions are not in its interests.”142
Conclusions
138.Wales could be profoundly affected by Brexit. The Welsh economy is highly reliant on membership of the EU Single Market, in particular in the fields of manufacturing (which is a proportionately larger sector of the Welsh economy than in other parts of the UK, and where a small number of exporting companies in the automotive and aerospace industries are principal economic drivers) and agriculture. Two-thirds of Welsh exports go to the EU, and Single Market membership has been an important driver of foreign direct investment. The Welsh economy is therefore particularly vulnerable to the effects of any diminution in the UK’s unfettered access to and ability to trade freely with the Single Market.
139.Welsh farming is particularly at risk. Eighty per cent of Welsh land is designated as an EU Less Favoured Area, and Wales’ topography and climate means that Welsh farming is dominated by hill farming and sheep farming—sectors that are particularly dependent on EU funding, through the Common Agricultural Policy, and EU markets. The rural communities that rely on the farming sector, which make an important contribution to Welsh culture and language, are also at risk.
140.Overall, Wales is a substantial net beneficiary of EU funds, including via Common Agricultural Policy payments and EU structural funds. This places it in a vulnerable position, and we note the strong arguments put to us that Wales should not lose out financially as a result of Brexit. In particular, we note widespread concern that the Barnett Formula is ill-suited to recompensing Welsh communities for the loss of needs-based EU funding.
141.While the numbers of EU workers in Wales are comparatively low, the NHS, agriculture, tourism and some parts of the manufacturing sectors are heavily dependent on EU labour. Restrictions upon the free movement of EU workers could place these sectors under strain.
142.But while Brexit presents major challenges to Wales, it appears to have less leverage over the UK Government than either Northern Ireland or Scotland. We heard general concern that, because of its size, because the situation in Wales does not give rise to such complex political and constitutional questions as in Scotland and Northern Ireland, and because, unlike the other devolved jurisdictions, most votes cast in Wales were in favour of leaving the EU, the interests of Wales may be overlooked in the Brexit negotiations. The UK Government needs to take action to assuage these fears.
143.The Welsh Government has made clear that it wishes to work constructively with the UK Government to ensure that Wales’ interests and priorities are reflected in the terms of a UK-wide Brexit agreement. The UK Government needs to reciprocate this good faith and to seek to protect Wales’ interests in the Brexit negotiations. If this does not prove possible, then the case for identifying other means by which Wales’ particular interests can be defended may become more compelling.
86 BBC, ‘EU referendum: Jones fears for jobs after Brexit vote’ (24 June 2016): www.bbc.co.uk/news/uk-politics-eu-referendum-36618878 [accessed 20 June 2017]
87 Welsh Government, Securing Wales’ Future (January 2017): https://beta.gov.wales/sites/default/files/2017–01/30683%20Securing%20Wales%C2%B9%20Future_ENGLISH_WEB.pdf [accessed 20 June 2017]
90 Ibid.
93 Ibid.
94 Q 124, European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129 and Brexit: trade in non-financial services (17th Report, Session 2016–17, HL Paper 134)
105 Ibid.
108 Ibid.
111 These are areas where farming is handicapped by geography, topography or climate and in which farmers are eligible for compensation for the extra costs incurred or income foregone.
119 Ibid.