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Brexit and UK Manufacturing?

Brexit negotiations continue to limp along with the European Parliament just casting their vote that there has been insufficient progress. And, things look a little bleak, with European Commission President, Jean-Claude Juncker stating that, “We cannot talk about the future without any real clarity.”

As a leading manufacturer that trades directly with many companies from EU member countries, one of our main concerns is the trade deal we end up with once we officially depart. We have already felt the impact of leaving the EU, with the pound plummeting against both the euro and the dollar. In the short term, although rising inflation has increased factory gate prices, the weakness of the pound has meant that we can compete more aggressively for international business, and this has led to many new client wins.

Longer term, UK manufacturing will potentially have some barriers to overcome dependent on the exact trade deal which is struck. For instance, we have traded in a tariff free environment across the EU since we entered the single market, but this may change. Historically, tariffs have been used as an important barrier to free trade. They are often imposed to protect domestic industry from cheap imports. However, it often leads to retaliation with other countries placing tariffs on our exports.

If tariffs are applied by members of the EU, this may result in higher prices for consumers and businesses. And, the knock-on effect of tariffs would be to reduce margins, profitability and competitiveness when trading with our European partners. However, as the likes of Boris Johnson (and his leave supporters often point out), Brexit presents new opportunities as well as risks. Half of the UK’s manufacturing exports are sold outside of EU markets, and Brexit will also provide us with the opportunity to negotiate more beneficial trade deals with these countries.

Outside of the specifics of the trade deal with the EU, there are a number of other factors which could affect the future of the UK manufacturing sector post-Brexit:

Funding from the European Union

There are a raft of business funding and subsidy initiatives available through the EU, which are unlikely to continue after the UK formally exits the union. What makes matters worse is that the government has not yet confirmed whether they will continue the payments which many companies presently receive. One of the most prominent examples of this is the Common Agricultural Policy (CAP), which is EU funded. However, the UK puts more money into the CAP than it takes out, so perhaps it may be farmers inside the EU that will be hit the hardest? From a business perspective there are a wide range of direct funding initiatives such as EU grants, and indirect funding in the form of the European Structural and Investment Funds, that are likely to disappear.

Business funding

While I have mentioned how the devaluation of sterling can be positive for UK exports, the banks don’t see it as a good thing, and can become very risk adverse during uncertain economic times. As a result, their lending criteria can become even tougher, and in the case of RBS (which allegedly exploited small business during the financial crisis), they can pull all funding at very short notice.

Because of Brexit, companies in need of a business loan to expand will probably find it harder to secure finance from UK banks. And, this is not just restricted to UK companies, The Bank of England has warned that lending to businesses could be impacted after Brexit because companies from EU member states, such as Iceland, Liechtenstein and Norway – provide about 10 per cent of the lending to UK businesses and would need to reapply for authorisation to operate in Britain after it leaves the EU.

If you are an SME manufacturer rejected for funding, you should be aware of the Bank Referral Scheme, whereby your bank relationship manager should direct you to a designated business funding platform, such as Alternative Business Funding. These platforms have a much wider variety of funding options for both start-ups and established businesses.

Your staff

One of the reasons why the UK voted to leave the EU, was to have more control over the free movement of people, but huge concerns remain for many employers that have relied on a steady stream of EU workers.

The manufacturing sector currently employs 300,000 EU citizens, representing about 10 per cent of the workforce. If large numbers of these EU workers leave the UK, or it becomes more difficult for EU workers to secure employment in the UK, then there could be a labour shortage for many industries including manufacturing.

There will be winners and losers
Some sectors will naturally be more exposed to tariffs. The car industry, for instance, would face 10 per cent tariffs under WTO rules. But other industries such as the manufacture of mechanical seals — which stop fluids leaking out when pumps and similar devices working at high speed — will only face a 1.7 per cent tariff. This has already been offset by the devaluation of sterling.

Crucially for all manufacturers - you only face tariffs when your exports classify as manufactured products. If you’re exporting parts to assemble to order, the rate falls to zero.

Clearly there will be winners and losers because of Brexit, but we are already taking steps to ensure that we are able to trade successfully with the EU.

Paul Bennett is Managing Director of Fascia Graphics

Paul Bennett

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