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How will a hard Brexit affect business?

So far post Brexit business confidence has remained high, as the widely predicted economic downturn has failed to materialise. Despite that, the pound has hit a 31 year low against the dollar, and business confidence has started to weaken. In their first post-Brexit survey, the Federation of Small Businesses found that business confidence is down for the first time since 2012.

At the recent Conservative Party Conference, Theresa May announced that Article 50 will be triggered before the end of March 2017. A ‘hard Brexit’ is looking more likely, with indications that immigration caps will be prioritised above access to the single market. As free market access has traditionally been considered important for the success of the British economy, it’s understandable that businesses may be feeling jittery.

What is a hard Brexit?

Simply put, a hard Brexit is a deal  in which Britain is not a member of the single market.

Directly after the referendum, there was speculation that the UK would seek a Norwegian style deal, becoming part of a group of countries including Iceland, Norway and Liechtenstein, who are members of the European Economic Area (EEA) and have access to the free market, without actually being part of the EU. These countries are,still bound by EU rules, such as free movement of people, and pay a membership fee to the EU. A Norwegian type deal is typically seen as a ‘soft Brexit’. However, it is believed that the UK will not be able to secure full access to the free market without also allowing free movement of people. Given that the Government has indicated that immigration controls will not be sacrificed in favour of free market access, it appears that the UK will leave the single market when Brexit is completed.

Whilst access to the single market may not be part of our Brexit deal, Theresa May has said:

“I want [the deal] to give British companies the maximum freedom to trade and operate in the single market – and let European businesses do the same here.”

How realistic that is remains to be seen.

How will business be affected by a hard Brexit?

Whilst a soft Brexit would, more or less, preserve the status quo, a hard Brexit is a truly unknown quantity. Directly after May’s speech, the pound plummeted to a 31 year low against the dollar, indicating that the markets were spooked by the Government’s announcements. Additionally, the past couple of weeks have seen businesses such as Nissan announce that they will need to be financially protected against any potential tax barriers that they experience in a Post-EU Britain. Whilst big business and key sectors may be able to secure deals from the Government, SME’s will undoubtedly wonder where they stand.

However, not all news is bad. An analysis by ratings form Moody’s has found that a hard Brexit would have just a modest effect on the city, allowing London to retain its status as one of the world’s financial capitals. On the flip side, there are fears that a withdrawal from the single market would make passporting, where a financial institution which is regulated in one country can automatically operate in all EU countries, impossible. This would make London less attractive for banks and those who service the financial sector.

Do we need access to the single market?

Proponents of a hard Brexit point to the fact that the UK imports more European products than it exports. This would mean that an unfavourable trade deal or introduction of tariffs could impact the EU more than it does the us, giving the EU an incentive to the UK favourable terms.  However, some worry that concerns over the future of the EU may mean that the UK will not get an easy time of it in negotiations. There are a number of countries within the bloc that are currently experiencing high levels of anti-EU sentiment. Negotiators will want to be sure that Britain doesn’t have such a good deal that it encourages other countries to follow our example.

A blueprint the Government will undoubtedly be looking at is the so-called ‘Canada Plus’ deal.

After years of negotiations, Canada recently signed the CETA deal, which aims to eliminate 98% of tariffs between Canada and the EU. Those in favour of a hard Brexit state that the UK could pursue a similar deal, with an added agreement for our service sector, which would give a degree of access to the single market, without compromising immigration controls. However, these deals are incredibly complex, and take many years to negotiate. Additionally, having access to the single market (as opposed to being a member) can be less reliable and more complex for businesses.

Another option the Government is apparently looking at is a sector by sector deal – where sectors considered crucial for the UK economy (such as automotive, farming, finance and technology) will have full market agreements, whilst other sectors would have varying degrees of access.

So, how would a hard Brexit affect your sector?

  • You rely on imports

Imports have already become more expensive due to the fall in sterling. If this trend continues,  then businesses that rely on imports will almost certainly have to pass their increased costs onto the consumer, or find a way to offset the extra expense.

  • You rely on exports

The devaluation of the pound is a boon for businesses who rely on exports. Additionally, many a business owner has vented about regulations and red tape enforced on them by the EU. Any businesses who are intent on trading with the EU will have to comply with EU regulations in order to access that market, whilst those who export outside of the bloc may find that Brexit makes their life easier.

  • You rely on migrant labour

Typically, businesses that rely on migrant labour fall into two camps: those that use migrant workers due to cost benefits, such as builders, and those who rely on niche skills, such as technology businesses. The Government will be seeking to ensure that key sectors such as technology, health and housing sector do not suffer due to Brexit. A likely scenario is that an EU national will have to have a job offer in order to come to the UK. Whilst this may complicate the recruitment process, it wouldn’t affect the ability of companies to hire foreign workers. Additionally, the Government may make it easier for workers from China, Canada or America to work in the UK, steadying the influx of highly skilled workers.

  • You’re affected by EU laws

At the Conservative Party Conference, Theresa May announced the ‘Great Repeal Bill’, which will give the Government the power to keep EU laws they want to keep, and scrap others. May has promised that worker’s rights will be protected throughout this process: many of our workplace laws including mandatory maternity pay, are enshrined in EU law. Any amendments to existing laws will be debated by Parliament. It’s worth noting that this bill will require the consent of the Scottish Parliament, which may not be forthcoming.

  • You work in tourism

There have already been reports of a weakened pound making the UK more attractive to foreign tourists – something that has benefitted our high streets. Post Brexit we have seen a boom in staycations, as tourists find holidays abroad too costly.  If the pound continues to weaken, this trend is likely to continue, although a recent poll found that 90% of travellers stated that their holiday plans were unaffected post Brexit.

  • You don’t know how the EU affects your business

Perhaps you don’t really feel like the EU has any relation to your business at all. Businesses that serve local markets can struggle to see the relevancy of Brexit to them. However, if the UK enters a period of low economic growth, consumers are likely to see purse strings tighten, meaning a reduction in spending. This has the potential to affect nearly all B2C businesses – from hairdressers to cafes.

More articles in our Brexit series:

Is Article 50 Final?

How does the EU affect business?

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