With the UK's departure from the European Union set to go ahead in March 2019, businesses across the continent remain uncertain as to what kind of repercussions this move will have, with optimism levels higher in some sectors than others.
Perhaps the greatest concerns are those held by international traders, with many business leaders expressing their worry that Brexit could lead to import and export activity being held back by new bureaucratic burdens even before the June 2016 referendum result. Much of this potential red tape is likely to be minimized if the UK and EU are able to agree a post-Brexit free trade agreement, but with Brexit negotiations progressing slowly, this remains a distant prospect.
With this in mind, legal firms Oliver Wyman and Clifford Chance have put together a report estimating the impact on businesses if no deal was agreed, with the UK and EU reverting to a World Trade Organization (WTO) trading relationship with each other. The findings are likely to confirm many of the concerns held by the business community, and underline the need to plan for every eventuality.
An impact for British and European businesses alike
The report calculated the impact of tariffs and non-tariff barriers to trade on companies in the UK and in the remaining 27 EU nations, estimating direct costs of around £31 billion (€35.12 billion) for EU exporters and around £27 billion (€30.59 billion) for UK exporters, with non-tariff barriers having greater consequence than the tariffs themselves.
Although the financial costs of this type of hard Brexit would be greater for EU27 nations in numerical terms, the impact would proportionately be four times larger for the UK as a percentage of gross value added. London would be hit particularly hard, due to the likely loss of the British capital's status as a financial hub if it lost its free access to European markets.
However, many parts of Europe would also suffer considerable economic losses - in Germany, the states of Bavaria, North Rhine-Westphalia, Baden-Wuerttemberg and Lower Saxony would be expected to shoulder around 70 per cent of the country's direct export losses, due to their leading global positions in automotive and manufacturing, while Ireland's agricultural sector would be hit hard if its UK customer base was suddenly curtailed.
Certain sectors set to be affected more than others
These findings are indicative of another important trend highlighted by the report - namely, the fact that certain industries and types of company are likely to be affected more harshly than others.
Indeed, the analysis indicated that 70 percent of the aggregate impact of a shift to WTO trading rules would be localized to just five sectors in the UK - financial services; automotive; agriculture, food and drink; consumer goods; and chemicals and plastics. The picture for the EU27 nations is similar - the automotive; agriculture, food and drink; chemicals and plastics; consumer goods; and industrials sectors would incur an estimated 75 per cent of the economic losses, despite accounting for only 23 per cent of the bloc's output.
It was also warned that small firms may be particularly at risk from a hard Brexit, as they will find it much more difficult than their larger competitors to reorient their customer base and supply chains to focus on markets beyond the EU.
Mitigating the impact
The potentially worrying trends outlined by the report underline a need for businesses and policymakers alike to take steps to reduce the potential downsides that Brexit could bring for international trade.
Companies have been advised to develop contingency plans, re-localize their supply chains, develop revamped business models and overhaul their IT systems to cope better with the incoming changes - although, as noted, this will be easier for some organizations than others, depending on their size and industry background.
As such, the onus for realizing a less traumatic Brexit is likely to fall on lawmakers - for example, Oliver Wyman and Clifford Chance's report indicates that the successful negotiation of a customs arrangement equivalent to the current EU Customs Union would reduce the EU27 impact of Brexit to around £14 billion, or £17 billion for the UK.
Jessica Gladstone, partner at Clifford Chance, said: "Failing to prepare is preparing to fail. Given the difficulty of knowing exactly what turbulence lies ahead, many businesses are putting Brexit in the 'too hard' box.
"However, exporters that understand exactly what Brexit's risks and rewards could be for them will be able to implement the right plans at the right time to ensure that they are one of the winners, rather than one of the losers."
