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Brexit: the impact for Dutch business

Economic Report

  • British prime minister Theresa May invoked Article 50 of the Treaty of Lisbon on March 29, officially triggering the process of UK withdrawal from the European Union
  • The prospects for free trade are far from bright, because Theresa May intends to leave the European single market and the customs union
  • Because the UK is an important trading partner for the Netherlands, Brexit will to impact Dutch businesses
  • Next to threatening the Dutch economy and business community, Brexit could also offer opportunities for some companies in the Netherlands. 
  • To help you determine how Brexit will affect your business, we provide a four-point plan and a checklist

Co-author: Frits de Vries

British prime minister Theresa May invoked Article 50 of the Treaty of Lisbon on March 29, officially triggering the process of UK withdrawal from the European Union (“Brexit”). This process will last a maximum of two years, unless all the EU member states agree to an extension. For the next two years, then, the United Kingdom remains a member of the EU and all the EU treaties continue to apply. Two key issues need to be negotiated during the pre-withdrawal period. The first is the so-called 'divorce settlement'”, covering such matters as outstanding British payments due to the EU, and the residence rights of EU citizens living in the UK (and vice versa). The second is the nature of the future trading relationship between the EU and the UK. It is far from certain that the two sides will be able to reach agreement on all relevant matters within the two years.

At some point in the next few months, the British government will table the so-called 'Great Repeal Bill' in Parliament. This is intended to incorporate all existing EU legislation into UK law, thus avoiding regulatory gaps and so ensuring continuity for the business community. Once Brexit has actually taken place, the British government will be able to amend that legislation as it sees fit.

Because the UK is treading a path no-one has ever taken before, a lot of things remain unclear at this stage. Never before has a nation withdrawn from the EU. Brexit is therefore bound to instigate a long period of uncertainty. A new Scottish independence referendum would add an extra layer of uncertainty.

The future trading relationship: four possibilities

The future trading relationship between the UK and the EU could take a number of forms. Broadly speaking, though, there are four possible models (see table 1): UK membership of the European Economic Area (EEA), full membership of the EU Customs Union, a new bilateral trade agreement or a so-called “hard” Brexit with no deal. At present, however, only the last two of these seem realistically likely, as Theresa May has effectively ruled out Britain staying in the European single market (making EEA membership impossible) and the Customs Union. This is because only then she can deliver upon the wishes in the UK to take back control on EU-immigration; to regain the freedom to negotiate bilateral trade agreements with non-EU countries; to end the jurisdiction of the European Court of Justice; to stop British contributions to the EU budget and to end regulation from Brussels. Because unhindered free trade between the UK and the EU would only be guaranteed by continuing British membership of the single market (the EEA model) and the Customs Union, the prospects in this respect look far from bright.

Table 1: Possible UK-EU relationships and their impact upon trade
Table 1: Possible UK-EU relationships and their impact upon tradeSource: Rabobank, Kalf en Prins (2017). Investing in Europe after Brexit, RaboResearch Economic Report

The UK is an important trading partner

Because the UK is an important trading partner for the Netherlands, Brexit is certain to impact Dutch businesses. Of total Dutch exports (in added value), 8 per cent are destined for the UK (figure 1). They account for 2.3 per cent of Dutch GDP. And 11 per cent of all Dutch imports (in added value) come from the UK.

The sectors most dependent upon exports to Britain are mineral extraction, manufacturing and agriculture. Within manufacturing, firms in the leather, footwear and textiles industry and electrical and optical equipment are relatively heavily reliant upon demand from the UK. On the import side, mineral extraction and manufacturing are also the sectors most dependent upon British goods. A relatively high proportion of foreign direct investment (FDI) reflects the traditionally strong economic relationship between the two countries, too.

Future trade with the UK: harder and more expensive

The first of the realistically possible outcomes, in our view, is that the EU and the UK reach a bilateral trade agreement. But the content of any such deal remains highly uncertain, since the EU’s official negotiating position is not yet known. With respect to a rise in trade barriers, there is a variety of possible outcomes: tariffs on specific products, border controls, and customs procedures. The UK will try to retain wide-ranging access to the single market, but we believe it is unlikely that the EU will consent to this. That, after all, would mean the British “having their cake and eating it”: reaping the benefits of free trade with the rest of Europe, but without the costs and compromises of EU membership. Were it to concede to all Britain’s wishes on this front, the Union would risk encouraging other member states want to withdraw on similar terms and, in the worst-case scenario, face total collapse.

A 'hard' Brexit refers to a situation in which the UK and the EU fail to reach an agreement on free trade during the withdrawal period. We believe this too is a realistic possibility – in which case cross-Channel trading relations would probably revert to WTO (World Trade Organisation) rules. These would entail the introduction of import tariffs, as well as driving up the cost of trade due to border controls and customs procedures. In both of the scenarios we deem realistic, Dutch companies doing business with the UK or with branches there will face increased barriers to trade. Read the study Future trade with the UK: harder and more expensive.

Shifting trade: opportunities for Dutch and European business

Figure 1: Brexit creates opportunities for European business and financial services
Figure 1: Brexit creates opportunities for European business and financial servicesSource: World Input-Output Database (2011 data), Rabobank

As well threatening the Dutch economy and business community, Brexit could also offer opportunities for some companies in the Netherlands. Those supplying products and services currently imported into the EU from the UK, for instance. Greater barriers to trade will probably make importing from the UK more expensive after Brexit. This substantially improves the competitive position of Dutch and European companies on the continent. The principal opportunities here lie in business and financial services and in manufacturing industry, the EU sectors currently most dependent on imports from the UK.

In addition, the Netherlands is well placed to attract non-EU companies which currently use the UK as their gateway to Europe. For them, it is a logical and relatively appealing alternative thanks to Rotterdam’s status as Europe’s largest seaport, high-quality hub airport Amsterdam Schiphol, a good physical and digital infrastructure, a favourable geographical position and a well-educated, multilingual workforce.

Box: Britain’s short-term economic outlook

The British economy grew strongly in the six months following the Brexit referendum, bolstered by consumer spending and, to a slighter extent, strong exports. In our view, however, the current high level of consumer expenditure is unsustainable and so will fall in 2017.

Reduced consumer confidence, due in part to the uncertainties surrounding Brexit, will encourage greater caution. Moreover, the sharp fall in the value of sterling against the currencies of the UK’s principal trading partners is fuelling inflation and so eating into disposable incomes. The pound may well depreciate even further if a hard Brexit becomes more likely. A weak pound is good for the economy in the short term, because it temporarily improves the competitive position of British exporters. But the uncertainties of Brexit and its impact upon trade and the economy will probably continue to suppress business investment this year. We predict UK economic growth of 1.7 per cent in 2017 and 1.8 per cent in 2018.

Brexit–steps to take and checklist

To help you determine how Brexit will affect your business, below we provide a four-point plan and a checklist.

  1. First, assess how closely entwined your business is with the UK and whether that is because you export, import or both. It is also important to establish how UK-dependent your supply chain is, both directly and indirectly. And do you have branches, subsidiaries or other interests in the UK? In conducting your assessment, involve staff from various levels of the organisation that are likely to have the most practical understanding of what Brexit might mean for the company. In larger organisations it might be worth setting up a permanent “Brexit Task Force” bringing together people from, say, operations, marketing, purchasing, HR, strategy and communications. Staff with financial, legal and fiscal expertise could also make a valuable contribution. As well as the potential threats, consider the opportunities Brexit might bring you – for example, British competitors becoming less competitive in the EU marketplace.

    See the Brexit checklist for specific points you should take into account at this stage.

  2. Draw up a strategic plan covering allthe possible scenarios for the future UK-EU trading relationship (see table 1). In this, set out clearly what action you need to take to parry the threats and exploit the opportunities, and when. For example, will trade barriers require you to adjust your pricing or your logistical chain? As well as the things you need to do, plan for Brexit’s likely impact upon those around you: your clients and prospects, suppliers, shareholders and competitors. The timing of your strategic actions will depend upon a number of factors. These might include the potential impact of Brexit on your business, the time needed to implement the proposed action (to set up a marketing campaign, say, to penetrate a new market) and the likelihood of the scenario it addresses and the nature of the trade barriers that situation puts in place (see table 1).

  3. Closely monitor the negotiations between the UK and the EU. As these progress towards the Brexit deadline, the probable outcome should become clearer and so you can disregard other alternatives.

  4. Implement the actions in your strategic plan. You may have to implement some actions  before the final Brexit deal is known.. Preparatory activities, such as sounding out new markets or suppliers, can begin well in advance. As it gradually becomes clearer what direction the talks are heading in, you can put more and more of your strategic actions into effect. So keep monitoring the Brexit developments and be prepared to alter your plans if necessary.
Carlijn Prins
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60033

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