Brexit: the impact for Dutch business
- 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
The British snap elections held on 8 June, weakened the Brexit mandate of Prime Minister Theresa May. She had called the elections to increase the majority of her Conservative Party in the British Parliament, yet instead the Conservatives lost their majority. Although the Conservative Party has formed a minority government supported by the Northern Irish Democratic Unionist Party (DUP), it remains to be seen whether this is a stable government. There is still a chance that Theresa May will resign as prime minister later this year.
Theresa May still wants to leave the Single Market and Customs Union and thus seems to maintain a hard line on Brexit. However, due to the election result, pro-EU Conservative members of parliament (MPs) are able to cooperate with more pro-EU parties to try to influence the negotiating position. Consequently, the odds of a softer Brexit have increased. A soft Brexit would mean that far-reaching free trade between the EU and the UK continues to exist, probably in exchange for concessions from the UK. At the same time, because the Conservatives depend upon other parties, the odds that the UK will not succeed in reaching an agreement with the EU on the divorce and / or future trade relationship have also increased. No agreement, i.e. a 'cliff-edge' Brexit, could lead to uncertainty and problems for businesses.
The Brexit process
On June 19, the Brexit negotiations between the UK and the EU started, almost a year after the referendum on British membership of the EU. The Brexit was already officially put in motion on 29 March 2017, the day Prime Minister Theresa May called in Article 50 of the Lisbon Treaty. The withdrawal process will last a maximum of two years, unless all the EU member states agree to an extension. Until 29 March 2019, then, the UK remains a member of the EU and all the EU treaties continue to apply.
Two key issues need to be negotiated during the withdrawal procedure. The first is the so-called “withdrawal agreement”, covering matters such as UK financial obligations to the EU, the Northern Ireland-Ireland border, 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. The EU and the UK will first have to reach sufficient agreement on the withdrawal agreement before the EU will start talks about the future relationship. It is far from certain that the two sides will be able to reach agreement on all relevant matters within the two years withdrawal period, especially since negotiations have been delayed due to the snap elections in the UK. In addition, a trade treaty should be ratified by the parliaments of all the EU Member States, which usually takes a lot of time. Moreover, it takes time to implement the practical changes to trade resulting from the Brexit. Therefore, a transitional period is probably part of the negotiations. This would bridge the period between the moment the UK is no longer part of the EU and the moment that the new trade agreements have been implemented and come into force. A transitional period seems required for an orderly Brexit because it would enhance continuity for businesses.
At the moment, it seems unlikely that Brexit will be cancelled as even British pro-EU parties respect the referendum result and thus want to leave the EU – albeit it in a softer way. Their position could turn around, however, if sentiment among the British population changes radically in the course of the next two years.
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, access to the Single Market remains); 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 likely. Although the likelihood of a softer Brexit has increased after the snap elections, we believe that the existing soft models, EEA or Customs Union membership, are not realistic outcomes. This is because in these models, the British Prime Minister could not deliver upon the wishes of the British people, which are:
- taking back control on EU-immigration;
- regaining the freedom to negotiate bilateral trade agreements with non-EU countries;
- ending the jurisdiction of the European Court of Justice;
- stopping British contributions to the EU budget and ending regulation from Brussels.
A softer Brexit could take shape through a bilateral trade agreement in which the British will make concessions, for example in the field of financial contributions, immigration or supervision by the European Court of Justice, in exchange for (partial) access to the Single Market. The election result has also increased the likelihood of a no-deal "hard" Brexit because it will be harder for the British Prime Minister to pass Brexit-related legislation through the British parliament.
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.
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 both the EU’s negotiating position on free trade and the extent to which the British want to make concessions to maintain free trade are 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 unless the British largely accept the terms of the single market. Otherwise, it would mean the UK could reap 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 wanting 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. A no-deal Brexit is sometimes compared to a cliff edge, because there will be sudden changes to doing business with the UK on the exit-day, while the necessary adjustments are not yet implemented. This would endanger continuity for businesses.
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
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 showed first signs of weakness following the Brexit referendum in the first quarter of 2017. Slower growth of household spending was the main driver of lower economic growth in that period. We expect that this trend will continue and that private consumption growth will be lower in 2017 compared to previous years. 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 household’s purchasing power. 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 suppress business investment in the second half of this year. We predict UK economic growth of 1.5 per cent in 2017 and 1.7 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.
- 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.
- 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).
- 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.
- 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.