Would Brexit make UK businesses less competitive?

A fall in the value of the pound would make exports cheaper, but this could be negated by trade barriers
  
  

mosaic pound sterling symbols
‘A lower pound makes imports dearer and exports cheaper.’ Photograph: Luke MacGregor/Reuters

In this week’s EU referendum Q&A our panel discuss how a Brexit could affect the costs facing UK businesses:

Would UK businesses be more or less competitive in the global market if we choose to leave?

If you have a question about the potential impact of the EU referendum on your small business, submit it here.

Larry Elliott

Economics editor at the Guardian, he has been with the paper since 1988

A decision to leave the European Union would lead to a fall in the value of the pound as investors react negatively to the uncertainty. A lower pound makes imports dearer and exports cheaper, so UK firms would be more competitive in global markets and the UK’s hefty current account deficit would be reduced.

Brexit campaigners say UK firms would also benefit by being less hampered by EU rules and regulations, although there is not a great deal of evidence to support this. Germany faces the same amount of Brussels red tape but runs a large trade surplus with countries outside the EU.

The EU remains the most important market for UK goods, so it is possible that any competitive gains from a cheaper pound would be negated by trade barriers in the event of a vote to leave. Much would depend on the size of the depreciation in the pound, whether the depreciation was sustained, and the deal struck with Britain’s former EU partners about access to the single market.

In or out, the biggest challenge for the UK is to improve the economy’s recent poor productivity performance. This involves factors such as skills, education, management, innovation and investment – and they will need to be tackled whatever the result on 23 June.

Swati Dhingra

Assistant professor at the department of economics at the London School of Economics, researching international economics, globalisation and industrial policy, she is co-author of Life after Brexit, a report by LSE’s centre for economic performance

After Brexit UK businesses would be less competitive within the EU market because they would face higher non-tariff barriers such as rules of origin and the costs of divergence in regulations. Potentially, UK businesses would also face tariffs when exporting to the EU and to countries with which the EU has negotiated trade agreements. If the business relies heavily on imports from the EU or the EU’s trade agreement partners, then it would have to pay higher costs for its inputs. The EU is the UK’s biggest trade and investment partner, so these higher trade barriers would make UK businesses less competitive.

There could be some gain in competitiveness from getting rid of EU regulations. But the gain would be small as the UK already has one of the most flexible employment and product market regulations in the world. And half of the estimated costs of EU regulations for UK businesses comes from just two sets of policies – the EU’s climate change/renewable energy policies and the working time directives (which entitle workers to 20 days of paid leave). Scrapping these seems politically infeasible regardless of Brexit.

Depending on the immigration policy adopted after Brexit, UK businesses might face higher recruitment costs. In the short term, businesses would also face greater uncertainty over the UK’s future relationship with the EU and other trade partners, and over the legislation that would be needed to replace EU policies.

Ian Cass

Managing director of the Forum of Private Business, a business support and lobbying group that specialises in helping employers with compliance and growth

We can’t know for certain; it will depend on a number of factors, such as how quickly new trade agreements are signed and whether the UK ends up with World Trade Organisation model, which effectively means they put nothing into the EU but also get nothing out in terms of preferential access to the market. This would mean that, looking even longer term, it is impossible to say whether we would be better or worse off compared to overseas competitors.

Regulation wise, small businesses continue to complain about the level of red tape coming out of Europe. Whether red tape would ease in the event of a Brexit vote would depend on what changes the UK government made following the referendum.

EU customers are likely to remain a big market for UK SMEs and a key issue for manufacturers could be that BSI standard products may not automatically have access to EU markets. Less focus on the EU may mean a greater focus on emerging markets, which has been the strategy behind UK Trade and Investment for a number of years.

More generally, investment is vital to competing in the global market. Many of the barriers to investment such as the UK’s overly complex taxation system (particularly when it comes to innovation), tight planning laws and the cost of employment are predominantly home grown.

Atrophy due to a period of uncertainty is, however, the biggest risk to the competitiveness of small firms. Firms generally are used to dealing with calculated risks, but it is hard to gauge what the final outcome will be and whether change will ultimately be better than long term stability.

John Van Reenan

Director of the Centre for Economic Performance, London School of Economics.

In the short run, it is likely there would be negative shocks as uncertainty spikes while we negotiate new trading arrangements with the EU and the rest of the world. This has potential to hurt investment and hiring.

In the longer run, there would be an increase in trade costs as we would have a looser relationship with the EU single market. This could potentially cause a fall in overall trade and in foreign investment, which could in turn depress productivity. Second, access to EU migrants, who provide a valuable source of skills to EU businesses, would be restricted.

The pro-Brexit campaign emphasises that UK businesses would have to contend with less red tape. However, we would have to continue to abide by EU export rules to trade with the EU without any vote on how these rules are formed. Since we already have one of the most lightly regulated labour markets in the world, there is no political appetite for jettisoning the working time directive.

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