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Businesses' Views on the Endgame of the Brexit Negotiations

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Businesses' Views on the Endgame of the Brexit Negotiations ‘Deal or No Deal?’ Businesses’ Views on the Endgame of the Brexit Negotiations Ed Balls, Peter Sands Emily Benn, Kevin Ferriter, Tobias Garnett, Eleanor Hallam, Sebastian Leape, Nyasha Weinberg M-RCBG Associate Working Paper Series | No. 101 The views expressed in the M-RCBG Associate Working Paper Series are those of the author(s) and do not necessarily reflect those of the Mossavar-Rahmani Center for Business & Government or of Harvard University. The papers in this series have not undergone formal review and approval; they are presented to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for non-commercial use only. 2 Table of Contents Abstract 4 Acknowledgements 4 Affiliations 4 Executive Summary 5 1. Introduction 10 2. Where We Stand Now 12 3. The Impact of Uncertainty 15 4. There is Consensus that “No Deal” Would Be Extremely Damaging 27 5. Though Better Than "No Deal", The Government's Draft Withdrawal Agreement / Draft Political Declaration Means Contuinuing Damaging Uncertainty 33 6. Most Businesses Would Prefer a Closer Relationship with the EU than That Envisaged in the Draft Withdrawal Agreement / Draft Political Declaration 42 7. Conclusion 50 Appendix 53 List of Interviewees 53 Bibliography 55 3 Abstract Brexit presents profound changes for British businesses: from how they trade, to how they are regulated and how they employ people. This paper represents the fourth phase of a research project in a series examining the impact of Brexit on small and medium-sized British businesses, examining their views as we reach the endgame in the Brexit negotiations, with the publication of the Government's Draft Withdrawal Agreement (“DWA”) and Draft Political Declaration (“DPD”). This research is primarily based on 180 interviews with over 120 small and medium-sized businesses, academics and trade association over the past two years, and draws on interviews and research from previous papers. The key conclusion from these interviews is unambiguous: the vast majority believe a “No Deal” outcome would be extremely damaging, and is a “worst-case scenario”. While preferable to “No Deal” the “Blind Brexit” that would result from the combination of the DWA/DPD would mean continued and damaging uncertainty, which is already having a negative impact for many businesses. While the DPD still leaves the shape of the post EU transition unresolved, most businesses would prefer a closer relationship with the EU than it currently envisages. Acknowledgements We would like to thank all the companies, trade associations, and experts we interviewed over the course of this research for making the time to share their perspectives with us. These are listed in Appendix 1. We would also like to thank the Members of Parliament who helped us during this research project, not least by helping identify companies to interview, as well as the individuals from various academic institutions and think tanks who gave us their insights. These are listed in Appendix 2. Finally, we would like to thank those who took the time to review the draft report and provide us with comments. The authors take full responsibility for the content and conclusions of this report, including any errors and omissions. Affiliations Ed Balls Research Fellow, Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School and Visiting Professor, King’s College, London Peter Sands Research Fellow, Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School Emily Benn Special Student 2017-8, Graduate School of Arts and Sciences Research Assistant, M-RCBG, Harvard Kennedy School Kevin Ferriter MPA Candidate - Harvard Kennedy School Tobias Garnett MPP Candidate - Harvard Kennedy School Eleanor Hallam PhD Candidate - King’s College London Sebastian Leape MPP 18 - Harvard Kennedy School Alumnus Nyasha Weinberg MPP 17 - Harvard Kennedy School Alumnus 4 Executive Summary In October and November 2018, the Brexit team at Harvard Kennedy School’s Mossavar- Rahmani Center for Business and Government returned to the small and medium-sized businesses (“SMEs”) that we consulted over the past two years to get an update on their views on Brexit and the UK Government’s negotiations with the European Union. Most of the businesses we spoke to have not changed their underlying positions on Brexit: the vast majority of businesses want to remain in the EU, or to see the Brexit negotiations result in a future relationship that facilitates frictionless trade, access to skilled and unskilled labour, and aligned regulation. A majority of respondents would be inclined to support the Government’s proposed Draft Withdrawal Agreement (“DWA”) and Draft Political Declaration (“DPD”) if the only alternative is a “No Deal” scenario. However, many expressed deep concern about the continuing uncertainty created by the Government’s plans - a “Blind Brexit” under which the future UK- EU relationship is negotiated only after the UK has left the EU. Most companies want more detail, less uncertainty, and a greater guarantee of future proximity to the EU than the Government’s proposals offer. Most Businesses Would Prefer the Closest Possible Relationship with the EU It was clear from responses that most businesses and trade associations we consulted have not changed in their views and retain a clear preference for the UK maintaining the closest relationship possible with the EU: in effect, remaining in the EU over any Brexit option; “Norway plus” over the DWA/DPD; the DWA/DPD over “Canada plus”; anything over “No Deal”. Although a majority preferred “Norway Plus”, which would keep the UK in the Customs Union and the Single Market, there was recognition that such an arrangement would leave the UK as rule takers, subject to EU regulations, without a voice in deciding them, and thus in a worse position than as members of the EU. Moreover, “Norway Plus” would entail acceptance of Freedom of Movement, continuing payments to the EU and de facto acceptance of European Court of Justice jurisdiction. From the perspective of the majority of business who want the closest possible relationship with the EU, the logic of Brexit remains flimsy at best. However, a perhaps surprising number of businesses – around two-fifths – do not have a clearly preferred deal option. Many of the SMEs interviewed were not familiar enough with the details of the different options to understand precisely the effect of each option on their business. Others had given up trying to analyse the impact on their business because the uncertainty is too great to make such analysis worthwhile. For most businesses, focused on navigating day-to-day business challenges, the key priority is to avoid the potentially catastrophic consequences of a “No Deal” scenario. 5 Avoidable Uncertainty Has Had a Large Impact on Businesses Two and a half years after the 2016 Referendum, we found our respondents increasingly concerned about the prolonged uncertainties arising from the Brexit process, which many noted had already begun to affect their businesses. According to our interviews, this uncertainty derives from three failures: 1. A failure to narrow the range of possible options for a future relationship with the EU. Businesses had expected to know at least the broad shape of the future relationship with the EU by this stage of the negotiations. Such an expectation is not unreasonable given that in her Lancaster House speech in January 2017, the Prime Minister declared the intent of reaching “an agreement about our future partnership by the time the 2-year Article 50 process has concluded”. Yet the DWA published on 14 November and the DPD published on 22 November fall far short of this aspiration. While the DWA makes clear the basis of the UK’s withdrawal from the EU, and how the transition period will work, the 26-page DPD leaves open a broad spectrum of options for the eventual shape of the UK’s relationship with the EU. 2. A failure to resolve specific issues essential to a wide range of industries. Most businesses felt that the Government had not made enough progress in the negotiation of essential sector-specific issues such as the continuity of outstanding cross-border financial contracts. In the few areas where there is clarity, most businesses were unhappy with the Government’s direction of travel – a striking example was the dissatisfaction businesses expressed with migration policy proposals following the Migration Advisory Committee (“MAC”) Report and Recommendations. 3. A failure to engage with businesses and their trade associations to understand their views and industry needs. The vast majority of businesses we spoke to feel ignored and unrepresented and have lost faith that their views are informing the Government’s position in the negotiations - either directly or through their trade associations. Businesses remarked that these uncertainties have already translated into problems for their companies, for example dampening investment and consumer demand. Moreover, these failures underpin widespread dissatisfaction with how the Government has conducted the Brexit negotiations. That dissatisfaction is shared by those who are both in favour of and opposed to Brexit - the vast majority of the firms we interviewed now believe that, at least from a business perspective, UK will be in a worse position following the UK’s departure from the EU. There is Consensus that “No Deal” Would be Extremely Damaging Almost all businesses view “No Deal” as an extremely damaging prospect and are astounded that it remains a possibility. Respondents fear tariffs, border delays, the loss of mutual recognition, staff shortages and travel restrictions with severe impact for supply chains and a complete lack of clarity around many facets of businesses operations. Some fear short-term panic and societal breakdown. Only a very small number of businesses – primarily firms that conduct most of their business outside the EU and who would benefit from a weaker currency – are relatively unconcerned by “No Deal”.
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