What has the Brexit campaign said about UK manufacturing?

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As we enter the final days of campaigning in the EU referendum we take a look at what consideration – if any – has been given to what the UK’s membership means for manufacturing.

The Remain and Leave campaigns have been trading blows for what feels like forever.  Voters have been hit with a landslide of statistics and analysis on everything from the ins and outs of trade deals to the regulation of cabbages. While some of this may have felt like more heat than light, some serious organisations have been trying to unpick what EU membership means for the UK economy and who the winners and losers might be should the electorate opt to leave on Thursday.

The view from economists 

Our interest lies in what‘s been said about manufacturing. While heated debate about the UK’s fiscal contribution to the EU, migration and trade impact on all sectors, a number of institutions have sought to look specifically at what Brexit would mean for the manufacturing sector.  Here’s a summary of some (but by no means all of the analysis).  

Manufacturing and supply chains: HM Treasury highlights UK manufacturers’ ‘complex cross-border supply chains that rely on imports from the EU as components in their products and import inputs in order to later export finished goods.’ Its assessment concludes that Brexit would lead to ‘higher import prices (that) would put these UK businesses at a competitive disadvantage. This would make the UK a less attractive destination for international companies, lowering investment and employment.’

Manufacturing trade with Europe: Manufacturing is one of the most export-intensive sectors of the UK economy and around 45% of exports from the sector head to the EU. HM Treasury estimate that around 1,050,000 manufacturing jobs are related to exports to the EU.

The OECD has dug deep into the numbers and assumes that post-exit the UK negotiates a Free Trade Agreement (FTA) with the EU and continues to trade with other countries under most favour nations (MFN) rules as before. The consequences for UK goods exports don’t look great. The OECD calculations show that ‘trade would be lower for all main categories of goods, hampering the functioning of value chains. The trade reduction in intermediate inputs has a particularly negative effect. Not only would UK producers supply less intermediates to the EU, the reverse is also true: imports of intermediates from the EU into value chains in the UK would fall.

Worryingly, the analysis concludes that ‘the negative effect of Brexit on trade would grow over time. Regulatory divergence would increase steadily, resulting in increasing trade costs. Some trade relations with overseas companies would be hampered. A gradual loss of export-oriented inward foreign direct investment, especially in manufacturing and financial services, would further hit export capacity.’

Manufacturing and FDI: While both HM Treasury and the OECD have alluded to potential consequences for manufacturing FDI, the IMF also highlights explicit risks for the UK industrial base. ‘The financial sector and high value-added manufacturing are likely most vulnerable to exit-related risks. Given the wide range of potential scenarios, including about tariff rates, access to the single market, and fiscal subsidies, assessments differ on the degree by which sectors will be affected. A number of other sectors could be adversely affected, particularly those that are tightly connected to the EU via supply chains). Notable examples include the pharmaceutical, aerospace, and automotive sectors.’

PWC agreed in its report – ‘A UK exit from the EU could, therefore, have a negative impact on investment and FDI. If the UK’s trading relationship with the EU reverts to WTO rules, it is likely that inward investment into the manufacturing and services sectors would be affected.’

Manufacturing and productivity: Before policy makers became consumed by the referendum, one of the big questions they were grappling with was how to deal with the UK’s productivity problem. A problem, which according to PWC, won’t go away if we leave the EU. ‘The impact on productivity after an EU exit is likely to result from lower exports and investment, in particular FDI. The reduction in the level of UK net exports, particularly in sectors with higher levels of export intensity such as manufacturing, financial services, and business services, is likely to have a negative impact on productivity. Studies have shown that exporters have a higher level of productivity compared to non-exporters. A reduction in net exports could, therefore, lead to lower levels of productivity in the UK economy.’  

This conclusion was also supported by analysis by CEEMET which suggests that ‘leaving the EU would depress productivity gains in the industrial sector and thus significantly weigh on growth and employment.’

The view from politicians

Economists aren’t the only ones to draw attention to the potentially negative consequences for manufacturing of a vote to leave. In a recent Opposition day debate in the House of Commons a number of MPs voiced their concerns about manufacturing outside the EU. A couple of notable interventions include:

Barry Sheerman: In Huddersfield it would mean catastrophic loss of income into our university and catastrophic impact on manufacturing industry.

John McDonnell: There is a desperate need for long-term, patient investment in our manufacturing base in order to develop an industrial strategy. The threat of Brexit is undermining those who make the decisions about that long-term, patient investment, and Brexit would be a disaster for recreating our manufacturing base in this country.

Chris White: a vote to leave would create unwelcome uncertainty at a time when our vital manufacturing sector needs stability.

A future without manufacturing: All of this only matters if voters agree that manufacturing is vital to the UK’s future prosperity – something @EEF_Economists firmly believe and a point we’ve blogged on extensively in the past. This isn’t a view shared by everyone. One economist for Brexit, Patrick Minford, argues that we should be relaxed about any negative consequence for the sector. ‘Detailed model calculations show we would receive a welfare gain of 4% of GDP, with consumer prices falling 8% and our competitive services sector expanding to take the place of diminished manufacturing output.’   

WhyUKMFGmatterstotheUK

Many of the key reports that have attempted to inform debate about the UK’s relationship with Europe conclude that manufacturing’s future outside the EU is far from rosy. It seems likely that trade, investment and productivity – the main components of better balanced growth in the UK – would all potentially suffer if the UK votes to leave.  

The view from manufacturers

Tomorrow we’ll be recapping on why manufacturers’ views are important to the debate and why remaining in is important to future growth of the sector.

Author

Chief Economist

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