Like the rest of Britain, if to a lesser degree, U.K. businesses are divided in their views on continued EU membership. Large exporting manufacturers, financial and professional services firms and those needing to compete for scarce skilled or cheap labor would, by and large, have preferred to remain. So, too, would have U.K. subsidiaries of multinationals for which Britain provided an accommodating base for their EU operations.
However, small, domestically focused U.K. businesses more often found EU red tape burdensome without being able to benefit from the free movement of goods, services, people and capital across EU member-states’ borders, and thus put themselves in the “Leave” camp on the initial Brexit vote.
It is important to remember that there were two parts to the Brexit negotiations: the binding agreement covering the narrow departure terms, and a broader nonbinding document that set out the aspirations for the future trading arrangements still to be negotiated.
There were a kaleidoscope of possible Brexits that sought to align the U.K. economically with the EU to the maximum extent imaginable, short of political membership. However, the major options fell along a spectrum with a “hard” Brexit at one end and a “soft” Brexit at the other.
There is no majority in the U.K. parliament or among the voting public for any one of these models. The only outcome that commands majority support is avoiding a no-deal Brexit. That is also what business sees as most disruptive as it would mean falling back to trading on World Trade Organization rules, unknown custom and tariff arrangements and maximum legal uncertainty.
The degree of interlinkage between London’s financial services firms and the economies of the EU is substantial and intricate in its regulatory and legislative interfaces. The gulf between what the industry wanted and what it looks as if it will end up with is vast. In particular, it will lose what’s known as “passporting,” the ability of financial firms to operate throughout the EU or the basis of being regulated in any one EU member state. The proposed substitute regimes for regulatory equivalence are still up in the air.
A similar story of slow attrition and new investment going elsewhere is playing out in the manufacturing industry. Japanese multinationals, including Nissan, that have built manufacturing plants in the U.K. as the basis of their operations in the EU, have said that continued new investment can no longer be guaranteed.
Written by Paul Maidment,Director of analysis and managing editor at Oxford Analytica.
