Raoul Ruparel was the prime minister’s special adviser on Europe under Theresa May and was directly involved in Brexit negotiations for three years. Last year he predicted how a Brexit deal would be struck. He nows works as an adviser to Deloitte.
LONDON — There are now 72 days until the U.K. leaves the transition period with the EU. Regardless of whether a deal is reached or not, this will mean a sharp change in trading terms between the two sides — and in the midst of a resurgent global pandemic.
Few people have considered how the two will interplay and what that will mean for businesses on the ground trying to deal with both.
There is a valid question as to whether the sheer breadth and depth of the economic harm caused by the pandemic means that the impact of Brexit will be largely irrelevant. Indeed, some have argued that given many economic sectors are having to overhaul the way they operate due to COVID-19, doing so for Brexit as well reduces the additional impact.
But while there are elements of this argument which hold true, when you delve deeper, the reality is the two sets of economic impacts from Brexit and COVID-19 are more likely to compound each other than offset each other.
For a start, the two shocks are likely to hit different sectors of the economy hardest.
Those firms making the most changes from COVID-19 aren’t always — or even often — going to be the ones needing to make the most changes from Brexit. This means the spread of firms facing acute economic difficulties after the end of the transition period will be larger than if they were facing only one of these challenges.
Some sectors will see significant challenges from both. In particular, these are the industries with complex supply chains which spread across many countries. Automotive is a prime example here, but any advanced manufacturing supply chain is likely to face acute challenges from both Brexit and COVID-19.
To better understand the interplay between the economics of Brexit and of COVID-19, it’s helpful to consider supply chains, people and a company’s resources separately, as I found during research for this Deloitte analysis.
What we see in terms of supply chains is that both shocks are likely to increase costs, but in different ways.
Brexit represents a set of permanent — and largely known — changes within supply chains. The need for additional customs declarations, for example, and then the associated checks at borders as well as potential delays that come from these checks will increase admin costs and mean some restructuring of supply chains.
COVID-19, on the other hand, introduces a significant amount of temporary uncertainty into supply chains. Varying restrictions mean goods cannot pass through certain regions or may be delayed, they also mean some workplaces cannot produce to the same capacity they did before, all while supply chains are disrupted by firms within them going bust or temporarily closing.
Depressed demand has cascaded through the supply chain, often in unpredictable ways given the varying ability of firms within a supply chain to deal with the impact of the lack of demand.
So there is little evidence to suggest the two would offset rather than compound each other.
That said, there is one potential beneficial interplay – given how low the level of trade is in many sectors compared to usual, there are fewer components and products moving back and forth between the EU and U.K. This means the level of disruption on day one next year may be lower than it would otherwise have been, if trade was at full volume.
There are also some important interplays when it comes to firms’ labor supply. Free movement of people will end with the conclusion of the transition period, meaning it will become harder to hire workers from the EU. This will have a particular impact on certain low skilled sectors.
But COVID-19 has entirely changed the labor market, with unemployment expected to spike significantly in the coming months, whereas previously the transition was expected to end while unemployment was near record lows.
As such, the impact of ending free movement of people could actually be softened. Beyond this, the pandemic has complicated some firms’ Brexit plans when it comes to moving people from the U.K. to the EU — either they cannot be moved due to restrictions or do not want to move in the midst of the pandemic — as well as causing many to delay much of the hiring in 2020, including graduates. Pushing those hires into next year means they will now have to happen under the U.K.’s new immigration system, and will have to be reassessed in that light to ensure they make sense and can still take place.
Finally, the finance and resources of firms across the economy are stretched like never before.
Often the people and expertise needed to deal with COVID-19 is the same as that needed to deal with Brexit. This finite resource is therefore more stretched dealing with both.
Furthermore, a key part of many firms’ preparations for the end of the transition is to stockpile products to manage any delays or disruption. At the same time, however, these firms often want to keep cash on their balance sheet to help insulate against the unpredictable path of the pandemic. There is therefore a massive tension in some cases between being better prepared for the pandemic and better prepared for Brexit.
What can be done?
A trade deal with Brussels would help reduce some of the impacts of Brexit for certain sectors. Tariffs would hit automotive hard and it is already going to be hit hard by both shocks regardless. But for the most part, the challenges are present whether there’s a deal in place or not.
At this late stage, the best both government and business can do is to make sure that their preparations take account of the new economic context produced by COVID-19 and that their plans are assessed with both these challenges in mind.