The Brexit vote, 5 years on - what do we know so far?
This note summarises the evidence so far of the impacts on Brexit on Scotland. It sets out early evidence related to areas such as trade, the workforce and EU programmes.
Trade and the Economy
Academic evidence suggests the UK's exit from the EU has already had an impact on investment and the economy – in line with the Scottish Government's long-term macroeconomic modelling. Born et al (2019) estimate that the output loss in the UK due to the EU referendum vote amounts to about 2.1% of GDP at the end of the first quarter 2019 and a study by Centre for European Reform (2019) also found that the UK economy was 2.9% smaller than it would be otherwise (by Q2 of 2019).
Reduced investment, together with changes in productivity and migration, are likely to create a further drag on the growth of the Scottish economy compared to continued membership of the EU. Scottish Government modelling indicates that in the long run, the basic Free Trade Agreement (FTA) negotiated by the UK Government with the EU could mean Scottish GDP is £9 billion lower (6.1%) by 2030 compared with EU membership.
COVID has added to the challenge. The Scottish Government made it clear last year that it was deeply irresponsible to proceed with the end of the EU Exit transition period at the same time as the peak of the COVID-19 pandemic – advice that the UK Government ignored. But the data show that the impact on trade with the European Union has been particularly severe.
Overall UK trade in goods has fallen considerably with total exports and imports falling from £266.4 billion in the first four months of 2018 to £237.6 billion in the equivalent period in 2021. Comparisons are made with 2018 as it is the most recent period in which relatively stable trade patterns were observed, and were not impacted by either the pandemic or the end of the EU transition period. But the decreases in trade with the EU have been much larger than the declines in non EU trade. When compared to January-April 2018, exports of goods to the EU were 19% lower in 2021, compared to non-EU exports of goods which were only 4% lower. The difference is Brexit.
Going beyond these headline statistics, we know from business surveys that many Scottish businesses have faced additional trading costs due to EU exit since the start of 2021. Evidence from the ONS Business Insights and Conditions Survey (BICS) suggests that businesses experiencing challenges with exporting or importing attribute the main cause of these difficulties to the end of the EU transition period not the COVID-19 pandemic. Latest data from the BICS survey covering business feedback in May also indicate that a third of all manufacturing businesses in Scotland have faced increased costs due to red tape, and almost half have faced increased transportation costs.
This is also reflected in feedback from over 670 importing and exporting businesses Scottish Enterprise engaged with between January and April 2021 across a range of sectors, including food and drink (25%), oil and gas (21%) and technology and engineering (18%). Forty-one percent of these businesses reported that the top challenges they faced at the time were caused by the end of the transition period, such as transportation costs (named by 17% of the businesses) and disruption and issues at UK borders (13%).
As predicted by Scottish Government analysis, the most immediate, severe and visible impacts are disproportionately concentrated in specific areas of the Scottish economy – sectors which are also disproportionately represented in Scotland at a UK level, i.e. the food sector, particularly seafood, meat and dairy, as well as beverages and textiles.
According to HMRC, UK exports of food and live animals to the EU, which includes seafood and fish, decreased by £1.2 billion (34%) in the first four months of 2021 compared to the equivalent period in 2018, with stricter checks and certifications being one of the main reasons. Reports showed that in January 2021, for example, the consignment sign-off was taking six times longer and that the transit of goods to France was taking three days instead of an overnight transit. For some of these sectors that makes the transaction simply unviable.
The food and drink industry is a major contributor to Scotland's economy. It was worth around £15 billion in 2018 (in turnover) and accounts for one in five manufacturing jobs. Scotland has 18,850 food and drink businesses, employing around 115,400 people.
The latest GDP data show that output in the food and drink sector decreased by 0.5% in Q4 2020, whereas output across the economy as a whole increased by 2.0% which captures both the impact of the pandemic and how the sector was already struggling with new barriers.
The disruption to the seafood sector since early January offers the clearest evidence so far of the additional costs and losses associated with becoming an EU third country, and the trade frictions that result, including dealing with new and untested processes. Taking account of steps such as investment in upgrades to software and changes in working patterns, the shellfish sector has quoted increased costs of £500-600 per consignment, regardless of size.
Issues in the seafood sector are heavily interlinked: a consequence of the deal itself and lack of time to prepare for it, both here and in EU Member States. Over 70% of Scottish seafood exports were to the EU in 2019, worth over £770 million.
Following sharp falls in fish exports to EU countries in January 2021, February and March figures showed some signs of recovery. But April's trade figures suggested any recovery was slowing down. Total UK exports of fish in 2021 were 27% lower than in the first four months of 2018.
Some businesses could become completely unviable. For example, seed potatoes, one of Scotland's key quality exports to the EU, are now prohibited from export to the EU. The anticipated loss of these markets is estimated at £11 million based on the annual average of 20,000 tonnes exported to the EU and 2,000 tonnes exported to Northern Ireland. Most Scottish exporters were able to export to their EU and NI markets ahead of the end of the transition period for this growing season but the challenge is now for next and future seasons. Other goods – such as the movement of sheep – are facing new export barriers. These relate to compliance with manufacturing processes to ensure protection of human health and safety or protection of the environment also affecting manufacturing industries including chemicals.
These stark figures mean real impacts on jobs and communities. Local authorities with high concentration of employment in Brexit-sensitive industries are particularly exposed to EU exit. For example, Moray and Aberdeenshire had the highest share of employment in food manufacturing in 2019, while Shetland Islands and Orkney Islands had the highest share of employment in fishing. And while this exposure to output losses is expected to be higher in rural areas, some urban areas with high reliance on manufacturing jobs are also likely to be impacted.
Similar difficulties apply to imports. Project Management Institute (PMI) figures for May showed a further near record lengthening of lead times, pointing to a severe pressure in global supply chains. These pressures were mainly linked to shortages of inputs, raw materials and containers, transportation delays and COVID-19 restrictions. Further anecdotal evidence suggests that many firms in the construction industry could face shortages of supplies due to EU Exit. A recent Construction PMI report also suggested a record high increase in input costs, reflecting a surge in demand for construction materials and severe supply shortages.
Several uncertainties remain on medicines. Over two thirds of medicines normally used in the NHS are imported from the EU through a supply chain that is privately operated on a UK-wide basis. The impact of anticipated changes to customs controls due to take place in October 2021 and January 2022 are still unknown and in the latest communication with the pharmaceutical industry the DHSC Chief Commercial Officer advised the industry to retain the current level of preparedness to mitigate against any potential disruption to medicine supply.
As a result of leaving the EU, Great Britain will no longer have access to the single licensing process for medicines offered by the European Medicines Agency (EMA). This means that approvals for any new medicine on to the market in Great Britain have to undergo a separate approval process. Once fully in force in 24 months, the impact of the new GB regulatory processes on the attractiveness of the GB market to pharmaceutical companies, and on possible delays to the availability in Scotland of innovative new medicines, remains unknown.
Some of these difficulties are about unavoidable new rules and regulations. Some are about costs which now need to be permanently factored in. They are the consequence of Brexit and it is clear that these problems are here to stay.
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