Brexit would economically harm UK science and engineering industries

20 June 2016 Consultancy.uk

The economic impact of the UK leaving the EU are across the board not projected to be rosy. A new report warns that a Brexit would be particularly damaging to the UK’s science- and engineering-related industries, which are highly dependent on FDI and unfettered trade with mainland Europe. A Brexit would lead to lower FDI inflows into the UK, and longer trade processes, causing considerable economic harm, leading to a situation which is considerably more expensive than the current model.

The motivation for the UK to leave the European Union are multifaceted and varied, from concerns about sovereignty, to nationalist’s fears of the loss of identity, as well as an increase in immigration and arguments that economically the UK is getting a rough deal from its EU membership. Those that are keen to stay, suggest that those seeking to leave are using a range of informal fallacies to make their case, and further believe that European-wide integration benefits long run economic growth.

The majority of think tanks and economists seem to back the stay campaigners, at least when it comes to the economic benefits of the status quo and the potential negative effects of leaving. According to the most cited studies on the matter, the short term effect on the UK’s GDP is estimated to average a fall of -1.5%  – with considerable uncertainty about the consequences for the long-term economic outlook.

Economic forecasts of a Brexit

Science and engineering industries
According to a new analysis by Roland Berger, leaving the EU would have a negative impact on UK’s science- and engineering-related industries, both in terms of a loss of access to key markets as well as limitations of FDI. The industry today is one of the UK’s key economic drivers, directly employing 2.6 million mostly highly skilled workers. Even manufacturing, which has famously declined from 25% of the economy in 1980 to half of that today, has still grown at an average rate of 1.5% per annum since 1948, and the UK remains the #11 manufacturing economy worldwide.

One area that is set to affect the industry if the UK voted to leave would be its standing as a FDI hub. The UK punches well above it weight in terms of foreign direct investment (the UK attracts more inward FDI than the next five EU states combined), with all sectors and regions benefiting from inward FDI, creating an estimated 84,000 jobs in 2015 alone. Conversely UK businesses have also invested £1.0 trillion overseas, from which they earn £65 billion each year.

Engineering and sciences industries – such as automotive, aerospace & defence and chemicals – are, through their reliance on innovation and R&D, one of the key recipients of inbound FDI, capturing around half of the total number of projects. The consultancy’s estimates shows that, if the UK were to leave the EU, a large chunk would be under threat. FDI provides particularly England (excluding London) with capital for its industrial activity – the West Midlands for instance, has seen its manufacturing sector boom in recent years.

FDI location and distribution

Trade
As it stands, the UK is one of the world's most open economies. UK exports account for £390 billion vs. its £1.7 trillion GDP. The turnover of major manufacturing industries in the UK is highly dependent on trade with the EU. Of the total £189 billion turnover, 38% comes from exports to the EU, 33% to the rest of the world and 28% domestically. Chemicals, automotive and aerospace & defence are the most dependent on the unfettered access the UK currently enjoys in the single market.

Those advocating a Brexit suggest that the UK will continue to have unfettered access to the EU single market if the UK would leave. The consultants however – in line with a range of economic advices and Wolfgang Schäuble’s warning that a single market agreement is by no means guaranteed – argue that this is not the case, nor should the UK expect to find themselves in a strong bargaining position, given that, while 45% of UK exports are to the EU, less than 10% of EU exports are to the UK. Canada, as a commonwealth example, still has no free trade agreement with the EU, seven years after negotiations begun.

Trade of UK science and engineering industries

According to Roland Berger, “Leaving the EU would on balance be expected to have a damaging effect on both international trade terms and FDI attractiveness, particularly in the near term. Politicians, academics and economists can merrily debate the long term, and the consensus is that the long term will be damaged also, sadly the near term is the one we are living in. The Engineering sector requires continuous investment decisions if it is to retain its international position, and so will shrink throughout this near term; indeed we are already seeing these effects.”

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