Author: CBI Report July 2019

1. Movement of Goods

Frictionless trade in goods has been built up between the UK and the EU for the last 40 years, facilitated by the integration of rules and processes through the single market and customs union. That facilitation has created efficient and low cost webs of finely tuned supply chains spanning the continent, relied upon by both consumers and businesses. These supply chains are expected to be severely disrupted by no deal, creating widespread economic effects. The IMF, for example, believes that the trade disruptions in no deal would be severe and are estimated to cause in the first and second year, respectively, a decline in UK GDP of 1.4% and 0.8% and a decline in EU GDP of 0.2% and 0.1%

2. Customs

 A range of new customs requirements will be introduced for firms in the event of no deal, with the immediate and then increasing application of a number of laws regulating importing, exporting and the movement of goods as well as health and safety requirements. Almost all measures that facilitate the trade and transportation of goods that the UK currently has with the EU will fall away, leaving businesses to face burdensome customs procedures, declarations and consequent delays at the border. The government has previously estimated that these would range from 4% to 15% of the cost of goods transported, while an OECD study found that documentation and customs compliance requirements, lengthy administrative procedures and other delays can increase transaction costs by between 2%-24% of the value of the good . Ultimately, it is essential to remember the scale of the customs challenge in no deal. Up to 5,000 new HMRC staff will be required to manage the volume of new customs declarations and checks in the long-term. That staffing level will have to be matched to some degree by the private sector, with costs estimated to be around £20 billion a year from customs declarations alone. If no deal becomes a permanent state, these costs will count against investment cases for manufacturing firms considering the UK and will make it much more difficult for SMEs in particular to trade, creating an over-reliance on logistics providers instead of growth of in-house trading expertise. In the long-term, even once the initial disruption has reduced, customs requirements of no deal will have new impacts as temporary measures fall away. For example, TSPs which are intended to last over a year after the UK enters into no deal, with a review into the policy 3-6 months after its introduced. That review will determine how much change companies will experience when changes come again. Additionally, the UK has prioritised the flow of goods over security or revenue collection, which is the right choice for the short-term, but ultimately unsustainable. This creates the potential for multiple timelines for firms to adapt to in no deal.

3. The UK Border

Ports and airports, as the first point where traded goods will encounter the UK border, will immediately bear the brunt of a no deal. The main challenges for the UK’s border will flow from new requirements at customs, with ports which handle significant amounts of trade with the EU expecting to see increases in customs declarations of over a hundredfold in no deal if uptake of Transitional Simplified Procedures (TSPs) does not increase. Ports and airports have had to work closely with their governments to rapidly revise infrastructure, train extra staff to manage new procedures, and work with local authorities and police forces in order to manage delays and queues. Delays are expected to have a huge impact at the UK border in no deal; research has found that two extra minutes spent on each vehicle at the border could more than triple queues on the M20 to 29 miles. Ports in EU Member States are also highly concerned about queues and delays of UK imports and export. It is important to remember the scale of the challenge of no deal at the UK border. The EU is the single biggest destination for UK maritime port traffic, accounting for 55% of all international traffic though UK ports and accounting for a total of 116.7 million tonnes entering the UK from EU ports in 2017. The UK and EU have both focused a lot of their preparations for no deal at the UK border. Around 7,000 people have been hired or will be hired by public authorities to manage additional requirements, both sides have provided very clear notices on their intentions, and additional land has been requisitioned or purchased. However, preparations thus far have been insufficient to avoid disruption. The UK border will still see additional delays and complications. Part of the reason for this is timing and space. Expansion needed at some pinch points for UK-EU trade to manage the extra burdens on trade effectively is significant, and there simply has not been enough time or clarity to undertake them. A good example of the time needed for projects of that ambition is the ‘Calais 2015’ project, which was designed and developed between 2009 and 2014, with phases of public debate and inquiry, planning and tendering. The new terminal will cover 44 hectares, has a total cost of €862.5 million, of which €662.3 million will be spent on the actual building works. Building works commenced in the final quarter of 2015 and the new facilities are anticipated to enter into service in January 2021. UK ports and airports have had nowhere near this level of time or organised planning. However, even with sufficient time and resource available to plan, delays and disruption at the UK border is inevitable in no deal – not just over the initial months, but over years if no deal becomes permanent.

4. Haulage

In no deal, hauliers will be responsible for navigating the new customs systems and procedures, which alone are significant challenges. But in addition to these, road hauliers will also immediately encounter further additional challenges through new rules for vehicles, licences for drivers and permits for trailers, creating complexity upon complexity and – ultimately – costs for customers. With 3.5 million goods vehicles travelling between Europe and Great Britain in 2017, and with more roll-on-roll-off (Ro-Ro) lorry movements between the UK and EU through major ports each year than there are container shipments to and from the UK and the rest of the world , this will be a substantial challenge. The consequences of no deal for the haulage sector will ripple through the economy, not least for food and drink trade, with food products accounting for 15% of all commodities exported via road and 36% of imports. Haulage companies will be at the front line of no deal, and firms from independent eBay traders to enormous manufacturers and retailers will be reliant on them being ready for no deal. Given their significance, the UK and the EU have both taken steps of varying effectiveness to reduce the immediate impact of no deal. Some of these are fundamental to the movement of goods and people, such as measures to allow UK-licensed road hauliers and coach and bus operators to continue moving so long as equivalent rights are conferred by the UK onto EU operators. However, many of the steps that have been taken are temporary, and further, rapid negotiation would be needed between the UK and the EU in no deal if both sides wanted to avoid additional disruption when those measures fall away. Whether further measures are taken to reduce disruption or not, costs for haulage companies to operate in no deal will spiral rapidly. For example, for companies to use CTC, they will need a cash guarantee, either an individual guarantee for single movements or a comprehensive guarantee for several. For companies to operate a bilateral permits system with the EU, the Road Haulage Association estimates that, with administration cost and the need for multiple permits for UK operators, would add approximately £53 per movement in and out of the UK for UK operators and about £26 for EU operators . On top of new costs of administrative processes over the additional costs of delays in terms of driver wages and running costs, not least for specialised HGVs that have to maintain constant temperatures to keep medicines, meats or chemicals at the right temperature. One firm has calculated that a day’s delay will cost £400 per lorry . As the average hauliers only operates a 2% profit margin , the costs of no deal complications will be passed onto their customers, from the NHS to supermarkets, and ultimately consumers and taxpayers. The costs for users of haulage firms will also be exacerbated if the delays and chaos at the UK border put EU operators off dealing with the UK at all

5. Regulated Goods

Much of the goods trade that the UK does with the EU is underpinned by joint rules, processes and testing – which means that goods cleared for sale in the UK are automatically allowed to be sold in the EU. Some products do not require testing, but a huge range of goods do – including toys, safety equipment, goods for military use, chemicals, medicines and more. The rules that underpin these regulated goods remove non-tariff barriers to trade. In no deal, these non-tariff barriers are expected to be equivalent to an additional tariff of 6.5% on UK exports to the EU – nearly double the average WTO Most Favoured Nation tariff . The effect of this on the manufacturing sector will be substantial; manufactured goods trade are expected to see the greatest hit in the event of a no deal, with additional trade costs on UK-EU trade estimated to be equivalent to 9%-17% of the value of trade compared with today’s arrangements. Specifically, GVA in the motor vehicles sector is expected to be approximately 23% lower in the long run compared to remaining in the EU . These consequences are a mixture of a range of no deal consequences – including customs, tariffs, uncertainty and the labour market – but non-tariff barriers are a bigger challenge for regulated goods firms than those producing non-regulated goods.

6. Regulated manufacturing

Production and sale of fireworks, and the Personal Protective Equipment Directive sets out the rules for a range of goods including equestrian helmets, paintballing goggles and oven gloves. In a no deal, while these basic product rules are likely to stay the same for the immediate future, companies will no longer be able to get approvals in the UK that are valid in the EU. UK firms will need to use two different testing bodies, paying for approval twice over to export – and after an initial transition period, EU exporters to the UK will have to do the same. UK manufacturers and importers will also need to apply a new system of product markings which will supersede the present CE mark. The CE mark is used across the EU to show that products meet specific quality standards, including for safety. In no deal, the UK will introduce its own UKCA mark, but UK companies will still be legally obliged to use CE markings in the EU. To achieve a CE mark requires an often complex process which may include an independent conformity assessment by a testing organisation called a Notified Body (costing thousands of pounds), testing and technical documentation, all of which EU and UK traders will have to do twice over in no deal. For much of the UK’s manufacturing base, no deal will come with significant complications to doing business. To export to the EU, companies must ensure that their products conform to detailed EU rules, often supported by the use of European standards. Higher risk goods also require this conformity to rules to be proven, via testing by trusted third parties. For example, before a car or part is put on the market to be sold, all motor vehicles, trailers and their systems, components and separate technical units must go through rigorous testing to ensure they meet the necessary technical, safety and environmental standards. A range of EU rules must be adhered do, such as the Pedestrian Protection Regulation which requires all cars to have energy absorbing bonnets and front bumpers. Similarly, cosmetics manufacturers have to comply with EU Cosmetics Regulations to ensure product safety and efficacy, and 30 types of products have to comply with very specific rules known as the New Approach Directives. A number of limited mitigations have been put in place to provide continuity for some months for manufacturers producing regulated products. Some UK goods already placed on the EU market will not need to be tested again, and the UK will continue to recognize the CE marking for certain products for an unspecified transition period. But products requiring third party testing like medical devices will have to be certified by EU based notified bodies from Day 1. These actions have been matched by those of the business community. Many UK companies are taking on extra costs as they pay to test and register products in the EU and the UK. Additionally, due to the hard work of the British Standards Institute – with the support of the UK government – it is expected that BSI’s membership of CEN and CENELEC, the European Committees for Standardization and Electrotechnical standardization, the UK will maintain a voice in the development of European Standards that, used voluntarily, show good business practice across 34 European countries. However, the sheer variety of products covered by EU legislation means it will be very difficult for every UK company to be ready on Day 1. The short-term impact is likely to be confusion for many companies, with a risk that some UK exporters will lose market access while UK retailers may lose product lines. Additionally, many of the measures are only temporary – creating additional waves of no deal impacts that will prolong uncertainty.

7. Chemicals

A number of partial mitigations are available to the chemicals sector in no deal, but they are expensive and difficult to implement before an October deadline. The UK government has made a number of sensible steps, including basing its new chemicals regime on the existing EU regulatory regime or REACH, while on the EU side ECHA has found some technical facilitations to support some continuity. This approach is welcome, but cannot negate the fact that the practical changeover to the new system is estimated to create up to half a billion pounds of extra costs for business, according to the Chief Executive of the Chemicals Industries Association . As a result of the daunting scale of these costs, and the political uncertainty, many chemicals firms have been waiting until the last possible minute to take the steps they need to for no deal. One downstream user of chemicals confirmed to the CBI that 81% of its suppliers had yet to confirm their plans. And the backdrop for the sector managing these changes is important to remember; the chemicals sector is already suffering the chilling effect of no deal, with companies reporting a halving of capital expenditure, reductions in exports and lost jobs and more companies predicting a fall in margins in July 2019. In no deal, the UK chemicals sector will face a complex and costly regulatory wall falling between it and the EU, which currently accounts for 60% of its exports and 75% of its imports and raw materials. Any UK company exporting chemicals to the EU will need to ensure that its chemicals are registered with an EEA based organisation. In many cases, achieving this means setting up an EU subsidiary. Meanwhile, any UK company importing chemicals will need to ensure that those substances are registered in the UK’s new chemicals. There are 21,000 chemicals registered in the EU REACH system in total, 5,000 of which are registered by UK-based companies. In the worst-case scenario, the UK industry would risk losing access to up to 16,000 substances in no deal . While chemical registrations in the EU can be transferred to the UK, this is difficult because many chemicals have been registered with the European Chemicals Agency (ECHA) by groups of companies under confidential legal agreements. This means UK companies now have to pay to release the data – which in some cases is confidential – that is needed to re-register a chemical in the UK. Additionally, instead of sharing the registration costs across a wide group of EU firms, there will only be a small pool of potential UK partners to share the costs with. There is also no obligation for EU-based companies to share data with UK businesses, and in some cases there is commercial advantage not to. As a result, no deal will mean some UK companies will be forced to duplicate testing to register EU substances in the UK, including in some cases through animal studies. The choice for chemicals firms in no deal is stark: pay more for the right to use chemicals they previously had access to or cease to use them altogether. And the costs are significant. One firm reported that the cost of repeat registrations for the 3000 substances it would be responsible for would be €15 million, considering only costs for registration fees, excluding costs to negotiate data access. At the macro-economic level, analysis suggests that, in the long-run, the chemicals, pharmaceuticals, rubber and plastics sector would be amongst the hardest hit sectors in event of a no deal. Sectoral GVA is estimated to be 22% lower in a no deal scenario compared with today’s arrangements .

8. Life sciences

The life sciences sector has made huge efforts to prepare for no deal Brexit. The industry has worked closely with UK government and the NHS, and spent hundreds of millions of pounds to put in place mitigations, including duplicating regulatory requirements, changing supply routes and increasing stocks of medicine held in the UK in line with Government guidance. This has reduced the likelihood of some of the worst fears for public health. But these cannot be ruled out altogether because there are things outside of the control of industry, such as logistical breakdowns. Additionally, stockpiling and transport of medicines are subject to some obvious practical constraints, particularly for time-sensitive medicines like flu vaccines. While the short-term costs of no deal will be measured by the risk to patient safety, long-term the UK’s risks the erosion of its most research-intensive industry as regulatory obstacles oblige companies to relocate high value work elsewhere. The long-term damage to one of the its most productive sectors due to new regulatory barriers and extra costs is of great concern. No deal will put considerable strain on this life enhancing economic relationship between the UK and the EU’s life sciences industries. As it falls out of EU rules, the EU will no longer recognize UK testing of medicines and medical devices and the UK will lose access to critical databases for checking safety of medicines. Flow of medicines will be acutely vulnerable to delays at the border. As every month 45 million finished packs of medicine move from the UK to the EU, and 37 million move from the EU to the UK, this is a serious concern.

9. Agri-food

Food and drink is one of the most exposed sectors to a no deal Brexit. UK exports will face costly and damaging regulatory changes from day one. These will include veterinary checks at the European border, where stringent hygiene tests are carried out. Food will have to be diverted to Border Inspection Posts (BIPs) at or near the European border, where a range of tests will be undertaken - from examining the levels of heavy metals in white crab meat and the levels of salmonella in pork, to undertaking veterinary checks on feathers and trophy animals; ensuring pet food is correctly labelled to comparing certificates for frozen fish against the real products, and much more. Firms will also face changes to labelling and packaging, and a potential de facto embargo in areas like organic foods as – in a Brexit regulatory Catch 22 – these need approvals to be sold that can only be given once the UK has left the EU. And with 30% of the food consumed in the UK comes from the EU, concerns about no deal in the UK retail sector are so high that  Asda, Sainsbury’s and Tesco have all issued warning about food price hikes and empty shelves. The sector will also be affected by changing tariffs – which will make UK exports to the EU less competitive while opening UK producers to foreign competition – and by uncertainty on the Northern Ireland border as cross-border agri-food trade is critical to the NI economy. These combined effects of no deal are likely to mean that UK food exporters lose market share in the first chaotic months and may struggle to recover their previous competitiveness on the EU market. One recent analysis suggests that UK Food and Drink manufacturers will face a fall of £3.4 billion in event of no deal. For some parts of the food industry, however, particularly those affected by big tariff changes such as sheep farmers, no deal could have devastating consequences. The UK has put in some valuable mitigations to facilitate trade of food in no deal. For example, the UK has made efforts to secure the flow of imported food by establishing transition periods for EU legislation and prioritising flow of goods at UK borders. But these mitigations risk being less effective in practice given the vulnerability of perishable foods to delays and the asymmetrical approach being taken by the European Commission. While stockpiling can mitigate for some effects of no deal, this is also constrained by the 31 October deadline as warehouse capacity will be limited in the run up to Christmas. Additionally, perishable food imports to the UK will still be vulnerable to border delays if queues develop on either side of the channel, risking gaps on the supermarket shelves and higher prices. The most significant thing that the EU could do to reduce the disruption of no deal on agri-food is to reflect the mitigations that the UK has taken, providing sensible transition periods instead of an abrupt change. There also needs to be more clarity on whether each side will recognize each other’s so-called Geographical Indicators which protect the authenticity of specific products from a specific location, such as a Melton Mowbray pork pie.

10. Tariffs and Taxation

The UK’s commercial relationships are tied up with the EU, through a range of tariff schedules and taxation provisions. The joint tariff schedules that exist at present mean that the 49% of the UK’s exports in goods which go to the EU, as well as 53% of its goods imports, do so without the need to pay tariffs. This is fundamental in helping UK companies sell to European consumers at lower prices, as well as enabling manufacturers and shoppers to benefit from less costly products and inputs coming from the continent. Without tariffs, goods can move more quickly and more cheaply across the UK-EU border, boosting trade and supporting supply chains. The removal of tariffs is a central pillar to any liberalising trade policy. The reintroduction of tariffs to the UK’s trade with the EU (as well as a number of other markets around the world) would represent a huge step backwards for UK business and UK trade policy. Similarly, where taxation is intertwined between the EU and the UK, and steps to unravel this must be taken with care.  In no deal, the UK plans to scrap many tariffs, allowing duty-free access across almost all imports into the UK from both the EU and from the rest of the world. This may limit pressure on price rises in some specific areas, but it will have highly concentrated impacts on specific sectors and regions of the economy. This means some industries will face sudden competition from an influx of cheap goods, duty-free, from around the globe. Cereal, eggs and most fruit and vegetables, for instance, will no longer be afforded any tariff protection. In contrast, some sectors and products will see the sudden implementation of higher import tariffs in no deal. This will create significant damage for those sectors integrated into regional EU supply chains as well as those companies which import lots of finished goods from the EU. The UK’s fashion sector, for instance, last year imported almost £730 million worth of products from Turkey tariff-free. These goods will face an average import tariff of 12% in no deal . This will lead to additional, and in some cases unmanageable, added costs for the many small and micro businesses importing from Turkey. UK businesses trading into the EU will also pay tariffs on exports for the first time in 46 years in no deal. These will be applied on 90% of UK exports by value, with the total increase in costs payable on duties estimated between £4.5 billion to £6.0 billion per year. Some UK sectors will face extraordinarily high costs. For instance, tariffs in the automotive sector – including 10% on vehicles and 4.5% on components –would lead to added export costs of between £800 million and £1.5 billion extra a year.  If passed onto consumers, these duties would raise the price of UK-built cars sold in the EU by an average of £2,800 – affecting demand, profitability and jobs . This effect will be exacerbated for firms integrated into European regional value chains, as tariffs on parts may be paid more than once as shipments cross the UK-EU customs border multiple times. Just one crankshaft used in a car can cross the Channel three times in a 2,000-mile journey before the finished car is complete. Each crossing into the EU could potentially incur tariffs in a no deal scenario. Tariffs is one of the areas where the UK and the EU have taken the most starkly imbalanced approaches to no deal. The UK has a short-term – even potentially short-sighted – approach that contains great risk. The EU has stated that it will immediately impose third country status on the UK, with little mitigations, and significant disadvantage for UK firms. The UK’s approach has created a large amount of uncertainty around levels and for the duration they can be expected to be in operation, which is a huge concern for firms – with 57% of CBI members stating they are extremely concerned and 19% stating they are moderately concerned about them . Intentions for no deal tariff reductions are sensible ion paper but are intended to be in operation for a temporary period of up to 12 months. Realistically, changes to tariffs are rarely temporary and it will be hard to raise tariffs once they have been lowered. The EU’s approach to tariffs in no deal means UK firms will be forced to pay duties on exports to the EU. Together with the added costs of administration, as well as tariff accumulation on inputs crossing the Channel several times, UK business will take a huge hit to their competitiveness. Over time, this is likely to have knock on effects both for domestic UK companies and international suppliers servicing the EU market, who will assess if the UK remains the most efficient location for their facilities given the new burden of customs declarations, administration and the cost of the tariffs themselves. Meanwhile those companies subject to greater exposure from foreign competition in the UK, as a result of the UK’s tariff reductions, will face a double whammy. Only a deal with the EU can resolve this. Pretence otherwise only exacerbates the uncertainty. It is also important to remember that the UK is not totally prepared for no deal when it comes to tariffs. The UK’s Tariff Rate Quotas are still an issue of contention at the WTO, straining relations with over twenty other international partners, including the U.S., China, Brazil and India. .

11. EU Tax Directives

No deal will mean that the UK will no longer be treated as an EU member state for the purposes of the EU legal framework, and in the field of taxation this means that EU Directives – specifically the EU Interest and Royalties Directive and Parent Subsidiary Directive – will no longer apply to the UK. These Directives currently allow, in certain circumstances, associated companies to make payments of interest, royalties and dividends between companies located in EU Member States without the company making the payment being required to deduct tax before the payment is made, paying it over to the government in the country in which the payer is located. This is known as withholding tax. Removing withholding tax obstacles between associated company transactions creates freedom for firms to organise their group structure in the jurisdictions of their choice within the EU, creating consolidations and efficiencies. The impact of the EU Tax Directives no longer applying to the UK could be serious. Some EU Member States will start withholding tax on the payment of interest, royalties or dividends from companies located in their jurisdiction. This could result in a significantly increased tax burden for businesses which have material investment and/or transaction flows with these jurisdictions. At best, this would be a cash flow impact, but at worst, it could create an increase in costs if companies are not able to obtain a full tax credit for the tax withheld. The UK Government’s guidance clarifying where in UK law the treatment under the EU Interest and Royalties Directive and Parent Subsidiary Directive will be mirrored has been welcomed by companies, as have the information about steps businesses need to take to ensure they continue to be entitled to make payments from UK companies free of withholding tax. Following the UK’s exit from the EU, it is important that the government works swiftly in approaching EU Member States to renegotiate those double tax agreements which apply a positive withholding tax rate to ensure treatment in the EU Directives is mirrored.

12. Northern Ireland

 As a result of its unique economic, geographic, social and political factors, Northern Ireland is the region of the UK most vulnerable to a no deal Brexit. This is borne out by every serious economic analysis of no deal, with some estimating Northern Ireland’s GVA could be 9.1% lower if the UK fails to secure a deal – an annual loss of almost £5 billion by 2034 . Added to this, forecasts suggest 40,000 jobs in Northern Ireland could disappear, especially in industries such as agri-food and haulage. With 142 areas of cooperation between Northern Ireland and the Republic of Ireland, and peace and prosperity irrevocably intertwined, Northern Irish businesses are deeply worried about the impact of no deal not just on the economy but on social stability on the island. In the initial days of no deal, the main impacts for Northern Ireland are likely to be more related to uncertainty more than to concrete changes. However, the long-term impacts are serious. These risks are further heightened by the absence of a devolved government in Northern Ireland since January 2017. For businesses this has resulted in policy paralysis where key issues – from infrastructure to skills – have seen little, or no, progress. This is not only impacting decisions which need to be taken to prepare for a no deal but risks the effective and efficient decision making that will be essential for business to continue operating after no deal due

13. The Irish Border

No deal at the Irish border – a 310-mile-long stretch of land which contains 208 border crossings - is anticipated to be one of the most complex and disruptive aspects of no deal, both from an operational perspective as the only land border between the UK and the EU, and from a political perspective due to the unique challenges and history of the island of Ireland. Current plans for no deal and the Irish border are temporary and untenable, providing little reassurance for firms operating across the island of Ireland. The scale of the challenge of no deal at the Irish border should not be understated. Estimates vary, but suggest there may be around 758,000 non-farming cross-border export deliveries from Northern Ireland to the Republic of Ireland each year – or around 14,000 a week – as well as approximately 410,000 import deliveries the other way around. 74% of Northern Irish exports to the south are by businesses with fewer than 50 employees, which will struggle the most acutely in no deal, particularly as they mostly make regular but low-value consignments. Northern Ireland is not ready for the impact of no deal on the border, first and foremost because it is still not clear what the changes at the border will be. Advice from the UK government regarding operations at the Northern Irish border were not published until the middle of March 2019, and the Republic of Ireland and the EU still have not made their own intentions clear. This means that businesses do not know what to prepare for and, as the Northern Ireland Audit Office has stated, “Northern Ireland’s capacity to implement any changes necessary may be constrained given the short time available” . Even if short-term plans were published and detailed, that would not be sufficient to avoid disruption due to the huge uncertainty and complexity of no deal in Northern Ireland. Firms doing legitimate business on the island are particularly concerned about what the UK government’s plans will mean for smuggling across the Irish border, firstly and most obviously because the proceeds of smuggling in Northern Ireland are used to fuel crime within communities. Smuggling will only be encouraged by the tariff differentials arising from the UK government’s temporary plans not to impose tariffs on goods moving from the Republic of Ireland into Northern Ireland. The Northern Ireland Food and Drink Association has estimated that a 28t lorry can expect to have a tariff differential North-South of £70,000 for beef or £52,000 for cheese and butter, creating huge incentives to dodge duties. While no infrastructure is likely to be erected at the Irish border in the short-term, firms may be cautious and either avoid exporting cross-border where possible or adjust procurement strategies to focus inwards, with Northern Irish operators preferring suppliers and customers in the North, and Republic of Ireland operators switching attention to the South. As a result, trade and its associated activities may drop and become less efficient. The worst-case scenario is that, in the long-term, no deal persists and infrastructure is resurrected at the border, surveillance is introduced, mobile enforcement patrols increase and a significant burden of costly and complicated checks descend on businesses intending to operate on both sides of the Irish border. This will disrupt integrated supply chains and create costs and delays, damaging normal operations that had previously been simple. Given the scale and intensity of the problem of the Irish border, if no deal persists in the long-term, job losses are predicted by every credible economic authority. The UK government, Northern Irish political parties, the Irish government and the European Commission will all have to work very closely together in no deal, making this one of their top priorities to resolve if no deal occurs.

14. The Common Travel Area

If no deal occurs, the Common Travel Area (CTA) will be maintained, which is of huge importance to firms across the UK and Ireland as - not only does it support movement for work purposes that can be as simple as crossing the Irish border for work in the morning – but it has also encouraged many citizens to take up residency in their neighbouring jurisdiction for work, study or retirement purposes. The main disruption arising from no deal on the CTA is that some people are worried there will be changes, despite commitments to the contrary. The numbers of people benefiting from the CTA at present is substantial. According to Ireland’s 2016 Census, the number of people born in the UK and living in Ireland is 277,200 with 57,000 of these UK citizens coming from Northern Ireland. As a result, UK citizens in Ireland make up 5.6% of its population, 8% of its workforce, and 10% of students. Of the 57,000 Northern Ireland citizens living in Ireland in 2016, 47% – or 27,000 – were living in counties along the border . According to the most recent estimates, during 2018 there were 34,000 residents in Northern Ireland who were born in Ireland and who mainly lived near the land border. The UK and Irish governments’ commitments to maintain the CTA provides much needed clarity for business on the rights of UK and Irish citizens at a time of more than sufficient uncertainty and instability. It will ensure that business retains its access to the 30,000 strong talent pool of frontier workers crossing the Irish border every day. Yet with these promises being made against a backdrop of uncertainty across the UK, there is a lack of public confidence and trust in this commitment being met in the event of a no deal. A joint United Kingdom-Republic of Ireland issuance of guidance and clarification through an ambitious communications campaign would certainly be a positive step to reassuring citizens and business of this commitment to the continuation of the CTA.

15. The Integrated Single Electricity Market

No deal may have a complicating effect on efforts to improve the Integrated Single Electricity Market (ISEM) which operates between Northern Ireland and the Republic of Ireland. This unique structure is deeper than any other cross-border wholesale energy market, is helping to underpin the security and competitiveness of electricity supply in both jurisdictions, and has led the way as a model for the operation of cross border markets within the EU as well as for the EU Single Energy Market that is now being created. At present, a project to build a North/South Interconnector is under development to fully link the energy markets, in order to secure operational efficiency of the ISEM, support wider all-island energy needs, and reduce the risk of an all-island black-out – something which could cost up to £568.5 million per day . These developments are being planned to sustain economic growth and undertaking them will consolidate the ISEM as a proven example of the benefits provided by an all-island economy of scale when designing, planning and delivering essential infrastructure. No deal may reduce the benefits of this work in the long-term but will not cause immediate disruption With 5% of the UK’s electricity exports having come from interconnectors with Ireland in 2017, the commitments made by both Ireland and the UK to maintaining the ISEM have been welcome news to businesses and meant they can safely presume that interconnector flows will continue in no deal. However, some disruption will still occur in the event of no deal. Leaving the EU without a deal will mean that the operation of interconnectors will be less efficient than today, which risks having wider impacts on market liquidity and on the cost of electricity in the long-run. Additionally, moving ISEM from operating on a pool to a bilateral basis may lead to changes in the number of businesses participating in the EU ETS, creating price distortions within the electricity and carbon markets. Reassurances in the form of cross-party commitments to minimise divergence from EU energy policy are needed. Divergence would lead to further impacts on cost and efficiency of energy flows, with implications for the security of supply for both Ireland and the UK. Not only will this undermine the development of the North/South interconnector and its potential to bring sustained economic growth to the island of Ireland, but it would also have a knock-on impact on the cost for consumers.

16. Regulated Services

The UK services sector is a great British success story, accounting for nearly 80% of the UK’s GDP . It also employs 4 in 5 workers across the country, the majority of these outside London and South East, including in the booming business, professional and financial service centres in Leeds and Edinburgh, the growing tech presence in the North East and Bristol, and creative hubs in Birmingham, Liverpool and Glasgow. The UK is the world’s second largest exporter of services and the EU is the largest recipient of UK services exports – which were worth £109 billion to the UK economy in 2017 and equivalent to 40% of the UK’s total services exports74

17. Financial Services

In the event of no deal, UK financial services firms will overnight lose the ability to access the Single Market through the ‘passport’ which allowed them to provide services into any other EU Member State once it has been authorised in one EU Member State. It will become more expensive and complicated for them to provide regulated financial services in the EEA. They will therefore be required to adapt their business models or cease providing such services to citizens within the EU27 and EEA unless they establish a third country branch or subsidiary within the EU, or utilise the various contingency measures that have been adopted by the EU or EU Member States. However, these will not provide a long-term solution for impacted businesses. The process to establish such a presence is expensive and time consuming. European regulators require that the new establishment has adequate governance, risk management, controls, capital and liquidity and is not simply a brass plate operation. Additional risks of no deal include outstanding unmitigable risks, unforeseen risks, risks of feedback from wider economic impacts and risks of retaliatory action from the EU on not granting equivalence or imposing tighter regulatory controls. Financial services firms are feeling the impact of uncertainty over no deal. The CBI’s latest Financial Services Survey shows that sentiment continues to drop after three years of flat or falling optimism. There are also concerns among a number of financial services businesses that no deal or a deal that does not provide adequate market access will have a long-term detrimental effect on the future of the UK’s financial services. This will have a wider impact on the UK economy as financial services firms play a crucial role in enabling growth across the economy, helping households save and invest by providing everyday services such as bank accounts and mortgages, and channelling much-needed capital for businesses to grow through lending or access to capital markets. Financial services firms have spent the past three years and, as confirmed by EY, £4 billion on no deal planning to date . Firms have sunk costs to adapt to no deal and have prepared themselves as much as they can. The UK government and financial institutions have taken steps to minimize the disruption of a no deal Brexit, providing sensible steps on many fronts through the regulators in order to preserve financial stability. The TPR is invaluable to the UK’s financial services sector, as an international financial services centre, and continuing supervisory co-operation between the UK and the EU will be crucial. The UK Government must ensure that the evolving political situation does not impact the current no deal arrangements. Minimizing the disruption of no deal to EU citizens is only possible if the EU reciprocates the UK’s measures centrally, rather than relying on individual Member States to decide how to respond, as has been the case to date. Further guidance and certainty would give the business community comfort and enable them to improve their plans. However, based on feedback from the EU, CBI members are not expecting the EU to respond. Even if some of the initial disruption is reduced by the EU taking further steps, the transfer of jobs, capital, liquidity and expertise from the UK to EU would accelerate if there is no deal. To counter these effects the UK must maintain and increase its long-term international attractiveness as a place to do business and preserve its global competitiveness in the global marketplace.

18. Professional and Business Services

Under a no deal scenario, many Professional and Business Services (PBS) firms will lose the legal basis to export to the EU overnight. This is because rules on services provision are not just set by the EU, but also Member States, where rules for the provision of services are patchy. For regulated businesses such as those providing legal advice and representation, audits and the preparation of financial statements, the barriers to doing business can often be very high – not least for small businesses. Leaving the EU without a deal could, therefore, leave cross-border trade in business and professional services in disarray, hitting hundreds of thousands of customers, companies, and ultimately jobs. The Law Society predicts the loss of 12,000 jobs in the legal sector alone by 2025 in the event of no deal, while the Royal Institute for British Architects (RIBA) estimate a no deal would reduce UK architecture exports by £73 million a year . With many of the impacts of no deal for PBS firms occurring behind closed doors in offices across the continent, the consequences will be less visible than those taking place at ports but no less concerning for the economy. For example, failure to take additional steps risks audit reports no longer being regarded as legally valid – leading to legal uncertainties and questions around financial stability and market integrity across the UK and the EU. The costs to firms have the potential to include the loss of entire contracts, with the potential need to sub-contract business in order to maintain continuity of service for clients, as well as difficult conversations with the potential to damage relationships with customers. Grave and widespread issues of liability and responsibility should be taken seriously by the EU and the UK. The UK has made a number of significant steps towards providing continuity for PBS firms in important industries such as the legal and auditing sectors. However, there is concern that these do not go far enough and that companies are not ready. For example, a tech UK survey showed around 42% of tech members had taken no active steps to prepare for no deal, rising to 65% of firms with fewer than 10 people. Routes do exist to secure continuity for UK firms operating in the EU and to gain access in the future. However, these are lengthy, complex, costly and a long way from the current arrangements. For example, a UK registered auditor, can currently achieve recognition in an EU Member State, and the right to practise in audit, without the need to undertake the entire qualification procedure of the relevant national profession and associated bodies. Presently, it is necessary only to pass an aptitude test in that Member State. There is no requirement for audit experience specifically in the EU host Member State and the aptitude test purely covers the specific divergence between the home country qualification training and that of the host body. In the absence of an agreement between the UK and the EU in this area, a UK auditor would be required to complete a full re-qualification in the Member State in which they wish to practise. This would mean the completion of new exams and the completion of a minimum three years of monitored practical experience requirements, all of which could take up to five years. PBS companies are deeply concerned about no deal, and uncertainty about this is have an effect now: optimism in the professional and business services sector has been declining over the last 4 quarters . The long-term cost of reduced competitiveness for PBS firms is high on the list of worries – and will impact not just PBS companies themselves, but the wider economy, as there are few business activities that do not require accountancy and audit, legal, engineering, architectural, recruitment, consultancy, advertising, research or assurance services.

19. Energy

The relationship between the UK and the EU on energy policy and regulation is deep and detailed, and no deal creates the need for complex overnight changes. One of the biggest concerns about no deal on energy comes from the fact that no deal means the UK decoupling from the highly intricate Internal Energy Market (IEM) it is currently a part of. The IEM is a long-term project to liberalise and harmonise the energy markets of EU Member States to make energy supply more affordable and secure, through regulations, interconnectors – the physical links that allow the transfer of energy across borders – and common network codes that facilitate the harmonisation, integration and efficiency of the market. Removing the UK from this system would prove to be a mammoth task, cast doubts on the efficiency of interconnection flows and potentially lead to energy price rises. This will make achieving the energy sector’s key aim – ensuring the lights stay on, at the right cost and with the least impact on the environment possible – more difficult in the years ahead. This is particularly challenging given the current date for the UK’s exit from the EU, which falls in the middle of the high-demand winter season for energy suppliers. No deal provisions for the energy sector have been particularly under lock and key, with very little being given away on either side. While some steps have been taken by the UK to minimize the impact of no deal on energy firms – such as coordinated plans for the nuclear sector and ensuring the continuity of gas trading via PRISMA – ultimately, wider-reaching doubts remain. The UK government continues to lay Statutory Instruments and is having ongoing discussions with interconnectors on new market access rules to ensure the flow of electricity and gas in the long run. Businesses also continue to prepare as best they can by reviewing their supply chains and procurement systems, revisiting contracts with EU partners and suppliers and in some cases, stockpiling goods in the event of border blockages. However, further questions exist as to the UK’s fate as it leaves the EU ETS. Firms are anticipating potential market distortion the longer decisions go unmade in this area. This concern is so significant that 1 in 3 Energy Institute members believe Brexit is the single greatest challenge facing the industry in 2019 . Even if some of the short-term disruption can be managed, in the longer-term, businesses and consumers may have to juggle energy price rises as a result of no deal as well as reduction in interconnector efficiency and increased pressure from new EU Directives and increasing demand.

20. Broadcasting

There are more than 600 TV channels in the UK that broadcast from the UK internationally, with a combined value of over £1 billion, beaming content from music to sports across the globe, and without a deal their right to do so freely into the EU will fall away. This puts at risk the UK’s status as Europe’s leading international broadcasting hub, endangering its trajectory of growth – currently at 17% a year for international channels . Overall, the broadcasting industry is perceived as being as prepared as it can be for no deal. To provide further reassurance and confirmation of that perception, the UK could encourage transparency from Ofcom, while the European Commission could do the same for licensing agencies in priority Member States. This would give the business community greater confidence. However, ultimately there are no realistic steps that can be taken to change the fundamental challenge: in no deal – or indeed if a future deal does not cover broadcasting rights – the UK audiovisual sector’s ability to broadcast freely into the EU will fall away, and greater movements of jobs from the UK to the EU are inevitable. To deal with this risk, broadcasting businesses have been applying for licenses in the EU. This will entail some short-term operational change, as EU regulations on audio-visual services require firms broadcasting within the EU to have substantial operations based there. While many companies may be able to minimise operational change in the short term, there is a clear risk that companies will divert more investment to the EU in the medium to long-term, as the UK slowly loses critical mass and other Member States continue to develop their infrastructure and become more attractive as a place to invest.

21. Aviation

Both the UK and EU have repeatedly stated that, in the event of the UK leaving the EU without a deal, aeroplanes would continue to be able to fly to and from the UK and EU. Temporary steps have been taken by both sides to ensure this would be the case. However, aviation falls outside the remit of the WTO, and so, unlike other sectors, there is no automatic fall-back when the UK leaves the EU. A deal must therefore be agreed that is sustainable and endures for the long term. This is not just vital for holidays, but for the economy as well. In an increasingly interconnected world, the aviation industry is one of the great facilitators, contributing significantly to economic growth in the UK and within the EU. 63% of business travellers and 77% of inbound leisure visitors reach the UK via air , while goods transported by air are usually high value, perishable or required for ‘just in time’ manufacturing activity, as well as personal post. The aviation industry directly contributes £52 billion to UK GDP and supports 961,000 UK jobs . A long-term aviation agreement is also important for reasons of safety. The UK’s current automatic access to the EU Single Aviation Market is underpinned by a web of common rules that have helped develop a level playing field in areas like safety and the environment, as well as providing the infrastructure needed to co-ordinate 26,000 flights across the continent every day, flights which carry 164 million passengers between the UK and the EU each year. In no deal, the UK aviation industry will be excluded from this infrastructure, from sharing the insights of experts and best practice, as well as access to services run by the European Aviation Safety Authority (EASA) such as training for all national aviation authorities to ensure all aircrew are certified in the same way – so that the conditions for a pilot or engineer’s license, the credits for training, and the medical fitness tests across Europe are all at the same standard. The UK and the EU have both taken sensible approaches to ensure that disruption is reduced in the immediate aftermath of no deal for aviation. The UK has gone further than the EU in many ways, for example by allowing EU-registered airlines to continue to operate UK domestic routes for a period of time. In contrast, if UK carriers are flying between EU Member States, the EU will allow UK airlines to make stops in the EU for non-traffic purposes including maintenance and re-fuelling, but not for embarking or disembarking passengers. However, both parties need to urgently re-examine those plans and their timescales, particularly in the context of the extension of Article 50. For example, the EU’s plans to allow security screening requirements for all direct passenger flights to and from the UK to remain in place are now only valid for 2 months after no deal, when in March they would have provided for 9 months of continuity. Additionally, the EU will only allow airlines that are not more than 50% controlled by EU nationals to continue flights for 6 months if a plan is put in place to resolve these ownership and control issues beyond these 6 months. Similarly, the UK needs to update its own contingency plans for cabotage, which at date of this report going to print are due to expire 3 days before no deal occurs. The temporary nature of provisions is a fundamental concern for the UK and European aviation industry, because without a deal these contingency plans will elapse and remove the rights of UK airlines to fly to the EU. This is not just about functioning without disruption, but functioning at all. Continued extension of current measures will not be sufficient in the long-term as they are limited in many ways. One of the most significant restrictions in current provisions is that no new EU flight slots will be permitted, removing flexibility to set up new routes or adjust existing ones. Further negotiation with the EU will therefore be essential for aviation even in a no deal scenario.

22. People

With an estimated 3.6 million EU citizens living in the UK, 1.3 million UK citizens living in EU Member States, and thousands of employers who have built their businesses on the ability to easily move staff across the Channel – whether to carry out short-term work, provide ‘fly-in-fly-out’ services, or go on longer-term secondments – the effect of no deal on people is just as important as the effect on trade. The uncertainty about the impact of no deal on people’s everyday lives is so widespread that 74% of CBI members are extremely or moderately concerned about uncertainty for EU citizens as a result of no deal.

23. Current Residents

No deal would throw into doubt millions of people’s ability to continue to live, work and study – as well as their access to healthcare, benefits and social services – wherever they are. It would cause unnecessary uncertainty for hundreds of thousands of families, and confusion as Member States attempt to protect citizens’ rights in different ways, to varying degrees and with different deadlines, cutoff dates and grace periods. Additionally, the current lack of coherent provisions means more work for individuals – and employers looking to support their staff – as they try to understand the differences a no deal Brexit means. The UK has gone a long way to reduce uncertainty for EU citizens living in the UK, ensuring their rights will be protected in a no deal Brexit. Over 900,000 people have applied for the EU Settlement Scheme so far, but it will still be a significant challenge to get all EU nationals signed up by 31 December 2020 in a no deal scenario. Government should therefore quickly but calmly resume efforts to raise awareness that the Settlement Scheme is open to all EU citizens who are resident in the UK by Brexit day regardless of whether a deal is agreed or not. In contrast, the EU has done rather less on the rights of UK citizens currently living in the EU, with a patchwork of rules, deadlines, processes and expectations across the EU. For example, there is no guarantee that registering as a permanent resident will protect UK nationals’ status and rights in the country they are living in; this will depend on the individual approaches taken in each Member State. It is even more important in the EU, therefore, that information for UK citizens is clear and readily available. Businesses across Europe want to see every Member State match the UK’s offer and commit to protecting the rights of UK citizens in the event of no deal – with all EU countries providing a grace period after no deal, to provide time for UK citizens to complete the necessary paperwork and administrative processes required to stay in the countries they call home. The European Commission should also consider what else it has in its power to undertake for UK citizens, particularly when it comes to healthcare and students.

24. Mobility

No deal would cause immediate overnight disruption for UK businesses which rely on sending their staff to the EU for short-term work or to provide ‘fly-in-fly-out’ services. These range from British engineers flying to Germany to carry out emergency repairs on a grounded plane, through to French lawyers catching the Eurostar to London to provide legal services; from staff of an American tech firm – whose European HQ is in the UK – moving for a work placement in their Barcelona office, through to an Italian sound technician travelling to the UK on tour with a famous music artist. The UK would default to third-country status for Member States’ immigration rules, stopping much of the frictionless movement for the thousands of work-related trips made by staff between the UK and EU every single day. If a mobility framework between the UK and EU is not agreed, then many firms which depend on easy travel for work or to provide services will simply relocate operations to the EU or lose the business that is currently possible. The UK’s approach to mobility of EU staff – while temporary – is sensible and has been welcomed by businesses. The challenge on the EU side is of much greater concern for firms because, while the EU has proposed visa-free travel, this is not an entitlement to work or provide services. Leaving the EU without a deal means the UK will default to third-country status for Member States’ national immigration rules. Therefore, UK nationals travelling to provide services or undertake a placement or intra-company transfer in the EU will need to check whether a visa or work permit is required to work or rent, even if it is not required at the border. Some of the UK’s most successful industries are some of the most mobile, and therefore most at risk of impact from a restrictive approach to the temporary movement of workers. For example, one leading professional services firm reported its employees takes as many as 10,000 trips to the EU each year. Additionally, it is difficult to plan contingencies for UK staff who perform short-notice tasks such as engineers carrying out ‘fly-infly-out repairs’ on machines and aeroplanes. The consequences of this are real. There is a risk – for example – that, if UK contractors and service providers cannot deliver for EU customers due to restrictions on mobility, this business the UK does with the EU will be replaced as customers seek out more reliable, easier and less expensive providers. In worst case scenarios, it could mean that UK firms are in breach of contract. As this issue is unlikely to be resolved without negotiation both between the UK and the EU and bilaterally with Member States, this competitive disadvantage is likely to take some time to resolve, if it ever can be without a UK-EU deal.

25. Future Immigration

No deal will not only have consequences for the movement of staff on a short-term basis, but also longer-term internal secondments in European offices, placements with external clients or suppliers, and long-term employment. UK employers have benefited from being able to easily draw on the talent, skills and labour of over 500 million people – and concern about losing this is high. 63% of CBI members are extremely or moderately concerned about the impact of no deal on the ability to attract talent from around the world . This is because, if firms cannot hire the skills they need, it limits their growth and has knock on impacts on domestic employment. The Bank of England has calculated that, even in the prepared no deal scenario, with net migration of 100,000 the UK unemployment rate rises to 4.5%, and output per hour falls – leading to lower productivity growth, lower incomes and lower consumption . While the UK government has made sensible steps on temporary mobility and current EU citizens living in the UK, concerns from businesses about its long-term plans for future immigration are extremely high. This concern is so significant that some firms are already taking steps to move production, operations and associated jobs out of the UK. For example, an agricultural producer in the East of England has trialled importing spring onions from Ghana over the summer months, when these can and have been grown in the UK. An international manufacturer is actively planning to move 300 jobs from the UK to the EU, as it does not believe it will be able to find the language skills it needs in the UK after Brexit; 80% of affected roles are currently filled by EU nationals, but it will mean job losses for the 20% of UK staff as well. In addition to existing jobs and operations being moved, firms are considering future access to workers in the UK as they make investment decisions, and it is counting against the UK as a place to invest, with reports of factories being opened in Poland and in France instead of the UK as a result. Even the proposed short-term measure to provide a temporary system for registering EU citizens wanting to work in the UK in the event of no deal, while sensible and welcome, have drawn confusion. For example, the Home Office has stated that while European Temporary Leave to Remain will be in place following a no deal, employers will continue to only have to check an EU Identity Document such as a passport of driving licence. This is positive, but it also raises legal questions for employers. Despite lawfully carrying out a correct right to work check at the start of employment, firms could end up inadvertently employing an EU national who is in the UK illegally – if the individual fails to apply for European Temporary Leave to Remain after 3 months. This risk is placing employers in an uncertain legal position. It is also unclear how European Leave to Remain will be effectively enforced without right to work or rent checks – as these are key mechanisms for enforcement within the UK immigration system. Similar confusion will occur for EU students planning to study in the UK for longer than the 3 years provided for by European Temporary Leave to Remain. With 21,600 EU students currently enrolled with universities in Scotland – around 9% of the total student population – in 2017-1898, this is a significant number of potential future students who need clarity. Further efforts by the UK government to consult and communicate would be welcomed by businesses, as well as citizens across the EU considering the UK as a place to make their home and livelihoods.

26. Data

Cross-border data flows are the life-blood of the modern economy, especially for sectors such as advanced manufacturing, logistics, financial services, and IT. The UK is an international leader for data flows, which have increased 28 times between 2005 and 2015. The UK currently has the largest data centre market in Europe , worth over £73 billion to the economy, and over 75% of UK data transfers are with EU countries

The UK’s mantle as a global hub for data flows is at significant risk from no deal, due to increased legal costs, interrupted data flows and reduced investment in data centres that will begin from Day 1, as the UK will immediately become a third country under EU law and additional legal safeguards will be required to facilitate the transfer of personal data to the UK. This is of great concern to businesses – with 53% of CBI members either extremely or moderately concerned about their ability to manage cross-border data flows in the event of no deal and only 10% unconcerned  . The risk of no deal on data has meant UK companies have already undertaken costly legal processes to update existing contracts, led some UK firms to shift jobs abroad in data-intensive areas such as HR, and seen investment in data centres in EU countries in place of UK ones. The effect of no deal on data will be invisible compared to the disruption at ports, as it will be experienced in offices and legal departments, but no less impactful, with the worst-case scenario impact of UK companies losing contracts with EU customers who no longer wish to deal with UK partners. For example, a UK conference centre might lose bookings from EU companies that would be in breach of personal data rules if they sent attendees’ data outside of the EU without the right contractual safeguards. There is a risk of litigation to prevent data flows being made to the UK, even if European companies have updated their contracts The UK government’s approach to no deal goes some way towards supporting firms preparing for no deal on data, helped by the fact that there is international precedent that firms can learn from. Getting ready for the free flow of personal data to fall away is a resource intensive and costly process. Some smaller firms are holding off investing significant money and resources into no-deal preparations until there is certainty that the expenditure is necessary. The UK government must ramp up its preparation to ensure SMEs are aware of the impact of no deal on data. Getting ready for no deal on data is made even more complex and risky as the European Court of Justice is currently reviewing the validity of standard contractual clauses that are business’ main option for maintaining data flows in no deal. If it rules against them, the options to ensure the free flow of personal data between the EU and UK will be reduced. In a no deal situation, until an adequacy decision is reached, the UK’s digital economy will be less competitive in a fast-growing global market. Achieving an adequacy decision with the EU Commission will be vital for the UK in both a deal and no deal scenario. The UK has unprecedented alignment with the EU on data protection standards and the ICO is internationally renowned regulator which will support the UK’s negotiating case. Yet gaining an adequacy agreement following a no deal scenario is likely to take more than a year, with the quickest adequacy decision so far being finalised after 18 months. As a third country, the UK’s national security legislation – in particular, the Investigatory Powers Act – will be heavily scrutinised for its compatibility with the GDPR, potentially lengthening the uncertainty

27. Competition Policy

Competition between business make markets work better and is a key driver of productivity and innovation. The prevention of anti-competitive activities helps businesses to grow and to protect consumers, ensuring they benefit from low prices and high-quality products and services. For example, European Commission decisions prohibiting cartels from forming were estimated to generate a benefit to consumers in the range of €5- 6 billion in 2013 . After Brexit, it is imperative the UK retains its reputation as an open economy that encourages competitive markets, effectively enforced by clear legal frameworks. While there may be some changes to parts of the UK’s merger and antitrust regimes in a no deal, they should remain largely familiar, subject to any separate non-Brexit related changes the UK Government implements. The biggest short-term impact will be on firms that are partway through a European Commission merger control or anti-trust investigation, as well as companies which are determining whether a new transaction is likely to be caught by the EU or UK merger regimes. In the longer-term, divergence between the UK and the EU’s competition regimes has the potential to add far more disruption. It is imperative that the UK retains its reputation as an open economy that encourages competitive markets after Brexit. Providing continuity on competition policy and ensuring it is effectively enforced through clear legal frameworks and strong authorities will ensure this. This is important for businesses in the UK and the EU. The UK has given a number of reassurances to this effect to give firms greater certainty and reduce disruption and delays. As most firms will not be affected by changes to competition policy, business’ main outstanding concern is that of the burden of no deal on the CMA which will face a range of new responsibilities. These new functions include state aid enforcement, a swathe of competition cases under merger control rules, anti-competitive agreements (including cartels) and abuses of dominant market position, all of which were previously reserved to the European Commission. The measures taken by the EU and the UK so far will nevertheless mean disruption and costs from competition in a no deal in the short-term to ongoing activity, in the medium-term due to duplication of investigations and procedures, and in the long-term if there is divergence between UK and EU regimes. For example, the UK is currently conducting its 5-yearly statutory review of the competition regime. Meanwhile, the EU is discussing whether to adapt its competition regime in certain sectors with the intention of allowing for the evolution of European champions able to compete with large inbound businesses from the world’s major economies, such as China and the US. Without an agreement between the EU and the UK on future collaboration on competition policy, the UK could find itself at a competitive disadvantage in markets dominated by a few large players in receipt of government support.

28. Global Relations

The UK is party to 1,261 international agreements with third countries as a member of the EU. These include around 40 Free Trade Agreements (FTAs) but also stretch to regulatory, transport, customs, nuclear and agricultural agreements, as well as a number through the World Trade Organisation (WTO). Most important for UK business are the FTAs, including with markets such as Japan, Switzerland, Mexico, Turkey and Canada. Together, the EU and the third country partners it has concluded negotiations with account for 41% of global GDP. In no deal, the UK would see significant tariffs and other market access barriers appear around the world.

29. Free Trade Agreements

In no deal, the UK will automatically lose access to the FTAs it has through EU membership. This puts at risk some of the gains UK firms have made in international markets as a result of these FTAs, which can be in the hundreds of millions of pounds. The EU-South Korea agreement, for example, is worth £500 million to UK companies every year . The EU-Canada deal, CETA – which saw UK meat exports to Canada increase by 36.3% and wine exports grow by 16.6% after it came into force – is one of those at risk, but some deals have been carried over and are no longer of major concern, such as the EU-Chile deal which supported UK exports to Chile to grow by 16% on average each year, with a total increase of 351% since 2003 . A lack of continuity in some FTAs may force UK firms to stop exports into certain markets altogether due to the exorbitant tariffs they would face, which would make them instantaneously uncompetitive. A 10% tariff on finished vehicles exported to Turkey and a 49% tariff on scotch whisky to Morocco, for example, would be a huge hit to competitiveness of specific firms and could even wipe out their exports to particular countries entirely. There is also significant concern from businesses that EU firms may seek to replace UK companies in their supply chains so that they can qualify for zero tariffs through EU FTAs as they will not be able to in no deal. There is also a risk that large international manufacturers could relocate to mainland Europe to stop significant tariffs arising on their trade with the EU, and that consumers may adjust their purchasing preferences - whether it’s French Cognac instead of scotch whisky or a Mercedes over a Land Rover. No deal on FTAs will not just impact goods trade across the world but services firms as well, as modern deals protect intellectual property, enhance digital trade, open procurement opportunities and enable data flows. CETA, for example, includes mutual recognition of professional qualifications, meaning doctors, pharmacists and architects – among others – are automatically recognised as qualified in Canada based on minimum training conditions. Similarly, the FTA with Mexico gives access to procurement opportunities for UK firms, which is vital in this regard as Mexico is not signed up to the WTO’s Government Procurement Agreement (GPA). The worry about this is widespread among the business community – with 31% of CBI members extremely concerned and 29% moderately concerned about the effect of third country FTAs falling away in no deal. The UK government has dedicated a lot of time and resource to signing a number of ‘rollover’ FTAs, to avoid disruption for firms. However, there is not enough time before no deal or the political window needed to secure all of them, with FTAs with Canada, Japan and Turkey particularly highlighted as unlikely to be secured. Trade with those countries will be under ‘WTO terms’ in no deal, with tariffs in place and other market access barriers erected. Additionally, in some markets where new agreements are ready and in place for no deal, they are not yet comprehensive enough to secure complete continuity of trade. Some of these rollover FTAs include sunset review clauses, which creates uncertainty for businesses as they do not promise longstanding continuity. In other FTAs, the deals fall some way short of being as comprehensive as the ones the UK has as a member of the EU. For example, the agreement with Norway and Iceland is a very basic, goods-only agreement. Services firms which enjoy a close Single Market relationship with a lot of access to Norway may have to apply for new licenses in no deal, and will no longer benefit from easy movement of staff across borders. Similarly, the rollover agreement with Switzerland only preserves 3 out of 20 mutual recognition agreements. For the 17 that fall away, testing and inspection of goods manufactured in the UK will no longer be recognised in Switzerland – forcing significant duplication for businesses exporting goods such as medical devices and machinery.

30. WTO Agreements

As the UK leaves the EU, it will shift from being predominantly represented by the EU due to its exclusive competence over trade policy, to a full independent member. As a result, there is a need to ensure continuity in Geneva. This is particularly important as the UK’s membership of the WTO’s Government Procurement Agreement (GPA) is due to its EU member status, and accession to the GPA needs to, and has been secured for the UK in its own right. The UK is a party to several multilateral agreements at the WTO that provide valuable benefits, protections and facilitations for British business around the world. The UK has done almost all that it can to secure its position at the WTO. For example, there is no sign up required to continue partaking in the Information Technology Agreement (ITA) which provides 0% tariffs on goods like computers, phones and semiconductors. The UK will be able to benefit from the commitments of all other ITA members and no further steps are needed. Similarly, the UK will continue to benefit from the Agreement on Trade-Related Intellectual Property Rights (TRIPS) – subject to maintaining TRIPS complaint levels of domestic intellectual property protection. As such, UK copyright works will continue to be achieve some protection in all WTO member countries. Additionally, the UK can continue to benefit from the Trade Facilitation Agreement, which contains provisions for expediting the movement, release and clearance of goods. On the important GPA, the UK’s secured accession will mean only a temporary drop off – which, with the right planning from applying businesses, may not have any real impact as relevant international public sector contracts can have relatively generous application timelines. However, it should be noted that this does not create a level-playing field for UK companies competing for EU public procurement contracts as the WTO provisions are not as extensive as that granted to EU members. This is significant, as the European Commission estimates that (excluding utilities) public expenditure on goods, publicly-procured work and services in the EU amounted to £1.5 trillion in 2015 . The UK and EU have thus far displayed excellent cooperation at the WTO regarding the splitting of their existing tariff rate quotas (TRQs) that largely concern agricultural products. However, over 20 third countries, including the U.S., China, Brazil and India, have objected to these joint plans and a WTO legal challenge on the viability of these revised TRQs would appear likely with concerns the UK may be forced into an arduous renegotiation with third countries

31. Other International Agreements

No deal will also have an impact on more specific agreements gained through EU membership that facilitate trade outside of FTAs and make it much easier for UK companies to sell to global markets. The UK government has stated that not all of these agreements require action; that some have been superseded, and some are not of direct or immediate relevance to the UK. The Secretary of State for Exiting the European Union outlined in January that around “1,000 [EU] treaties had a relevance to exit, which slipped down to just under 400 with a direct impact, and a very low number—in the tens— of more material issue from exit day”. The UK Government has worked hard to carry over as many crucial international agreements as it can in time for Day 1 of no deal. Diplomatic effort has been expended across the globe, and some tough negotiations concluded with major powers such as the US, Canada and Israel. However, the job is not yet done. Some agreements were not ready for the original Article 50 deadline in March and have yet to be rolled over, including air services agreements, customs cooperation agreements, mutual recognition agreements, trade in organic products agreements, and a nuclear cooperation agreement. A government list identifies 158 agreements that it is seeking to replace by exit day. If further steps are not taken to secure continuity for international agreements, there will be significant consequences. If further air services agreements are not concluded, it would severely limit air connectivity to and from the UK and the Balkans. If the mutual recognition agreement in operation with Mexico falls away, UK spirits such as Scotch Whisky and Mexican tequila will no longer be protected terms in the respective markets. Extra delays at the border, and reduced data sharing to combat fraud and hazardous products would result should customs cooperation deals become invalid. Additionally, some deals that come into operation in the event of no deal are not as ambitious or beneficial as the UK currently has through EU membership. For example, while the US rollover deal of ‘Open Skies’ protects established airline rights, new routes can only be established by airlines that have substantial ownership and control in the UK or USA thus limiting the scope for new services from international entrants. This creates long-term competitiveness risks, as the UK will not have the clout that the EU has to strike more beneficial deals.

32. EU Programmes

The UK is involved in a number of EU-organised programmes and funding schemes as an EU member. One of the most important for business is Horizon 2020, the EU’s research and innovation programme that brings together businesses, academics and Universities across Europe to work together on solving global problems. There are also a number of other programmes and funding schemes the UK is a part of through the EU, ranging from the European Maritime and Fisheries fund which in 2018, among other things, provided £2 million to develop Whitby East and West Piers and £236,000 to upgrade facilities at Brixham fish market , to the PEACE programmes in Northern Ireland which provide funding and support for cohesion-building initiatives in areas around the Irish border, particularly focused on young people, social inclusion and combating poverty. Some EU programmes such as Creative Europe, which has supported collaborative projects run by organisations from the Royal Opera House to arts organisation Writing West Midlands, have benefits beyond funding – namely in the form of collaboration with partners across geographic territories. In the event of no deal, the UK should eventually be able to re-join many of these, but there is likely to be a drop off in between and participation will not be on the same terms as today

33. Research and Innovation

No deal puts at risk the huge benefits UK Universities, businesses and the research community have found from participation in European research and innovation programmes. This is because the UK will no longer be able to apply for most new opportunities for over a year, and even then on much less favourable terms. This is a problem for three reasons. Firstly because these programmes have been an important source of long-term funding, UK businesses having received over €5,101 million in the current funding round, or just over €1.275 million a year, representing a substantial addition to UK Research and Innovation’s annual budget of £7,458 million. Secondly, these programmes have provided unique collaborative opportunities and access to specialist expertise, allowing industrial innovators to work together on challenges that can only be solved through cross-border collaboration, such as medicine, cyber-security, robotics and big data. Third, the programmes have offered an opportunity to influence regulations from the earliest stage and enable Universities and businesses to have a voice shaping the international research agenda. The concern about no deal’s impact on UK firms’ involvement in EU research and innovation programmes is already having consequences. Feedback suggests that ongoing uncertainty about no deal is making European research institutions nervous about entering into projects with UK partners – such that UK researchers have been shut out of partnership bids. A study by UCL of 9 leading Universities saw the number of Horizon projects led by UK researchers in the universities surveyed dropped from 49 in 2016 to just 20 in 2018. The percentage of projects the universities are leading declining from 15% in 2016 to 9% last year, and the total number of Horizon projects the institutions were involved in dropped by a third, from 331 in 2016 to 227 last year . This is affecting businesses as well. Under Horizon 2020 – the EU’s current research framework programme – the UK has been placed second only to Germany in its number of project participants and share of funding. However, the latest figures from BEIS show that, when compared with October 2016, UK businesses have fallen from the second highest recipients of funding in the EU – to fifth overall. The UK government has had all the right intentions when it comes to mitigating the impact of a potential no deal on UK businesses, Universities and researchers that participate in European research and innovation programmes. The practical steps the UK government has taken to prepare for no deal have been the right ones, and the signals being sent on the importance of the UK remaining an open nation for science and innovation much welcomed. Yet the challenges of uncertainty already affecting UK firms and higher education will be further heightened if no deal takes place. The UK’s ability to collaborate with European research partners will be greatly hindered and organisations will lose out on access to valuable funding support. Some institutions have very high numbers of Horizon 2020-supported projects running simultaneously: the University of Oxford has participated or is participating in 423 projects, for example, while the University of Edinburgh has involvement in 258. Managing the fall out of no deal on research and innovation collaboration will be a complex distraction for these organisations working on important projects from AI to super-pixels. In the long-term, the UK should be able to seek to associate with the next EU research and innovation programme, Horizon Europe, and businesses would welcome a firm commitment from the new government that it intends to do so. Though the UK can take action domestically to support research and innovation, the EU framework programmes are unique in scope and scale and the full benefits of membership will not be fully replicated.

34. Regional Funding

Following the UK’s exit from the EU in no deal, the UK will lose access to £2.4 billion annually from European Structural and Investment Funds (ESIF). ESIF provides funds to address regional imbalances in Member States by supporting skills, infrastructure and innovation in local areas. These are administered by government and allocated based on a range of criteria. Of the money guaranteed by the EU and match funded by UK private and public institutions, less than 20% has actually been spent with a further 72% of funding agreed, as of November 2018. The remainder must be agreed by 2020 and spent by 2023 . There are five funds that are collectively referred to as ESIF – but two are particularly important for the business community. First, the European Regional Development Fund – worth €5.8billion to the UK between 2014-2020 – which promotes economic and social cohesion within the EU through the reduction of imbalances between regions or social groups. This fund is also the source of the funding for Northern Ireland’s PEACE programme. Second, the European Social Fund – worth €4.9 billion to the UK between 2014-2020 – which provides financial assistance for vocational training, retraining and job creation schemes. Programmes granted monies under ESIF range from loans for social enterprises and voluntary groups in South Yorkshire, to bringing superfast broadband to 15,000 people in Cornwall and supporting NEETs in Norwich to find fruitful employment. The UK government, thus far, has had all the right intentions when it comes to mitigating the impact of no deal on access to regional funding. The steps to underwrite current programmes were highly reassuring, for example, and honouring this commitment will be key. However, concern is growing about the delivery of these intentions. The UK government has proposed a new UK Shared Prosperity Fund (UKSPF) to replace EU funds and deliver sustainable, inclusive growth based on the Industrial Strategy. The consultation was due to begin at the end of 2018 but this has been delayed and is still yet to start – creating uncertainty for businesses about future funding streams, particularly in some of the more vulnerable areas of the country. This creates a genuine risk of a delay in the pipeline of new projects once the current funding window ends at the end of 2020. This is because for continuity of projects in the regions, bids for projects post-ESIF will need to begin in 2020. In the long-term, there is no doubt that these streams can be restored. The UK has a great opportunity to ensure cohesive, streamlined funding for the regions, more closely meeting the UK’s economic aims than ever before. But action is needed quickly to ensure a new funding regime is in place for 2021

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