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November 28, 2016

How the UK economy’s key sectors link to the EU’s Single Market

The following are the key findings of this report:

  • The report investigates the relative importance of main sectors of the UK economy and their dependence both direct and indirect on trading with the Single Market. The biggest sector in the UK is retail/wholesale trade, totalling £178 billion in 2014. This was followed closely by manufacturing on £165 billion, while financial services came in came in third at £122 billion. Other important sectors include the (non-market) areas of healthcare and education.

 

  • Energy supply came through as the fastest growing segment on 22% average growth in the period 2012-2014. This picture may have changed somewhat recently though in light of the sharp decline in energy prices in 2015 and 2016. This level of growth could thus be merely cyclical.

 

  • Other industries that grew rapidly over the period include the digital and broader creative industries, accommodation and food and administrative and support services. Mining experienced the biggest decline during this timeframe, seeing through a 9% contraction. Importantly, the decline in mined commodities started earlier than energy, so decreases here may again not be a permanent feature.

 

  • At an economy-wide level, Cebr estimates that in 2014 exports to the EU contributed £187 billion in GVA to the UK economy (including multiplier effects), equivalent to about 10.3% of UK GDP. In terms of EU trade dependence, we estimate that 3.25 million UK jobs are directly and indirectly linked to EU trade.

 

  • The manufacturing sector is heavily dependent on exporting to the EU and would certainly suffer significantly if access is restricted or held back by tariff barriers. Despite the statistics, the retail and wholesale sectors do not export very much directly (roughly £36bn of services in 2014[1]) but because of the specialism inherent in modern logistics, the distribution sector is intimately involved in the supply chain for both exports and imports, which would appear to account for the bulk of the estimated jobs affected by the links between the sector and trade with the EU. If this trade were to diminish, there would certainly be a knock on effect on the sector.

 

  • The two other sectors with a very strong link to exporting to the EU are banking and insurance and professional services. For other sectors, their direct links to trade with the EU are less, but nevertheless they are indirectly linked, since in a modern economy most sectors depend in some way on other sectors.

 

  • It is important here to mention another sector which has a different dependence on the EU. Currently the UK’s third largest sector at 9% of GDP is the so-called Flat White Economy, which combines technology with the creative sector. This sector has accounted directly and indirectly for more than 40% of UK GDP growth in the past 4 years and is forecast to account for 15.7% of UK GDP by 2015 making it by then the largest sector in the UK economy. This sector, currently heavily based in London but spreading rapidly to other major parts of the UK[2] is critically dependent on labour from the EU and elsewhere. The main book describing the sector describes immigration especially from the rest of the EU as ‘the UK’s secret economic weapon’. Any move to cut immigration from the EU would be a body blow to this sector and would have a significant impact on UK GDP growth.

 

  • Agriculture and fisheries have their own links with trade with the EU which depend on the Common Agricultural Policy and the Common Fisheries Policy. These sectors would suffer from withdrawal from these policies unless these policies were replaced by alternatives that provided equivalent access.

 

  • Using different indicators – size (GVA), growth (GVA growth) and existing trading relationships (captured by trade, trade growth and employment linked to trade with the EU) – Cebr shows how the major sectors of the economy are linked to the EU single market. These measures show a considerable amount of variation in rankings but all are linked in some way. The value of the above indicators can also be seen when considering composite rankings. Manufacturing, retail and wholesale, financial services and professional services come though strongly on most measures, but there is considerable variation in terms of other segments depending on the approach undertaken.

 

  • Although it might seem theoretically possible to cherry pick a number of sectors and negotiate trade agreements for the sectors, there is considerable linkage between the sectors. It has taken a quarter of a century to negotiate the single market as it exists today and could take nearly as long to renegotiate a new arrangement on a sectoral basis. The practical problems of negotiating agreements that cover the majority of our trade would not only take years but the uncertainty thus generated would hold back investment and damage the economy.

 

  • Whether the UK is inside or outside the single market, EU regulations cannot be avoided if Britain wishes to trade with the European Union. What can potentially be decided is the form of compliance, either though EEA rules, FTA equivalence or firms individually complying with standards for their exports. The more regulatory independence the UK tries to carve out, the more difficult it is likely to be for British firms to export to the EU without facing trade barriers.

 

  • The broader economic impact of having more restricted market access also has to consider secondary effects. Industries such as real estate could be affected if the landscape for foreign direct investment changes. Furthermore, foreign investment into key British industries such as manufacturing may also be affected by restricted access if investors end up having less certainty in the ability of their assets to generate income domestically and abroad.

 

  • While EEA single market membership would provide Britain with continuing and dynamic access for key industries, the current model does entail members having to settle for only a relatively modest amount of influence on single market rules. Given the size of the British economy compared to other EEA countries and uncertainty regarding the future framework of the EU, these terms of membership may change over time.

 

  • If the UK ends up outside of the single market and without a free trade arrangement, importers and exporters would face tariffs and possible regulatory divergence problems. Meanwhile, being outside the customs union, exporters and importers could be hindered by rules of origin, even if the UK opts to remain in the EEA single market.

 

  • EU negotiations will also need to strategically consider the unregulated services sector, covering areas such as digital, the creative industries, the arts, technology, research and consultancy (among others). While current EU trade in these industries could prove more difficult to restrict, it may be subject to a number of indirect impacts given the industry’s reliance on EU/EEA workers, in addition to the opportunity cost of not being able to take full advantage of future single market deepening measures that could enhance future access.

 

  • In conclusion, the central finding is that most, if not all, sectors are linked to the EU. There appears to be no single sector whose economic characteristics – whether GVA, growth potential of trade density – do not link closely to and benefit from trading within the EU’s single market today. A sector-by-sector approach, which seeks to prioritise or choose ‘winners’ in isolation of others, therefore, cannot be achieved without the risk of creating ‘losers’ through reduced access and reduced future mutual benefits.

 

[1] Source: Supply and Use Tables 2014 ONS https://www.ons.gov.uk/economy/nationalaccounts/supplyandusetables/datasets/inputoutputsupplyandusetablessummarytables

 

[2] Cebr forecasts that by 2020 there will be more Flat White Economy jobs in the north of the UK than in London alone.

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