Written evidence from the CBI (EUR 08)

The CBI welcomes the opportunity to respond to the Committee’s inquiry on the business views on the EU referendum. Although there are a wide range of factors under consideration at the referendum, the business community has an important voice in the debate and is uniquely placed to comment on the impact on the UK’s prosperity.

The CBI is a confederation of 140 trade associations, representing mostly smaller firms, alongside medium-sized and larger businesses who tend to join the CBI directly. Together the 190,000 businesses we represent employ nearly 7 million people, about one third of the private sector-employed workforce. Our members come from every sector of the economy, including agriculture, automotive, aerospace and defence, construction, creative and communications, financial services, IT and e-business, management consultancy, manufacturing, professional services, retail, transport, tourism and utilities.

Through comprehensive consultation with its membership over the last 3 years, the CBI understands that there is not a uniform view in the business community on the EU referendum. However, a clear majority of CBI members believe that, on balance, the benefits of EU membership outweigh the disadvantages and the alternatives to full membership of the EU have serious downsides.

This submission to the Business, Innovation and Skills Committee will argue that:

1. A majority of CBI members of all sizes, sectors, regions and with varying degrees of interaction with the European Union believe the UK remaining in the EU is the best option
2. Based on a range of business considerations, the majority of businesses believe the benefits of remaining in the European Union outweigh the disadvantages
3. Businesses are considering the alternatives to full EU membership, and believe they all have downsides for trade and investment in the UK compared to full membership
4. Businesses are concerned about an economic shock as a result of a vote to leave
5. The UK’s EU membership helps secure a greater number of more comprehensive Free Trade Agreements than the UK could likely secure alone

1. A majority of CBI members of all sizes, sectors, regions and with varying degrees of interaction with the European Union believe remaining in is the best option

1.1               In the wake of the Prime Minister’s renegotiation, the CBI conducted a survey that concluded the majority of its members want to remain in the European Union. The CBI’s survey was conducted by ComRes, an independent polling company. 80% of CBI member organisations responded that remaining in the EU would be best for their organisation, while 5% said that leaving would be in their best interest and 15% were unsure[1]. 77% said that remaining in the EU would be in the best interest of the wider UK economy, while 6% said that leaving would be.

1.2               There are some variations in views on the EU by sector, but a majority of CBI members from all sectors thought it best to remain. 77% of members in the construction sector thought it would be best for their organisation if the UK stayed in the EU. Other higher returns include members from the financial and insurance (81%), professional scientific and technical (83%) and education sectors (83%). Organisations in the arts, entertainment and recreation industry displaced slightly lower support (57%) as did wholesale businesses (65%) but these sectors had higher percentages of members reporting they did not know what leaving the EU would mean for their business (33% and 36% respectively), rather than significantly higher percentages of those wishing to leave.

1.3               The majority of SMEs in CBI membership believe remaining is better for their business, but large organisations are more likely to state this. 71% of small and mid-sized business members believed remaining in the EU is best for their organisation. 11% believed the best option for their organisation is to leave EU, and 18% did not know. 65% of SME CBI members said remaining in the EU would be in the best interest of the UK economy as a whole as opposed to 81% of large businesses. 15% of SME members said that leaving the EU would be in the best interests of the UK economy compared to 4% of large members.

1.4               CBI member businesses with closer trading or investment relationships with the European Union are marginally more likely to say that a ‘remain’ result is the best option. CBI member organisations that operate inside other EU countries were more likely to say that a ‘remain’ result is in their best interest than those who do not – 83% against 76%. Similarly, CBI member organisations that invest in and export to the EU are marginally more likely to say a ‘remain’ result would be in the best interest of their organisation – with 84% and 82% preferring to stay in. 77% of CBI members that operate solely in the UK thought remaining would be in their best interest.

1.5               Although there is some variation between regions, the majority of CBI members in every region of the UK support remaining in the European Union. CBI members based in London were the most likely of all UK regions to say that a ‘remain’ result would be in the best interest of their organisation (85%). Members in the Midlands and East of England were the least likely, although a strong majority (75%) still said that remaining in the EU would be in the best interest of their organisation.

1.6               In the CBI’s experience, the majority of firms have come to their view on the EU as a result of a logical business case. Different business models mean that experience of the European Union can vary between companies, which may explain some of the diversity between business views. Those companies that are less exposed to the European Union, in the experience of the CBI, may ascribe less importance to it. Additionally, for some smaller, owner-founder firms, personal considerations may play a role in nuancing conclusions, which may further explain some of the diversity in views.

Table 1 – Business organisation surveys

As shown by Table 1, the conclusions of the CBI’s member survey are generally reflected in all other surveys by business organisations - all surveys of businesses to date have shown more support from businesses for remaining in the EU than for leaving.

2. Based on a range of business considerations, the majority of businesses believe the benefits of remaining in the European Union outweigh the disadvantages

When considering the potential impact of the result of the referendum, businesses take into account the range of ways in which their company, supply chains, sector and the economy interacts with the EU. Overall, business benefits from the UK being a member of the EU with access to the single market, trade deals with the rest of the world, harmonised regulation, access to skills and increased investment. While there are costs, overall, EU membership has had a positive impact on UK business and the economy.

2.1               The UK’s business community considers easy access to the single market one of the biggest benefits of EU membership. The EU enables easy access through the single market to the UK’s largest trading partner – 45% of UK exports in 2014 were to the EU, amounting to £227 billion worth of goods and services.[2] While the share of UK exports to the EU is declining as the UK increases its trade with countries outside of it, the value of exports to the EU has increased on average by 3.3% each year between 1999 and 2015.[3] 80% of British businesses that trade overseas do so with the EU[4] – it remains a growing and critical market for the UK.

2.2               The access to global markets that the UK’s membership of the EU provides is a benefit for UK businesses. The EU facilitates global trade by providing the UK with privileged access to 53 markets outside of the EU through trade deals. As an economy worth £10.6 trillion in 2015 with a market of 500 million people, evidence shows that the EU enables the UK to secure more and higher quality trade deals than it is likely to be able to if negotiating alone. Additional impetus has been added to the EU’s global trade agenda by the Prime Minister’s renegotiations.

2.3               EU regulation can be a benefit to UK businesses, but it can also be a cost. Businesses frequently report that harmonisation of EU rules and standards makes it easier to enter the markets of the 27 other member states. There are costs to EU regulation and badly designed regulations can be damaging, but this must be considered alongside the benefits of the regulation and the likelihood of comparable domestic regulation. Calculating the net cost of EU regulation is therefore complex. The Department of Business, Innovation and Skills has calculated the cost of EU regulation as £8.6-9.4 billion.[5] The Prime Minister’s renegotiation aims to reduce this cost by introducing a target for reducing regulation.

2.4       The UK’s single market access encourages international investment, which supports many British jobs. As part of the EU, businesses in the UK have open access to the single market for their exports. 72% of foreign investors cite this access to the single market as important to the UK’s attractiveness as a place to invest.[6] The UK would still be an attractive place to invest outside of the EU, as there are many other attractive factors including language, law and culture - but single market access is a key factor in the decision-making process for foreign companies

2.5        Free movement from the EU provides UK businesses with access to the skills they need to grow. Continued access to labour from across the EU is important for business in being able to fill skills gaps. Free movement also allows firms to flexibly move resource around the EU for temporary projects and training, and allows UK workers to seek employment in the other EU member states. But the freedom to move must be a freedom to work and not a freedom to claim welfare payments. The CBI supports the government in tackling abuse of the system, which should help to maintain support for the principle of free movement of people. In the long term, employers must also work with government to improve skill levels in the UK workforce.

2.6       The direct budgetary cost of the UK’s EU membership is often overstated. The UK’s gross contribution to the EU budget was £18.8 billion in 2014. After the UK’s rebate of £4.4 billion and other public sector receipts of £4.6 billion, the UK’s net contribution to the EU budget was £9.8 billion in 2014 or around £360 per household per year.[7]

2.7             Considering all the relevant economic factors, a CBI literature review estimates the overall benefit of the UK’s EU membership is around 4-5% GDP, or £73-91 billion. There have been many studies attempting to quantify the overall economic impact for the UK of EU membership – taking into account a variety of factors. Generally, analysts focus on tangible ‘static’ benefits such as the creation of trade or lower prices, at the expense of ‘dynamic’ benefits such as investment and innovation. On costs, the ‘static’ negative impact of unwarranted legislation is easier to identify than some of the benefits. Studies tend to be non-overlapping, focusing on different aspects of membership and using different methodologies and counterfactual assumptions. The CBI undertook a literature review of credible academic studies looking at all these factors for an overall view of the impact of EU membership on the UK economy. This review was initially published in 2013 but was updated in February 2016 to take account of new studies. The mid-range estimate of the overall impact on the UK economy of EU membership is around 4-5% of GDP, equivalent to £73-91 billion or £2,700 - £3,300 per household.[8]

2          Businesses are considering the alternatives to full EU membership, and believe they all have downsides for trade and investment in the UK

Many countries trade with the European Union under World Trade Organization rules, but the EU also has preferential trading arrangements in place with over 50 countries. It is helpful to analyse these to understand the deal the UK may be able to secure in the event of a vote to leave, and the CBI is encouraging its member businesses to do so. The relationships the EU has with Norway and Switzerland, and the EU-Canada Free Trade Agreement are often cited as ‘off the peg’ models the UK could seek to adopt. CBI analysis shows that all alternatives to full EU membership provide reduced access to the single market and less influence over the rules that govern it. Any new arrangement is likely to take many years to negotiate.

If the UK failed to achieve an agreement with the EU within the 2 years allotted by Article 50 of the Lisbon Treaty, and secured no extension, its trade would revert to operating under WTO rules. This would hit certain sectors disproportionately and reduce the competitiveness of UK exports.

3.1               Norway has full access to the EU single market but no influence over rules. Norway is part of the European Economic Area (EEA). Joining the EEA would allow the UK to retain access to the single market covering goods, services and capital. However, Norway has to implement the majority of EU rules (around 75%[9]) without formal influence over their development.

Those advocating a vote to leave often argue on the basis that the UK could stop free movement of people and budgetary payments while signing more trade deals with the rest of the world. If the Norway relationship is replicated, none of these ambitions would be realised. As a condition for access to the single market, Norway operates free movement and paid almost €1.8 billion to the EU budget in the period from 2009-2014, making it the 10th highest per capita contributor to the EU.[10] Additionally, Norway has considerably fewer FTAs than the EU and negotiates them mainly through the European Free Trade Association (EFTA) – a bloc of four countries.[11]

3.2               Switzerland has secured partial access to the EU single market through a number of complex agreements which took a long time to negotiate. Switzerland is part of the European Free Trade Association but not the EEA. It manages its relationship with the EU through 120 bilateral arrangements, which took 16 years to negotiate. Swiss businesses can access the single market in areas covered by a bilateral agreement but Switzerland has to implement the relevant EU rules in return. If emulating the Swiss relationship, the UK’s preferential access to the EU market for services sector – a key part of the UK economy – could be restricted.

Free movement of people is integral to the Swiss agreement – which includes a ‘guillotine’ clause that means if one element of the Swiss agreement is dis-applied the entire agreement is suspended. This includes free movement, which the Council of the EU stated it considers ‘a fundamental pillar of EU policy and its four freedoms are indivisible’.[12]

3.3               Like Canada, the UK could seek a bespoke Free Trade Agreement with the EU but this is likely to lead to more limited market access. It has been argued that the UK should seek to secure a Free Trade Agreement similar to the EU-Canada deal (CETA). This will be the most ambitious trade deal ever signed by the EU, removing many tariffs and quota and harmonising standards in many sectors. However, under CETA, all Canadian exports have to comply with EU rules, though Canada will have no formal influence over regulators in the EU's Member States or at EU level. Canada does just 9.4% of its trade in goods with the EU, so may consider this acceptable.[13] However, the EU is the UK’s largest trading partner and as such a lack of formal influence over the terms of trade could have a considerably larger impact.

The UK’s main services export – financial services – is also likely to suffer under a Canadian style agreement. Under CETA, Canadian financial services firms must comply with complex regulatory and licensing requirements in order to access the EU market. In addition, many important service sectors, such as air transport and audio visual services, are not covered by the agreement at all. Therefore, even the most ambitious EU deal to date provides Canada with significantly less access than the UK currently has to EU markets.

3.4        If the UK cannot secure an agreement with the EU or an extension after the two year period prescribed by Article 50 of the Lisbon Treaty, it would leave the EU and begin to trade under WTO rules. The Article 50 process lays down a two year timetable for a country to leave the EU. The Prime Minister has confirmed that this process would be triggered straight away following a vote to leave.[14] In such a scenario, the UK would formally notify the European Council which would agree guidelines for the European Commission to negotiate the withdrawal agreement.

During the two years, the UK would continue to operate as a full member of the EU and could also have to continue implementing EU law until the formal withdrawal process was concluded.[15] But the UK would not participate in the discussions at the European Council on its own withdrawal. If, after two years from initiating the Article 50 process, there is no withdrawal agreement or unanimously agreed extension of the period, the UK would automatically leave the EU and trade under WTO rules.

3.5        The tariffs businesses would have to pay under WTO rules to trade with the EU would reduce the competitiveness of UK exports. Under WTO rules, the UK would have to pay a tariff in order to export goods to EU countries and would be subject to quantity restrictions. All countries that are not in the EU single market, or that do not have a trade deal with the EU, pay the ‘Most Favoured Nation’ (MFN) tariff. The UK would therefore have to pay the same rate as the United States to export to our largest market. Just under half of US trade with the EU is subject to tariffs.[16]

The MFN tariffs, summarised in Table 2, are significant and would result in a serious impact on the competitiveness of UK exports by making UK goods more expensive when sold in Europe. Around 90% of UK exports to the EU by value would face tariffs.[17] Key UK export sectors would be particularly vulnerable to initial disruption, facing high tariffs and reduced access – food, drink and tobacco would face an average export tariff of 20%,[18] while automotive exports would be subject to a 10% tariff. Trading with the EU under WTO rules could also result in consumers in the UK facing higher prices, as tariffs could be applied to goods imported from the EU.

4          Businesses are concerned about an economic shock as a result of a vote to leave

A vote to leave the European Union could have a significant impact on the UK’s prosperity. The uncertainty around the UK’s trading arrangement with the EU would create an economic shock for the UK. This initial shock would stabilise as the UK negotiated a new relationship with the EU, but the type of relationship would determine the extent of the recovery. Many businesses have identified this uncertainty and reduced market access as a concern.

4.1               There would be a short term economic shock following a vote to leave and a negative impact on the pound. In the first five years following a vote to leave the EU, the UK could experience an economic shock as a result of the uncertainty that would ensue. There could be an impact on firms’ credit risk and the cost of capital as the potential loss of access to the single market could have a negative impact on UK firms’ export earnings and put upward pressure on import prices if tariffs are imposed. It is also likely that heightened business and consumer uncertainty could manifest itself as a delay in hiring and investment decisions.

The overall economic shock would likely be coupled with volatility in financial markets and a significant fall in the pound. The pound has been weakening against other currencies since November 2015, in part due to the EU referendum – the pound fell to a seven year low against the dollar the day after the referendum was announced.[19] Several major financial institutions have predicted a further fall in the value of sterling if the UK votes to leave.[20] One has suggested a fall of as much as 10% in the event of a vote to leave.[21] While currency depreciation may have some positive effects, it would also cause a significant increase in import prices, pushing up inflation and weighing on households’ purchasing power. In addition, both Moody’s and Standard & Poor’s expect to downgrade the UK’s credit rating. Together, these impacts mean that the UK economy would suffer in the short term from a vote to leave the EU.

4.2        Driven by the effects of uncertainty, barriers to trade and reduced free movement, the UK economy will be smaller in 2020 under an FTA or WTO scenario than if the UK remains a member of the EU. In February 2016, the CBI commissioned PwC to model the longer term economic impacts of two scenarios:[22] an optimistic scenario, in which the UK rapidly secures an FTA with the EU, maintains its existing trade deals and signs a new one with the US; and another more challenging scenario in which securing a new agreement with the EU takes longer and the UK falls under WTO rules for a period of time, but recovers its trade deals with third countries and signs a trade deal with the US after ten years. It would be possible to model scenarios that are significantly more pessimistic.

The analysis indicates a cost to the British economy of leaving of between £55-100 billion by 2020 – with GDP 3% lower compared to remaining in as part of the optimistic ‘FTA’ scenario and 5.5% lower in the WTO scenario. This could translate to a loss of income to the average household of around £2,100 – £3,700 in 2020. At best, there could be 550,000 fewer jobs and possibly 950,000 fewer jobs relative to remaining in the EU, with unemployment running as high as 7-8% in the next 3-4 years.

4.3        The longer term economic impact of leaving the EU depends on the alternative trading relationship the UK negotiates. The UK economy would slowly recover over time but the pace and extent of the recovery would depend heavily on the alternative relationship the UK secures with the EU. In the ‘FTA scenario’, UK GDP could recover more quickly but it would still be smaller in 2030 than if the UK remains in the EU. The ‘WTO scenario’ could present a more difficult picture for the UK economy. In 2025, UK GDP could still be 4.1% lower if operating under WTO rules than if it remained a member of the EU. This is partly due to ongoing uncertainty but mostly due to a drag on trade and migration to the UK. By 2030, the UK economy begins to recover but is still 3.5% smaller and UK employment around 600,000 lower than if the UK was a member of the EU.

5. The UK’s EU membership helps secure a greater number of more comprehensive Free Trade Agreements than the UK could likely secure alone

No alternative arrangement to full EU membership provides businesses with access to the Free Trade Agreements the EU has in place with third countries. That makes it hard for UK businesses to anticipate remaining party to existing deals with third countries if the UK left the EU. Outside the EU, the UK would be able to negotiate new deals without considering the needs of 27 other member states. However, it would not have the negotiating power that allows the EU to secure high-quality, comprehensive deals.

5.1               It is difficult for UK businesses to expect to be permitted to remain a part of the Free Trade Agreements the UK currently has in place through the EU. No alternative arrangement to full EU membership permits access to EU FTAs. Norway and Switzerland have the most comprehensive agreements with the EU and do not have access to Free Trade Agreements negotiated by the EU with third countries. Instead, the majority of their deals are negotiated through another regional bloc – EFTA, an organisation of four countries – themselves, Iceland and Lichtenstein. Similarly, no FTA the EU has with one country provides access to EU FTAs with other countries.

5.2               UK businesses currently experience significant benefits from EU Free Trade Agreements, and are expecting more from those in progress if the UK remains in the EU. Existing FTAs and EU membership cover 60% of the UK’s trade. If the EU completes all current negotiations that would increase to cover 88% of the UK’s trade[23]. Deals currently under negotiation, including the Transatlantic Trade and Investment Partnership are estimated to further reduce barriers to access for UK business in established markets, as are proposed deals with New Zealand and Australia. Additionally, the modernisation of current deals, such as that with Mexico, could provide improved access to emerging markets.

There are a number of deals which are currently agreed and undergoing legal scrubbing and ratification – including with Canada, Ecuador, Singapore and Vietnam. These agreements are all “New Age” deals – comprehensive agreements with aspects of services provision covered. Many industries are expecting to benefit from the opening of these markets, particularly when they consider the benefits achieved from the South Korea agreement which scrapped 99% of tariffs in just 5 years and boosted trade between the UK and South Korea by 57%.[24] The EU-Canada trade deal is expected to increase trade by 29% and add £1.3 billion to the economy[25]. Without this deal, it is hard to see how the UK could experience similar growth with this export market.

5.3               Negotiating a trade deal with the UK outside the EU is unlikely to be a top priority for most countries. The United States Government has stated a Free Trade Agreement with the UK would not be a priority as the US is “not particularly in the market for FTAs with individual countries”.[26] Instead the resource is better focused on partnerships with trading blocs. Regional blocs are becoming increasingly important in the global trade landscape: the total number of Regional Trade Agreements in force has grown from 25 to 1990 to more than 260 today.

5.4               Outside of the European Union, the UK is more likely to be at a disadvantage compared to its negotiating partners and secure lower quality Free Trade Agreements than those the EU can secure. As a bloc of 500 million consumers, the EU brings 8 times the clout to trade negotiations that the UK could alone. Evidence from other deals suggest that single countries are not as successful at securing deals as the EU, which gives the UK access to more markets than Switzerland, Canada or Australia – who have 38, 15 and 15 trade deals respectively. Additionally, the UK gets better trade deals through the EU. The EU-South Korea tariff reduction programme had a five year timeframe – the South-Korea Australia FTA will take almost 20 years to reach the same level. Similarly, the Switzerland-China trade deal gave China immediate access to Swiss markets whilst Switzerland had to wait 15 years for reciprocal access to Chinese markets.[27]

Conclusion

When businesses of all types weigh up the many ways in which the EU benefits their company, supply chains, sector and the UK economy, the majority of businesses that have expressed a view believe that the European Union has been a benefit to them. The CBI’s analysis is that all the alternatives to full EU membership have downsides for the investment in the UK, and for its trade – both with the European Union and the many countries outside it. The benefits and the downsides of the alternatives, combined with a risk of a serious economic shock that could result from a vote to leave, mean that, on balance, remaining in the European Union is the best option for the UK’s businesses.

April 2016