28 July 2023
On 31 January 2020, after nearly 50 years of membership, the United Kingdom (UK) left the European Union (EU). The end of that year saw the terms of the EU-UK Trade and Cooperation Agreement agreed and the transition period of the UK leaving the EU came to an end.
UK businesses have had to adapt to the changing, new, or as yet unknown business conditions under the new trade relationship with the European Union.
We asked our panel of middle market business leaders to share their views on the impact it has had on their trading and business operations.
Challenges in adapting to new trade conditions
Our survey results reveal that businesses are finding the transition to new trade conditions challenging. However, the level of challenge varied depending on the size of the business, with generally the smaller enterprises seemingly hit harder than their larger counterparts.
One of the main drivers of these challenges has been the introduction of new customs procedures. According to our survey 45% of middle marketing businesses have felt compelled to restructure their supply chains to navigate the new trading relationship.
As an example, recent research conducted by the London School of Economics found that food prices rose by almost 25 per centage points between December 2019 and March 2023, but had the UK not left the EU that figure would be 8 per centage points lower. This takes into account the recent inflation increases partly caused by the Russian Ukraine conflict and the spiking in wheat and grain prices.
Changes to import and export
Although 41% of middle market businesses reported that exporting to the EU has become more difficult under the new arrangements, 33% found it easier. Similar proportions were observed when businesses were asked about their ability to import.
Among businesses with a turnover between £10 million and £30 million, a lower percentage found trading with the EU easier, at only 19% for both imports and exports. Trade with countries outside the EU yielded more evenly split responses, with approximately one-third reporting increased difficulty and one-third finding it easier.
When it comes to providing services to the EU, 36% of businesses indicated that it has become easier, while 34% found it more difficult. However, again among smaller businesses, the percentage of those finding it easier dropped to 18%.
Increased lead times caused by customs checks were identified as the primary reason for heightened trading difficulties with the EU, according to 35% of businesses. Furthermore, 45% of the surveyed businesses confirmed that they had restructured their supply chains to adapt to the new trading relationship.
The financial cost to these changes could be substantial. For the automotive sector in particular the stakes are high. From next January, under the new ‘rules of origin’ laws, EV’s delivered between the UK and EU will face 10% tariffs. The tariff is placed on vehicles if less than 45% of the value of the components are sourced within the areas. Vauxhall-owner, Stellantis, has already said they could be forced to close UK production as a result of the change in UK-EU trading relationship.
A significant majority of respondents (63%) reported that their businesses have experienced higher prices for goods and services as a result of the UK's new trading relationship with the EU. The inflationary pressures stemming in part from the change in the trading relationship have impacted the profitability and cost structure of many businesses, but other factors, such as the conflict in Ukraine and the aftereffects of the pandemic have also contributed significantly.
Managing finding talent
The post departure system ended the free movement of people, which has contributed to a fluctuation in the UK’s labour force. The predicted net loss of the UK’s labour force due to this was 1%., around 330,000 workers.
Our survey found that recruiting skilled individuals from the EU has become more challenging for 38% of businesses, compared to 31% finding it easier. Consequently, 20% of the surveyed businesses have increased their recruitment efforts in areas outside the EU to address the talent shortage.
The impact of the UK leaving the EU has been felt across the real economy, with middle market businesses facing numerous challenges. The adaptation to new trade conditions, including increased customs checks, has affected both import and export activities. Smaller businesses, in particular, have struggled, as evidenced by the higher difficulty levels they face in trading with the EU.
The uncertainty of Brexit has had an impact outside of the UK and the EU, particularly in the US. One barometer of this is The Transatlantic Confidence Index, where US business confidence in the UK falling for the third consecutive year and the departure of the UK from the EU trading body being cited as one of the main reasons for the collapse in confidence.
At a more granular level, businesses are experiencing higher prices for goods and services, and recruiting talent from the EU has become more arduous. While some businesses have managed to restructure their supply chains and find new opportunities, others continue to grapple with the uncertainties and complexities introduced by the new trading relationship.
As the UK and the EU continue to navigate their future under the new trading agreement, it is essential for businesses to remain agile and adaptive. Ongoing collaboration and support from policymakers will be crucial in mitigating the challenges faced by the real economy and ensuring a smooth transition for businesses in the near future.