Brexit and Covid-19 – a marriage made in hell

Containers ready for export
Unless a free trade deal is agreed between the UK and the EU containers from the North East could be sitting a long time. Image by Markus Distelrath from Pixabay
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Football clubs across the North East have played a crucial role during the current pandemic: supporting foodbanks, doing community outreach, and perhaps most valuable of all, ensuring that the spread of the virus is contained by not giving fans any possibility of gathering in large numbers to celebrate success.

And whilst cheap jokes, such as those, attempt (and probably fail) to raise a smile in what has otherwise been a tragic episode, the seriousness of what continues to unfold might well depress regional mood levels even further.

The most recent results of the Quarterly Business Survey published by the North East Chamber of Commerce (and in the interests of full disclosure, analysed by the economic consultancy I run, ERS) were the worst I have seen in my 25-year involvement with the Survey.  The Survey asks if companies have seen an increase, reduction or no change in respect of a variety of performance indicators, with the ups minus the downs giving a balance.  Balances of -61 for domestic sales and -62 for UK orders told their own story.  Export sales and orders were both -40, pretty terrible but not quite so bad.  So maybe exporting could help as part of the North East’s recovery?  If only.

Exports account for a higher proportion of regional Gross Value Added (GVA) than in any other English region (26 per cent).  There are around 3,500 exporting businesses in the North East and nearly 60 per cent of the region’s exports are to the European Union.  Flowing without tariffs and unimpeded by non-tariff barriers.  But unless a free trade deal is agreed between the UK and the EU over the coming months, there is the prospect of one or more rather inconvenient spokes being stuck in the North East’s trading wheel.

The region’s exports are dominated by sales of cars.  Which brings us to Nissan.  Under WTO rules there are tariffs of 4.5 per cent on car parts and 10 per cent on cars.  In its evidence to the House of Commons International Trade Committee, Nissan said that tariffs would add £500m a year to costs.  That is not sustainable.  If Nissan felt it could add 10 per cent to the price of its cars and remain competitive, I suspect it would already have done so.

And it’s not just tariffs.  The Nissan plant relies wholly on operating on a Just-in- Time basis.  At any one time it holds a maximum of half a day’s stock and if it runs out of parts that is a disaster.  Honda reckons that an hour’s lost production costs it several millions of pounds.

So why not stockpile?  Build some warehouses?  Toyota has said that if it built such a warehouse it would be the third biggest building on the planet.  

But surely the region (and the country) could rebuild its economy, just as some would say it did following the closures of steelworks, shipyards and coalmines?  However, back then, the North East’s recovery was due in no small part to its ability to attract international investment.  This was driven almost entirely by the UK’s membership of the Single Market, something the North East will no longer be able to offer.

So, how are things looking going forward?  Over a 15-year period the UK economy ought to grow by around 25 per cent (based on a pretty modest projection).  However, were the UK to rely on World Trade Organisation rules as a basis for trade, this would likely reduce to 17.3 per cent – so 7.7 per cent less than it would otherwise have been.  Who says?  The Government says, in its Brexit impact studies.

Now a 7.7 per cent loss of growth would be very serious indeed, but in the North East, according to the Government, that figure rises to just over 16 per cent.  

Why is that?  Well look at the sectors that would be hardest hit by Brexit: chemicals, retail and wholesale, food and drink, motor vehicles and other manufacturing.  Ringing any bells?  On the specific of retail and wholesale, this is a very significant sector in the North East, responsible for 1 in 8 jobs.  A sector that has been under strain for some time, now looks set to have hit breaking-point following an extended period of closure for most stores.

In summary, the prognosis is about as depressing as it gets: pre-lockdown the North East was one of the worst performing parts of the UK; the coronavirus will have seriously damaged a variety of sectors and localities; Brexit will drag it down even further; and the assets and resources that helped the region recover from previous economic hits have been stripped away.

And what is the answer?  The Government appears to favour a dash to return to ‘economic normality’.  However, this threatens to miss the opportunity to consider whether we want to return to the status quo ante or create a more productive, inclusive and sustainable alternative. It also misses the point that the destination no longer exists.

Keith Burge is Managing Director of the economic consultancy ERS Limited and a Director of the Institute of Economic Development

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