The chemicals industry may have concerns about Brexit, but it also presents opportunities to unlock innovation

The chemicals industry may have concerns about Brexit, but it also presents opportunities to unlock innovation

Many British businesses and their trade associations backed Remain during this year’s referendum. Not consistently, some were full-throated echo-chambers for ‘Project Fear’. Others more pragmatic, supportive of the Government campaign, but not prepared to sign up to every statement.

In our case, we let both campaigns speak to our workforce, tried to stay as factual as possible in addressing questions, and did not insist anyone had to agree with us. That said, like everyone else – the new Government included – we were not well prepared for outcome of the referendum; better perhaps than those who spent the summer going through the grieving process – but not in a position to say much beyond respecting the outcome.

Going into autumn it’s a different picture. Most businesses do now have a basic grasp of the process, even if the timing remains opaque (save for expecting Article 50 to be triggered before the end of March), and outcomes uncertain: negotiations on exit, exit, transition arrangements, a new deal with the EU, replacement trade deals, new trade deals, and a domestic agenda involving the initial transposition of all existing European law but presumably with much of it then up for review. We also have a better grasp of where it is and is not appropriate to engage; where we have serious concerns and useful suggestions, not just vague grumbles about change.

Britain’s chemical industry is focused on four early themes. Tariff-free trade, access to skilled people, affordable energy security and policies supporting innovation. A fifth theme, regulatory consistency, is for later when it becomes clear in which areas the UK will be developing our own approach. A sixth, mutual recognition of service standards matters to manufacturers, but will be led mostly by professional and financial service companies.

In respect of trade policy, our worst-case (or rather most expensive) scenario is ‘hard Brexit’. Or less prosaically, the application of the EU’s Common Customs Tariffs (CCT) to goods from the UK, and vice-versa. This we assume will be for a transition period of unknown length, between Brexit and any new UK-EU free trade deal, if such a deal is possible.

Modelling this scenario is tricky. The average CCT rate for chemicals is 4.5%, most in a range between 6% and 9%, and around a quarter (usually base chemicals) zero-rated. It matters then what is being traded in which direction, in what volumes and at what value. Since UK firms tend to be higher up the value chain, we expect less cost impact on imported raw materials, but more on exported finished products. Exactly how the balance falls is something we are reviewing now. It will vary by firm.

Indirect impacts are also a concern. Our customers are the major chemistry-using industries in agriculture and manufacturing. Global protectionism in agriculture means food tariffs will be high. 182% is the highest CCT and some processed foods such as dairy average 42%. New cars can expect 10% to 16% dependent on engine size, but most drugs are tariff-free. It could be a very tough transition for farmers and automotive workers, but little change for pharmaceuticals.

In all cases there are new non-tariff barriers and bureaucratic costs to consider – from rules of origin, to quotas, to import licensing, and go slow processing such as that experienced by day trippers to France this summer. There will also be some positive mitigation in the form of currency moves, but possibly not enough to offset the deadweight costs of new protectionism.

We and many other companies then are struggling through these calculations in an effort to focus the minds of 28 governments on getting to a free trade deal as fast as possible. Political grandstanding in this case carries a heavy risk of very real and very avoidable harm.

Free movement we understand will not continue. We may think this bananas: that a passport is not a job qualification, that British-first job offers are misleading, and that the skills barriers to local hiring cannot always be overcome by training. But we understand the politics. Immigration has been top or near the top of the public’s issue list for much of the post-crash period. It was self-evidently a major driver of the vote to Leave. It, and any attempt to finesse the issue, could split the Government. We should, then, expect some changes, do our best to mitigate the worst of them, and cope with the rest.

Again this is hard to model. HR data can tell you the distribution of passports in your permanent workforce, but not all your contractors. We don’t yet know if some British passport holders came here originally as EU migrants enjoying free movement. We don’t yet know whether domestic labour can easily displace lost EU workers, or at what cost.

We also don’t know what the impact will be on British talent. Our current UK MD, for example, is British, but started his career in Germany, before moving several times and returning – vital global experience that clearly influenced his career. Such moves will not stop, but will get more difficult. For example if a German manager is presented with a Belgian and Brit of equal merit, will he hire the one who can move in six weeks, or one who can’t clear immigration for six months? Lost opportunities of this nature will be real, but hard to measure. Industry will be pressuring government into finding a form of migration control that is politically acceptable, but minimises damage to operations at home, and British talent abroad.

I won’t dwell on energy in a post-Brexit world, as nearly all of the damage done to British Industry from rising policy costs has been home grown, not a result of EU policy. The EU Emissions Trading Scheme is not a good thing. It is, however, far less expensive for our UK plants today than the UK Carbon Price Floor. It will be far less damaging in future than subsidies like the off-balance finance scheme cooked up for Hinkley Point. Suffice to say that the latter illustrates well the importance of ongoing EU trade to energy security and affordability. For example, the French interconnector means we can buy exactly the same nuclear power from exactly the same company in France… at half the cost. Perhaps Brexit might encourage a domestic reform agenda less geared towards economic self-harm.

The science and innovation story is tied to the free movement of talent. Ideas cross borders, but proximity helps collaboration. If we wish to retain the global centres of excellence we have created in our universities and catapult centres, let alone create new ones, we need bodies, not just ideas. We also need funding. Here the Government has been helpful, underwriting EU schemes until 2020, regardless of the outcome of Brexit.

There is also the prospect that actively breaking with the EU’s hazard-based approach to regulation – in key areas like gene technology, nanotechnology, and food production, will unlock innovation in the UK. In these areas there is every reason to hope that the post-Brexit world could be brighter than the status quo. Particularly if there are new trade deals, ones the EU has struggled to get in the past due to the complexity of getting 28 countries to agree. The UK and US, for example, are more likely to get past rows about GM crops and shale gas, and don’t have any need to debate quotas for home-produced movies on Netflix.

In that area industry will be attempting to work constructively with government on opportunities – likely linked to other work on the new Industrial Strategy and devolution agenda. So that’s the long term challenge. At the moment everything looks very confusing and potentially scary. The risks of the Brexit process are not yet addressed, but can be, or at the very least mitigated with pragmatism and negotiations underpinned by good data.

The opportunities could be exciting. Ultimately businesses will adapt, because that is what we do. But for now bear with us, like the Government, we’re capacity building, and it’s a long way to go to get this right.