Brexit Impacts: Part 1 - Business and Technology.

London

1.     Galileo satellite program

Theresa May’s Cabinet don’t agree on much when it comes to Brexit… but ‘Remainers’ and ‘Leavers’ are united in their exasperation with the EU over Galileo.  Britain has invested some €1.2 billion in developing the satellite navigation system.  The EU’s threat of excluding UK from this military-grade program is legalistic at best - and wilfully hostile at worst.

The UK tried to block the Galileo project when it was first conceived – but is now threatening to build its own.  “We need access to a satellite system of this kind,” according to Chancellor, Philip Hammond, adding that if the EU freezes out the UK: “Britain will have to go it alone, possibly with other partners outside Europe and the U.S., to build a competing system.”

At the time of writing, the EU is refusing to reimburse the money Britain has spent on the programme!

2.     Scientific research

The UK is a dominant player in European research - winning 15 percent of the funding and applying for more projects than any other EU country.  The UK now gets £1.24 back for every pound it contributes into the funding pot.  And being part of EU science means opportunities for collaboration across the Continent.

The UK is seeking “full association” with ‘Horizon Europe’ - the EU’s €98 billion science program.  Whist the UK will be “happy to make a ‘fair’ contribution” to its costs, negotiators want greater influence on decision-making than other non-EU countries.  “As an associate country we would look to agree an appropriate level of influence on the shape of the programme.  This should be greater than current non-EU precedents, recognising the quality and breadth of the UK’s contribution.”

The UK position is that it is ‘special’ - and would like to keep things very much as they are.

3.     Erasmus

The EU-wide ‘Erasmus’ program provides study opportunities abroad for some 2 million young people during the current budget cycle (ending in December 2020) - as well as boosting volunteering, employment training, entrepreneurship and sport.  “Erasmus is one of the institutions that we may stay a member of, if we can negotiate that, after we leave,” Brexit Secretary David Davis said in a statement to Parliament.

The European Commission in its proposal for the post 2020 budget has proposed opening the program up to any country that agrees to a “fair balance” of contributions and benefits – you can pay to join in.

4.     Security and terrorism

The UK participates in more than 40 EU measures covering police and judicial cooperation in criminal matters.  Many of these schemes - such as the European Criminal Records Information System, Europol and Passenger Name Records, there is no precedent for third-country involvement.

Since 2004, European Arrest Warrant scheme has led to the UK arresting and surrendering more than 10,000 people.  A results ratio of 8:1 for EU27 issued warrants : UK issued warrants.

The UK wants to negotiate a new treaty that would keep things pretty much as they are now.  The stumbling block is that agencies such as Europol operate under the jurisdiction of the European Court of Justice - a red line in the Brexit talks.  Or did the Mansion House speech indicate a softening on that point?

5.     Medicines

We previously reported in full on the early Brexit impact of the European Medicines Agency moving from London to Amsterdam. UK has lost 890 full-time professional jobs – and 36,000 visitors who attended scientific meetings each year.

The UK is powerless to prevent the move - but doesn’t want to be outside the EMA’s system of regulating medicines altogether.  Theresa May said: “We will also want to explore with the EU the terms on which the UK could remain part of EU agencies such as those that are critical for the chemicals, medicines and aerospace industries: the European Medicines Agency, the European Chemicals Agency, and the European Aviation Safety Agency. We would, of course, accept that this would mean abiding by the rules of those agencies and making an appropriate financial contribution.”

UK patients may have to wait longer for the latest life-saving drugs, and then pay more to cover costs of a parallel regulatory system – as pharmaceutical companies prioritise getting products licensed in the much larger EU market.

6.     Aviation

Grounded planes, ruined holidays and missed business meetings would be a disruptive way to embark on Brexit.

Unlike some other sectors of the economy, aviation cannot fall back on World Trade Organization rules to keep operating.  ‘Rights to fly’ between countries and to embark and disembark passengers and freight are based on EU airline ownership percentages – open rights come where at least 50 percent is EU owned.  We are waiting for alternative needs to be tabled.

Aviation Safety, however, is simply non-negotiable.   The government wants to remain part of the European Aviation Safety Agency.   There appears to be no real advantage in diverging from EU rules – and Brexit Minister, Steve Baker, said [May 2018]: “We are focused on reaching an agreement with the EU which secures the right arrangements for this vital industry.”

The EU has said that it is prepared to negotiate a bilateral aviation safety agreement - but that future membership of EASA is not possible.

7.     Chemicals

The British chemical producers have strongly protested Brexit - they have a lot to lose.  The European Chemicals Agency (ECHA) owns and maintains the world’s most comprehensive database on chemicals.  If the UK is no longer part of the agency, ownership of data submitted by British companies becomes “messy” - registrations are often shared between companies that produce the same chemical across the bloc.

Further, compliance with the EU’s chemical regulation, REACH, is a pre-requisite for access to the EU market.  The EU constantly updates the list of banned and restricted chemicals.  The two regimes will quickly diverge - unless the UK regularly copies ECHA’s decisions on individual chemicals.  Forget the Brexiteer narrative of ‘taking back control’ - anything less means producers wanting to export to the EU complying with two sets of rules, increasing red tape and costs.

Theresa May talked about “associate membership” of ECHA – however, at the time of writing, it’s unclear whether the EU will allow that.

8.     Energy

The UK is looking to “secure broad energy cooperation with the EU.”  This includes maintaining the single electricity market that operates on the island of Ireland and “exploring options for the UK’s continued participation in the EU’s internal energy market” according to the Prime Minister.

One certain Brexit impact is that the UK will leave the atomic energy community ‘Euratom’.

Euratom pre-dates the EU – established over 60 years ago.  Among other things, it makes sure that: countries don’t use their nuclear materials for weapons; manages nuclear fuel supply; allows qualified workers and equipment to move freely; and funds research and innovation.  These are crucial functions for the UK - home to the world’s biggest stockpile of civil plutonium and 15 nuclear reactors made up of parts sent from EU members and countries that have nuclear cooperation agreements with Euratom.  Without a replacement agreement, the UK will run out of nuclear fuel - and cancer patients will cease to have access to specialized radionuclides that are used in their care.

9.     Financial services

The Financial Services sector contributed £119 billion to the UK economy in 2017 – representing 6.5% of total economic output.  It supported 1.1 million jobs and paid £27.3 billion tax to HM Treasury in 2016/17 – that is more than the combined costs of running the Home Office, Department for International Development and Foreign Office.

UK based Financial Services businesses will lose their ‘passporting’ rights on 29 March 2019.  This ends the automatic right to operate and sell UK-authorised services and financial products across the EU.   The UK does not want to settle for the status normally reserved for countries outside the bloc – which is known as ‘equivalence’.

UK Chancellor, Philip Hammond, said that equivalence is: “wholly inadequate for the scale and complexity of the UK-EU Financial Services trade.”  The EU may withdraw ‘equivalence’ with little notice should it at any time consider that the UK’s rules have ‘diverged too much’.

UK Financial Services bodies stance is that they need to be part of a “comprehensive economic partnership” guaranteeing market access to businesses and consumers in the UK and EU.

10.  Broadcasting

UK companies account for around 30 percent of the television channels broadcast across the EU.  35 channels and ‘on-demand services’ on offer in the UK are also licensed across the remaining 27 EU countries.  

The British creative industries are worth around £92 billion annually – and the government does not want to lose access to the EU market.  The Prime Minister has now acknowledged that the rules that allow a broadcasting company licensed by UK regulator, ‘Ofcom’, to broadcast across the EU will cease to apply on Brexit.  She has argued that EU 27 citizens would miss out on British shows – but we await clarification from the European Commission on prioritising Regulatory correctness over popular demand.

11.  Data protection

Matt Hancock, UK Digital Secretary of State has nothing but praise for the EU’s new General Data Protection Regulation.  When GDPR came into force in May 2018, he tweeted: “I’m enjoying spending my Wednesday morning drafting my Privacy consent email for my newsletters. Coming to an inbox near you… #GDPR.”

Hancock knows there is a lot at stake.  The value of the European ‘data economy’ is set to increase to €739 billion by 2020 – representing 4% of overall GDP.  EU exports to the UK of data-reliant services were worth approximately €36 billion in 2016 - in sectors as diverse as finance, telecoms and entertainment.  The UK government wants to keep that data flowing after Brexit to avoid disruptions for businesses and public services - and to maintain data sharing by security services.

The UK position at the time of writing is for ‘recognition that UK laws and regulations provide data protection standards that are essentially equivalent to those applied in the EU’.  There are calls to go even further and create a uniquely close arrangement.

12.  Frictionless trade

The UK’s future trading relationship is fundamental to which Brexit scenario emerges.

The Government has been clear for months that it wants out of membership of both the EU single market and the customs union.  The former would mean accepting freedom of movement - a major driver for Brexit voters.  The latter would hinder the UK’s ability to do trade deals with countries around the world.

The dichotomy for the government is balancing these objectives against wanting: “the broadest and deepest possible partnership - covering more sectors and cooperating more fully than any free-trade agreement anywhere in the world today,” as Theresa May said in the Mansion House speech (May 2018).

The Prime Minister’s five pillars for a close future economic relationship are: commitments to ensure fair and open competition; an independent arbitration mechanism; an ongoing dialogue with the EU; data-protection arrangements; and maintaining the links between “our people.”   To some people many in EU, that sounds: “a lot like staying in the club”.

 

John Shuttleworth is a Partner with Brexit Partners