Brexit: impact across policy areas

More information has been published on many of the topics discussed in this briefing paper. Check the sub-headings on the parliamentary Brexit hub, Brexit: next steps of UK’s withdrawal from the EU, for more recent papers in a particular area. Trade

Taken as a group, the EU is by far the UK’s most important trading partner. In 2015 it accounted for 44% of UK goods and services exports (£222 billion) and 53% of UK imports (£291 billion). The UK imports more from the EU than it exports to it. In 2015 the UK’s deficit on trade in goods and services with the EU was £69 billion, while the surplus with non-EU countries was £30 billion.

The share of UK exports going to the EU has declined in recent years. In 2002 the EU accounted for 55% of UK exports. This had fallen to 44% by 2015. The share of UK imports from the EU declined from 58% in 2002 to 50% in 2011, before increasing slightly to 53% in 2015.

The UK’s new trading relationship with the EU will be the product of negotiation. Options range from membership of the European Economic Area (EEA) to trading under World Trade Organization (WTO) rules. The EEA option would be the closest to EU membership and would largely maintain access to the EU single market but would mean accepting free movement of people and contributions to the EU Budget.

The UK would have no direct influence over EU rules if it were a member of the EEA. The WTO option would be the biggest change from the current arrangements. There would be no requirement to accept free movement of people or make EU Budget contributions, but trade between the EU and UK would be subject to tariffs and other barriers to trade.

The EU has negotiated an array of preferential trade agreements with other countries. It is not yet clear what will happen to these agreements with Brexit but most analysts believe they will need to be renegotiated.

Overall economic impact

Besides the effect on trade, the long-term impact of withdrawal is likely to be on areas such as foreign direct investment (FDI), the UK’s contribution to the EU Budget and the effect of immigration on the labour market. The effect on FDI is uncertain, with much depending on the trade arrangements reached with the EU and other countries.

Access to the single market is an important determinant of FDI but by no means the only one. Outside the EU, the UK may be able to establish a regulatory regime more favourable to overseas investors, which could offset the effect of its departure.

The UK will continue to make contributions to the EU Budget while it remains an EU Member State. The UK’s contribution was an estimated £8.5 billion in 2015, around 1% of total public expenditure and equivalent to 0.5% of GDP.

Any future contributions will depend on what arrangements are agreed for the UK’s relationship with the EU after leaving. Members of the EEA, for example, contribute to the EU Budget, so if the UK joins the EEA, it is likely to pay into the EU Budget.

Possible changes to immigration rules following the UK’s withdrawal from the EU are likely to affect businesses and the economy, if it becomes more difficult for employers to recruit workers from other EU/EEA countries. The extent to which employers are affected will depend on the new rules, but one possibility would be to restrict economic migration to high-skilled migrants (via a points-based system).

This would reduce the flow of migrant workers doing low-skilled jobs. Employers may be able to compensate for any changes to immigration rules by recruiting more UK nationals, but this will depend on their ability to find workers with the same skills and to attract workers from a smaller pool of potential recruits.

Although the UK is a net contributor to the EU, certain regions where living standards are relatively low receive significant levels of support from the EU Budget through the European Regional Development Fund (ERDF) and the European Social Fund (ESF), boosted by matched funding from government or the private sector. Withdrawal would leave a policy vacuum which the Government would have to fill to avoid certain regions and sectors losing out.

Business and financial services

The argument centres on whether the benefits of having a more tailored and flexible national regulatory regime outweigh the loss of access to the single market that may come with pursuing an independent agenda.

A huge amount of existing financial services regulation is derived from the EU. The UK has frequently led reform in this area. It is likely, therefore, that a significant amount of this legislation would remain post-withdrawal. The majority opinion of City firms was that the UK should remain in the EU. The main question financial firms have is over the future of ‘passporting’ – the ability to sell across the EU with a non EU regulator.

Employment

A substantial component of UK employment law is based on EU law. EU employment law often provides a minimum standard below which domestic employment law must not fall. In some cases EU law has entrenched at an international level provisions that already existed in domestic law: for example, sex and race discrimination and certain maternity rights.

In others, new categories of employment rights have been transposed into domestic law to comply with emerging EU obligations. Some of these were resisted by the UK government during EU negotiations (e.g. agency workers’ rights and limitations on working time).

Commentators differ in their opinions on what the Government will do with EU employment law, but the Brexit Minister, David Davis, said in mid-July: “All the empirical studies show that it is not employment regulation that stultifies economic growth, but all the other market-related regulations, many of them wholly unnecessary”.

Agriculture

Brexit, in all scenarios, means a departure from the Common Agricultural Policy (CAP) and its subsidy and regulatory regime.

EU farm subsidies currently make up to around 50-60% of UK farm income. The UK Government has guaranteed the current level of direct subsides to 2020 “as part of the transition to new domestic arrangements”.

This is in line with the current CAP funding period and hence the timescale over which farmers and regulators have already invested and planned.

However, it is not clear what levels of support the UK Government will be willing to provide beyond this, or whether it will target subsidies in a different way.

Previous Government positions on CAP reform have indicated that the UK Government and Devolved Administrations would be unlikely to match the current levels of subsidy and would require more ‘public goods’ in return for any support, such as environmental protection, which the UK Government views as the overarching market failure in this sector.

Farming organisations are anxious to know what support will be available after 2020, the degree of future access to the Common Market and migrant labour, and how imports will be regulated.

On the positive side, they also see opportunities in UK trade deals outside Europe and a simpler farming policy which can focus on UK priorities for a competitive industry. Although, under some exit models e.g. EEA, key areas of frustration in the sector such as elements of EU pesticide and GM regulation would continue where there are concerns that scientific assessment processes have become overtly politicised.

Meanwhile, environmental groups are concerned about the overall level of funding for agri-environment schemes outside CAP and how far future UK agriculture policy would support environmental goals.

Fisheries

The implications of Brexit for fisheries are highly uncertain. Based on the views of different stakeholders and evidence from existing non-EU European countries, they may include:

• The UK obtaining exclusive national fishing rights over its Exclusive Economic Zone (EEZ) up to 200 miles from the coast. However, the UK may trade off some of these rights in order to obtain access to the EU’s EEZ or access to the EU market for fisheries products;
• Impacts on the UK’s ability to negotiate favourable fish quotas for UK fishers with the EU. It is not possible to say whether the UK will be more or less able to obtain satisfactory quotas for fishers;
• The identification of a mechanism to enable the UK to negotiate and agree annual fishing quotas with the EU and other countries;
• The introduction of a UK fisheries management and enforcement system. This in many respects may mirror the existing arrangements for managing fisheries, albeit with additional resources required;
• Restrictions on EU market access for fishery products (depending on the outcome of negotiations) and less influence in discussions on determining EU market rules for fish;
• Less certainty around public funding of support for fishing communities or environmental sustainability; and
• Challenges related to coordinating the protection of the marine environment with the EU

Environment

The environment is an area in which UK and EU law have become highly entwined. Depending on the terms of Brexit, it may be easier for future UK governments to change environmental standards.

Some have raised concerns that as a result some environmental standards could be lowered. There may be fewer incentives for the UK Government to meet environmental standards if EU enforcement mechanisms do not apply to the UK.

However, some incentives to maintain environmental standards will remain. The Government would still have certain international environmental commitments and some EU standards may still apply if the UK seeks to keep access to the single market. Future governments may also decide to increase standards in some areas.

A particular challenge following Brexit may be ensuring effective ongoing coordination with other countries, as many environmental challenges cannot be tackled in isolation. New mechanisms for coordinating with the EU and between the four nations of the UK might be needed.

Energy and climate change

EU policy on energy has been to develop a more transparent and open European Energy Market. The UK has a competitive and open energy market, with multinational companies and investors. Links with the EU market are likely to continue.

However, it is uncertain how Brexit will affect UK energy policy; emission targets are set into UK law through the Climate Change Act 2008, but exit may give the Government more scope in the way it meets climate targets and how it ensures UK security of supply.

A key issue for the industry will be investor confidence in the UK energy market so that capital projects continue. The UK is likely to want to ensure the UK industry continues to interact with the EU market.

An exit would affect the UK’s international climate targets under the United Nations Conference on Climate Change (UNFCCC), which it currently negotiates as a part of the EU block. It was recognised in the Balance of Competences Review that negotiating as part of an EU block was beneficial, as it had more influence at an international level than if individual Member States acted alone.

Withdrawal from the EU would have to address that lack of a UK-specific target under UNFCCC.

One currently unresolved question is how Brexit would affect the UK’s ratification of the Paris Agreement, which the UK signed in April this year. Recently, ministers have reiterated the UK’s commitment to tackling climate change but have made no comment on whether, when or how the UK might ratify the Paris Agreement.

Some commentators have suggested that Brexit may mean that the Paris Agreement itself has to be recalibrated. A recent briefing from the Department for Energy and Climate Change (DECC) has said “We remain committed to ratifying as soon as possible”.

The Select Committee on Energy and Climate Change has recently launched two inquiries exploring the implications of leaving the EU for UK energy policy and UK climate change policy.

The new Government announced on 14 July 2016 that the previous Department for Energy and Climate Change would become part of a new Department for Business, Energy and Industrial Strategy (DBEIS).

Transport

On transport, it is far too early to say what impact Brexit will have on aviation, shipping, public transport including rail and bus, and road haulage. Much will hinge on whether the UK remains a part of the EEA or whether it concludes bilateral treaties which oblige it to apply much of the current framework as regards single transport markets (such as Switzerland has).

More generally transport prices may be affected by the general economic impact of Brexit – for example if inflation rises so will rail fares; and if the economy experiences a downturn big expensive infrastructure projects might be more difficult to finance.

Immigration

The UK already maintains its own border controls. It is not part of the internal border-free Schengen Area, and Border Force officers conduct checks on EU/EEA travellers crossing UK ports of entry, as well as British citizens and non-EU/EEA nationals.

The UK has not opted in to EU measures facilitating legal migration of third-country migrants, but has recognised that there are benefits to practical co-operation and information-sharing with other Member States, for example to strengthen responses to organised immigration crime and current and future migratory pressures.

At the moment, it is very unclear what kind of future relationship the UK might have with the EU and EEA/Swiss states after leaving the EU.

A key question, when considering the impact of leaving the EU on immigration policy and the immigration rights of British and EU/EEA citizens, is to what extent the UK might remain bound by EU free movement of people laws post-Brexit.

There is unlikely to be any clarity about this until the withdrawal negotiations are underway. The legal status of British and EU expats post-Brexit will be one of the issues to resolve during the UK’s withdrawal negotiations.

Leaving the EU does not automatically affect the UK’s border controls in northern France, which are based on a bilateral treaty between the UK and France.

The UK will continue to be bound by the 1951 Geneva Convention on the Status of Refugees and related pieces of international law

Police and justice co-operation

The UK currently has an opt out arrangement with the EU on policing and criminal justice measures, whereby it can chose which measures to opt in to. The UK has chosen, with parliamentary approval, to opt in to a number of measures, the most significant of which is the European Arrest Warrant (EAW). Others relate to information sharing and participation in EU law enforcement agencies.

Predictions about the consequences of Brexit are of course speculative at this stage and depend on the outcome of negotiations. However, it is likely that the UK would wish to recreate at least some of the existing arrangements.

Some matters are covered by Council of Europe treaties (e.g. Convention on the Transfer of Sentenced Persons), although in practice these are generally less detailed and may prove to be less effective.

In other areas it may be possible to negotiate bilateral treaties with individual Member States, or with the EU as a whole. It is possible that, without the mutual recognition and trust between EU Member States that underpins the EAW and other measures, these arrangements would be more complicated, expensive or time consuming.

Human rights

A UK withdrawal from the EU would mean that the UK no longer has to comply with the human rights obligations of the EU Treaties. The controversial EU Charter of Fundamental Rights would not apply, and the EU Court of Justice would not have jurisdiction over the UK (except possibly for transitional cases that arose before withdrawal).

Withdrawing from the EU does not mean withdrawing from the separate European Convention on Human Rights. The Government is planning a British Bill of Rights, but Theresa May has said that she does not intend to withdraw from the Convention.

Social security

Entitlement to welfare benefits for people moving between EU Member States is closely linked to free movement rights. Brexit could have significant implications both for EU/EEA nationals living in or wishing to move to the UK, and for UK expatriates elsewhere in the EU/EEA, and those considering moving abroad.

If Brexit means the end of free movement rights, the UK will be able to impose restrictions on access to many social security benefits via immigration law. Entitlement to contributory social security benefits could be limited by limiting access to employment. It will also be possible to restrict the ability of EU nationals to apply for social housing.

The UK could seek to secure bilateral social security agreements on reciprocal rights with individual EU/EEA states, but negotiations could be difficult and protracted.

Alternatively, the UK could seek a single agreement with the EU/EEA as a whole. Such an arrangement could, however, end up closely resembling existing provisions in EU law. Whatever the solution, decisions would have to be made on how to protect social security rights already accrued at the point of withdrawal from the EU.

Health

Although health care systems are a matter of national responsibility, other aspects of health care – reciprocal access to healthcare through the European Health Insurance Card (EHIC), pharmaceuticals, the working hours of doctors and mutual recognition of qualifications, for example - are regulated to a greater or lesser extent by EU law.

The EU also has a significant role in ensuring a cross-border approach to important public health issues, such as preventing pandemics and anti-smoking measures.

If the UK remains in the EEA it might be able to continue to participate in the EHIC scheme, or, subject to negotiation with EU Member States, participate on a similar basis to Switzerland.

Higher education

Universities are concerned about the impact of Brexit on students and research. Brexit could mean the Government will not have to provide student loans or maintenance funding for EU students, which would save money.

But the loss of funding for EU students could have an impact on the numbers of EU students coming to study in the UK and this could have a detrimental impact on fee income for universities and on the culture and diversity of universities.

But it can also be argued that Brexit could increase places for UK students and charging EU students higher fees as overseas students could maintain, or increase, fee income if UK higher education continued to attract EU students.

The UK may lose access to EU research funding and there are also concerns that the movement of high calibre staff and researchers could be impacted, which could detrimentally affect the quality of research projects.

Consumer policy

Consumer protection in the UK is currently a complex combination of EU and national law. A huge amount of UK consumer protection regulation is derived from the EU.

For example, directives implemented in the UK protect consumers from unsafe products, unfair practices, misleading marketing practices, distance selling etc. It is unclear whether any EU-derived consumer laws would need to be repealed or replaced on Brexit because that will depend to a considerable degree on what form Brexit takes.

Foreign and defence policy

Acting through the EU means a larger aid budget, the promise of access to the largest consumer market in the world and a louder political voice. All of these can be significant ‘soft power’ tools in the pursuit of European interests. If the UK no longer co-ordinates its policy with Member States, it will lose access to these shared tools.

However, many UK actions are taken in conjunction with the US rather than the EU. Without the UK’s defence capacity and foreign policy experience, the EU’s voice in the Middle East, for example, could be less influential.

But it can also be argued that Brexit will not make much difference to the UK’s capacities in this region, that the US remains the most significant power there and that the UK could co-ordinate its Middle East policies more closely with those of the US.

While generally supportive of the EU’s Common Security and Defence Policy (CSDP), successive UK governments have been cautious in their approach to greater European defence integration, regarding it as entirely complementary to NATO and essential for strengthening European military capabilities within that alliance, as opposed to the pro-European view that the EU should establish an independent military capability outside the NATO framework.

Until the UK formally leaves the EU it will remain part of its CSDP planning structures and the EU military operations to which the UK has committed forces.

The impact of Brexit on the UK’s military is arguably minimal in the near term. However, the UK’s ability to influence or shape the CSDP agenda going forward will be significantly curtailed.

Questions have also been raised over future UK defence spending if economic growth predictions fail to materialise in the aftermath of the Brexit vote. The affordability of the MOD’s Defence Equipment Plan, should the defence budget be cut at some point in the future, could be brought into question.

The UK’s relationship with NATO will be unaffected.

International development

The UK channels funds for development cooperation and humanitarian aid through two budget lines, both of them managed by the European Commission: the development part of the EU budget, and the European Development Fund. In 2014, about 10% of the UK’s aid budget would have required reallocation if the UK had not been an EU Member State.

The devolved legislatures

With Brexit there could be further policy and legislative divergence in areas of devolved competence, as the UK Government and Devolved Administrations will no longer be required to implement the common requirements of EU Directives. This will probably be particularly noticeable in policy areas such as the environment or agriculture and fisheries, which are currently strongly governed by EU policy and legislation.

Scotland

Around two-thirds of Scots voted to stay in the EU, and the Scottish First Minister, Nicola Sturgeon, would like to find a way for Scotland to remain, despite the overall UK vote to leave.

Scotland has benefited from both pre-allocated and competitive European funds over the last four decades. Between 2014 and 2020 Scotland is set to benefit from around a further €4.6 billion.

During the 2014 to 2020 Multiannual Financial Framework, Scotland’s programmes will benefit from a total of €985 million; with match funding from the Scottish Government and other public sector organisations, total funding will be around €1.9 billion.

Wales

Wales has access to considerable funding opportunities from the EU, notably from the Common Agriculture Policy and Structural Funds (as well as many other funding streams). Between 2014 and 2020 Wales is set to benefit from around £1.8bn European Structural Funds investment.

Together with match funding, these funds will result in investment of at least £2.7bn across Wales. Nevertheless, Wales voted by 52.5% to 47.5% to leave the EU.

Northern Ireland

Northern Ireland benefits significantly from EU funding: a total of €1,211 million in EU Regional Policy Funding 2014-20. The impact of a UK withdrawal on Northern Ireland would also be different from that in the rest of the UK because NI is the only region of the UK to share a land border with another EU Member State. UK withdrawal would mean that an external border of the EU would run through the island of Ireland.

Further information

More information has been published on many of the topics discussed in this briefing paper. Check the sub-headings on the parliamentary Brexit hub, Brexit: next steps of UK’s withdrawal from the EU, for more recent papers in a particular area.