2018 sees us enter the next, crucial stage in the Brexit process with discussions about the UK’s future outside the EU set to begin.
Decisions will be made that will have a profound impact on Wales, defining our relationship with our nearest neighbours for many years to come. It will have an impact on our economy, jobs and businesses. As we enter what are called ‘Phase 2’ of the EU negotiations, the Welsh Government will do all we can to help bring about an outcome that is rational, evidence-based and meets the needs of our citizens and businesses across Wales.
We have just published our latest Brexit policy paper setting out our preferred trading relationship with the EU once we have left the Union. It is a positive vision of Wales as an outward looking, globally trading nation, open to the wider world and maintaining our strong trade with the EU.
Before I cover what our future trading relationship with the EU after Brexit should look like, let’s look at where we currently are. Exports from Wales in 2016 were worth £14.6 billion and we have posted our best inward investment figures for many years. 61% of identifiable Welsh goods exports and just under half of our imports are to and from the EU. Our success in attracting foreign direct investment over many decades is largely based on access to the EU market of more than 500 million customers.
These hard facts underline what is at stake if the UK Government fails to get the right deal for the UK or we crash out of the EU without one.
So what kind of deal would the Welsh Government like to see for the UK once we are out of the EU? Firstly, it’s important to stress that what we are proposing no way undermines Brexit. The UK is leaving the EU; our focus is on pushing for an agreement with the EU that protects our economic interests. Brexit is happening, but we don’t need to do it in a way that unnecessarily damages either Wales or indeed the UK as a whole.
It is vital that a transitional period be agreed in order to avoid a ‘cliff edge’ once we leave the EU and to ensure continuity for businesses. However the transition arrangements are defined, it’s essential that they provide continuity and clarity for businesses so they can adequately plan for change. The transition must not see any new tariff or non-tariff barriers and there must be no divergence on regulatory standards or the certification required to access the EU’s Single Market.
Moving on to what comes after the transition period, we believe that if the UK Government secures a sensible Brexit – with full, unfettered access to Europe’s Single Market and membership of a Customs Union – we are in good shape to meet future challenges and opportunities.
In her Florence speech in September last year, the Prime Minister Theresa May said the UK will leave both the Single Market and the Customs Union. We do not believe that such an approach is consistent with our economic interests. Such a move could see tariffs on Welsh goods – essentially taxes on the products we send to the EU – and would certainly lead to non-tariff barriers that would damage businesses and jobs in Wales. We are yet to be convinced that putting ourselves outside a Customs Union with the EU is in our interests, at least for the foreseeable future.
We commissioned Cardiff Business School to examine how post Brexit options would affect large and medium sized firms in Wales; this research is also published today and reflected in our trade paper. It found that the sectors most at risk from tariffs include automotive, chemicals, steel and electrical engineering, while the sector most at risk from non-tariff barriers is aerospace. These are sectors which are amongst the most productive in Wales and which currently provide a large number of highly-skilled, well-paid jobs: damage to these sectors will disproportionately impact on our wealth and prosperity. The research also found that in many larger businesses Brexit is already being factored into business decisions with clear economic ramifications for Wales. Key business decisions are likely to be made long before Brexit negotiations are concluded.
We absolutely agree that we should pursue all trading opportunities around the world and that is why we help businesses into new markets and have offices outside the EU – China, India, Japan, UAE, USA – to promote Wales. Of course, there are claims that the benefits of new trade deals with countries around the world once we leave the EU can offset the damage done by putting barriers between ourselves and our European markets. Such deals can seem an exciting prospect and we will work constructively with the UK Government to continue to grow our trading relationship across the globe. However, the UK Government has yet to show us any evidence of the benefits of leaving the Single Market and Customs Union or how new trade deals with other nations could possibly replace the benefits of full and unfettered access to the EU. It is interesting that the CBI has recently made clear its view that we should remain within a Customs Union with the EU in the medium to long term.
The scale of the European market still dwarfs other markets where we continue to work to promote Welsh trade and build new opportunities. For example 2% of Welsh exports go to China: even if we quadrupled these exports it would only compensate for losing less than 10% of our exports to the EU. We cannot foresee any trade deals that can compete with or replace the European market where 61% of Welsh exports currently go.
We need a post-Brexit deal that allows us to explore new trading opportunities across the world but also enables Welsh goods to keep flowing into the EU without new obstacles or costs.
In her Lancaster House speech the Prime Minister famously said that ‘no deal is better than a bad deal for Britain.’ The Welsh Government fundamentally disagrees with this and our paper sets out why. To suddenly move our extensive economic activity with the EU to World Trade Organisation (WTO) rules would be hugely damaging to jobs and our economy. Our agricultural, food producers and automotive sectors would be hit hard.
Trading solely under WTO rules with the EU would give rise to a high risk of significant commercial and economic disruption, with immediate increased costs and administrative burdens. It could result in the sudden appearance of barriers to entry to EU markets for those that trade in goods or services. According to the Federation of Small Businesses Welsh firms that do export are four times more likely to export to an EU destination than a destination outside the EU. It could also lead to disruption of trade with third countries where the UK is no longer able to benefit from what are known as rules of origin with other EU member-states.
The strong consensus among mainstream economic forecasters that replacing Single Market participation with WTO rules could result in a UK economy up to 8 – 10% smaller over the long run than would otherwise have been the case. This would be equivalent to between £1,500 and £2,000 per head. As I have said before, no one who voted for Brexit voted for the nation to be poorer.
In a post-Brexit world we also need ways of making decisions on trading relationship that reflect the devolved UK. We want decisions on new trading relationships with both the EU and the wider world to be taken in close co-operation with the Devolved Administrations in order to fully reflect the whole UK.
When we joined the then EEC in 1973 there was no National Assembly or Scottish Parliament, but things have changed significantly since then. We accept that the UK Government will have the main responsibility for trade policy after we leave the EU, but, as the debate about the Transatlantic Trade and Investment Partnership (TTIP) showed, new trade agreements can have really important implications for devolved responsibilities, whether health, agriculture or environmental standards. So we expect the UK Government to consult extensively with the Welsh Government, in particular whenever trade policy has an impact on devolved issues.
Brexit means we need a new way of agreeing many issues between the Devolved Administrations and the UK Government. We want to see the creation of a UK Council of Ministers as a forum for consultation on trade issues between the four nations of the UK.
Despite the uncertainty of Brexit, Wales remains very much open for business and ready to exploit the new impetus for trading opportunities. Our economy is vibrant and diverse and offers great opportunities for trade and investment. We are putting forward constructive proposals on our trading relationship with the EU and the rest of the world that would protect jobs in Wales and the UK and in no way undermine Brexit.
All articles published on Click on Wales are subject to IWA’s disclaimer.