BREXIT – The elephant in the room Presentation at the CIMR workshop UKs Industrial Strategy in Context Friday 23rd March 2018 Klaus Nielsen Birkbeck, Department of Management

The Industrial Strategy – strengths Overall approach - the need for a strong strategic state avoiding the ‘picking winners’ stigma moving away from tax cuts and deregulation only Rebalancing Grand challenges Sector deals Some strategic policy initiatives

The Industrial Strategy - weaknesses SMEs kicked into the long grass No cure to the short-termism disease Distorted view of innovation (R&D only) Little learning from the past No learning from other countries

The Industrial Strategy - uncertainties Funding (modest, what about the future?) Long-term political priority Brexit – the elephant in the room (p. 24-25)

Brexit uncertainty Hard or soft? Trade regime: a la Canada or Norway? Some certainty regarding withdrawal deal, exit date and transition period but not about future relationship New referendum or general election

Likely Brexit Outside of single market and customs union Canada ‘plus’ (with some cherry picking) - member of some agencies - taking part in EU research programmes - some financial services (equivalence) - regulatory alignment - costly and restricted Immigration of skilled labour largely unaffected Northern Ireland??? (“custom partnership”, magical thinking, “full alignment”, “highly streamlined customs arrangement”)

Effects of likely Brexit (a) Lower growth (EU Exit Analysis – Cross Whitehall Briefing, Jan 2018: 2% -8% over 15 years depending on type of Brexit; assumes US-UK deal offsets some of lost business with the EU) More effects in North than South Significant negative impacts on some industries – financial services, retail and manufacturing (in particular, industries with integrated EU/UK supply chains) Neutral or positive effect on other industries

Effects of likely Brexit (b) FDI (some relocation) Financial services (some job loss) Labour shortages in some industries Replication of most EU regulation Research funding (no net inflow) Independent trade policy?

Independent trade policy? (a) A significant Brexit dividend (counteracting the growth effect)? Highly unlikely, ‘fantasy world’ Difficult to replicate existing ties (several hundred new treaties required) Impossible to improve most existing ties (EU versus UK negotiating strengths) What can be achieved by an independent trade policy? (where exactly is it possible to achieve improved trade deals?) America first, China first

A look at the Department of International Trade Any evidence of likely favourable deals? Focus on the strength of the UK economy (irrelevant, will be weakened by Brexit) Focus on championing general free trade (more efficient outside than inside EU?) Focus on export strategy and export support (nothing that cannot be done in EU, nothing that similar departments in other countries also do) Focus on the fact that future growth will mostly happen outside of the EU (true, but is UK better equipped to take advantage of this inside or outside of the EU? General and vague statements about the virtues of independent trade deals (no evidence at all)

Brexit and the Industrial Strategy So no doubt trouble ahead Has EU rules constrained the strategy? Industrial strategy more important after Brexit Negative effects on implementation conditions (funding, political priority)