The UK chemicals sector is vitally important to the UK economy, making up to 10% of all UK manufacturing – the second largest manufacturing industry overall. The sector has an annual turnover of £32bn, total exports worth £26bn, a positive trade surplus of £3bn a year, and provides direct and indirect employment for around 500,000 people in the UK.
The sector also underpins other manufacturing supply chains in the UK, by providing products to a range of sectors including aerospace, agriculture, automotive and construction. Its supply chains are also international, with products crossing borders many times before final use. It is a diverse sector, ranging from fertilisers and plastics to personal care products and paints.
More importantly in terms of Brexit, the sector is the second largest exporter to the EU after the automotive industry. Indeed, the sector is highly dependent on trade with the EU, with 60% of its exports going to the EU and 75% of imports from the EU. And with 70% of chemicals companies headquartered from outside the UK, international investment, global competitiveness and a mobile workforce are in the balance.
No wonder then that industry representatives and experts are extremely worried about the consequences of Brexit and the government’s chaotic approach to the negotiations.
The Chemicals Industry Association (CIA – no, not the American one!) represents chemical and pharmaceutical businesses in the UK and its membership ranges from multinationals through middling-sized companies and to small ones.
In a pre-referendum survey of its members conducted by the CIA, there was 0% support for leaving the EU, with 70% wanting to remain – a measure of how important it is to this sector.
In March of this year, the Chief Executive of the CIA, Steve Elliott, called on the government to abandon its ‘wait and see’ approach to Brexit and provide clarity for the chemicals industry, and manufacturing in the UK more broadly. Moreover, in June, the CIA council reiterated its priorities for the Brexit negotiations, namely:
- Tariff-free access to the single market and the prevention of non-tariff barriers to trade
- Regulatory continuity and consistency
- Access to research and development programmes
- Access to skilled people
Trade and tariffs
The preferred option for the chemicals sector is for the UK to stay in the single market and to avoid customs tariffs, but if we don’t the sector will require a long transition of at least two to three years after we leave the EU to adjust. Indeed, the CIA is of the view that such a transition is ‘inevitable’ and would involve ‘staying in the single market’ for at least that time so as to ‘help support trade, investment, jobs and overall economic growth’.
The worst case scenario is, of course, crashing out without deal. Falling back on WTO rules would mean tariffs being imposed immediately on both sides, impacting not only exports and imports, but also re-exports, as many UK distributors buy in chemical and pharmaceutical products from the rest of the world and then sell these into the single market.
For the chemicals industry, this would mean tariffs on goods going from from 0% to, on average, 4% to 6%. For a company like BASF, who have a plant in my constituency in the city of Bradford, this could add £50 to £55 million a year to the cost of their operations. Overall, the cost of tariffs to UK chemical and pharmaceutical manufacturers could be in excess of £350 million.
Because of these considerable extra costs, UK chemicals companies headquartered elsewhere in the EU could decide to transfer some or all manufacturing to other EU countries to avoid the higher customs costs and bureaucracy. Indeed, 20% of the 126 companies represented by the Chemical Business Association are already investigating such moves.
Staying in the customs union would avoid some of this damage, but the government seem intent on pretending that they can have a separate customs arrangement with the EU that is exactly the same as the existing one!
The single market has rules to protect consumers, workers, public health and the environment. By jointly agreeing such rules across the European market, we make them more effective while at the same time cutting compliance costs for businesses. Nowhere is this more important than in the chemicals industry.
Chemical companies across Europe must comply with the EU system of Registration, Evaluation, Authorisation and Restriction of Chemicals, otherwise known as REACH. In place since 2007, the REACH framework provides a common system for testing chemicals so they are safe for human health and the environment. The framework includes chemicals used in food products for human consumption, feedstuff for animals, cosmetics, plant protection, packaging and waste, batteries, construction products and toy safety.
The Environmental Audit Committee (EAC) in the House of Commons has called on the government to provide clarity on its approach to REACH. If we are leaving it, what rules will apply instead and how will products be tested? Won’t most companies continue to follow REACH rules anyway, to continue selling to our largest market (and because they have become the benchmark for regulators across the world), but simply be bereft of a certification procedure recognised across Europe and beyond? Or are we going to set up our own chemicals testing agency, duplicating the EU one? If we do, how quickly will other countries across the world recognise it? If a new set of UK regulations appears and diverges from REACH, will our companies have to meet two different standards depending on where their product is sold? And if UK products are no longer recognised within the REACH framework, wouldn’t EU27 companies then choose alternative suppliers?
If we do decide it’s simpler and less costly to follow the REACH rules anyway, won’t we want a say on them as they are revised over time? Surely we would, but if we leave the EU, we will have no say over the implementation of or subsequent changes to the framework. The loss of influence is inherent in leaving the EU. If we go ahead with that, the question then becomes whether we want to compound it with further economic damage.
The government’s head-in-the-sand approach to these questions was encapsulated by the Environment Minister, Michael Gove. When the chair of EAC, Mary Creagh MP, recently questioned him about what the UK replacement regulation would be in the event that we don’t remain in REACH, his typically arrogant and flippant reply was to say that they would be ‘better’.
Thus the chemicals sector in the UK faces huge uncertainty about the kind of regulatory framework it will have to operate within and is keen for the government to clarify its position as soon as possible. And although the government has not provided any detail to date, they have admitted that the cost of replacing the European Chemicals Agency, which oversees the implementation of REACH, with a UK Agency could run into the tens of millions of pounds. To which one can add the cost to companies trading in both the EU and the UK of incurring the costs of compliance and certification with both systems.
In any case, setting up a separate but identical UK regulatory regime begs the question: what’s the point of leaving if you are just going to copy the EU framework?
Research and Development
Having easy access to EU research networks and funding is key to innovation and maintaining global competitiveness for the UK chemicals sector. Research and development in the sector is science-based, with an annual spend of around £5 billion per annum making up some 23% of the UK total R&D.
Not having access to the EU Framework Programme 9 (which will replace the current Horizon 2020 programme), and making exchanges more difficult, would have a profound impact on the UK sector’s ability to grow, develop new products and technologies, attract talented researchers and scientists, and work on ground-breaking projects with our world class universities.
For example, BASF (which has fourteen sites across the UK and employs 1,400 staff), are heading up a £14 million pound project on innovation in renewable-based products that involves companies and universities from across the EU. This is pioneering research which helps stimulate UK sciences and reduces our environmental impact.
It is not clear if the government wants to retain access to this particular ‘bit’ of our EU membership, but surely it would be madness not to at least try to keep the economic, educational and environmental benefits it brings to the UK.
Access to skilled people
The continuation of the free movement of labour is also vital to the chemicals sector, as it is dependent on EU migrant workers for their the production lines and big site projects that require specialist knowledge. But workers also go in the other direction, many UK citizens with specialist skills work on site projects across the EU.
Given that it takes longer to process non-EU nationals than EU nationals into to the UK (4-6 weeks to hire from the EU, but 3-6 months from outside), being outside the single market and not having easy, quick access to a well-trained, skilled workforce will have serious consequences for the sector.
It is clear that the chemicals sector is of vital importance to the UK economy and benefits greatly from our membership of the EU. This is why the industry’s representative organisations have very real concerns about the potential impact of Brexit on trade, customs, regulation, research and development, and access to a skilled workforce.
Typically, the government’s approach to addressing these concerns is to dream up unrealistic objectives, and follow them with a mixture of obfuscation and bluster on the detail.
Clearly, staying in the single market, or at the very least the customs union, would be sensible policy to pursue if we want a large sector like chemicals to continue to prosper and create jobs in the UK.