In the first part of the Huffington Post UK's analysis into how British business should react to David Cameron's EU speech, we considered whether business leaders were happy about the issue of a referendum being given on the UK's continued membership of the EU.
In this second instalment, we consider what the effects would be if the UK was to leave the EU entirely and whether businesses should start preparing now.
Our trade and business links with the EU
A report from Oxford Economics illustrates just a few of the problems we'd face outside of the EU – including:
- We currently trade in excess of £400 billion with the EU – that's around 52% of the UK's total trade in goods and services. By comparison, emerging economies such as China or India only represent a small proportion of the external trade conducted by the UK (4.2% and 1.3% respectively).
- Despite conducting a larger share of trade with EU countries, the deficits recorded with non-EU countries are larger.
- The type of products we trade with the EU is very different from the products we trade with non-EU countries; the main imports from outside the EU are Mineral Fuels and Oils, whereas those from the EU are Vehicles and Parts. Therefore, the UK could not easily substitute its trade with the EU by trading with non-EU countries.
- Foreign Direct Investment – the name given to the funds invested in the UK economy from outside the country - creates jobs, stimulates innovation and competition, and raises productivity. FDI money from EU member states accounts for half the total stock of FDI; the report estimates the EU FDI in the UK creates 50-60,000 jobs, and safeguards a further 40,000 - 50,000 jobs every year (0.34% of the labour force).
- The UK is home to the second largest stock of FDI in the world, after the US. The UK attracts such a high amount of FDI from both EU and non-EU countries, because international companies choose the UK as the gateway for their European operations. 26% of non-EU companies have their European Headquarters in the UK.
- Access to the single market is one of the main reasons why companies decide to invest in the UK.
Being part of the single market allows for free movement of labour and trade, but also means our regulations are harmonised across the board. This, claim proponents of the 'out' campaign, is harming British businesses by tying us up in red tape. This argument certainly carries weight, but the fact is, we are in the single market now, and many believe we'd do better to negotiate better terms from within, rather than from the outside.
UKIP leader Nigel Farage has pointed to Norway and Switzerland, which have thrived outside the EU, as examples that should lead decision makers to consider an 'amicable divorce' from the EU.
Both countries have access to the single market but are not bound by EU laws on agriculture, fisheries, justice and home affairs. But Norway and Switzerland have to abide by many other EU rules, without any influence over how they are formed.
And it's highly unlikely the other member states would allow us to pick and choose which rules we wanted to abide by – something Cameron himself said in a speech in 2012. "If we weren't in there helping write the rules they would be written without us - the biggest supporter of open markets and free trade - and we wouldn't like the outcome," he argued.
What should businesses do now?
However, 2017 is a long way away. By that time, tensions within the Eurozone will have calmed, we may have a different prime minister and the pro-out campaign may find itself losing ground.
So should businesses be concerned? Chris Cummings, chief executive of TheCityUK, said in terms of planning for the future, the prime minister's speech had ended the uncertainty, providing a clear trajectory for businesses to plan around.
"Eurozone integration is changing the rules of the EU, so it is a question of how we change the rules and relationships in the EU, not 'if'," he said.
"The absolute priority now is to confirm, define, and strengthen the single market and Britain's place within it. The debate was already underway.
"Businesses around the world take daily decisions about where to invest and where to allocate their capital. They have to know that Britain will remain a gateway to the single market."
Katja Hall, chief policy director at the Confederation of British Industries, told the Huffington Post UK the most important thing for businesses to do now was to work with the prime minister to bring about a good, workable deal for the EU.
Having said that, it would be good practice for British businesses to expand their trade links beyond our European partners, given the returns are much higher in emerging economies.
"We need to re-concentrate our exports away from the Eurozone. There has been some progress on that but it will be more likely to be achieved if we are in the single market," she added.
"The EU will continue to be an important trading partner, but we should look to gain growth from the growing economies in the BRIC region (Brazil, Russia, India and China), Turkey, Indonesia and other South American countries. We need to stay ahead of our competitors and establish good trade links."
Manufacturing is a sector which has been particularly badly hit during the recession and the Eurozone crisis – the EEF, the UK's manufacturing trade body, told the Huffington Post UK while it agreed with Cameron on most of his EU speech, they were concerned that raising the idea of a referendum might harm relations.
"Our reading of the situation is that Europe is changing slowly and there are a number of countries talking about reform," Steve Radley, director of policy at the EEF, said.
"There's a growing alliance to try and get Europe to agree to a plan for reducing the burden of regulations, and just at the time when they're turning that around we’re threatening to walk away."
Between 35% and 40% of the EEF's members are foreign owned, and the vast majority have parent companies within the EU. Threats of walking away could make it difficult for the UK arms to convince the parent companies to invest in operations on our shores, he added.
"If you look at Latin America, they're already organising themselves into integrated trading blocks, and we've got a better chance of trading if we're in one too."
"Having said that, it's too early to prepare for anything yet – it's a hypothetical outcome and depends on a general election result, a failed renegotiation and a treaty change," Radley continued.
"If we do have a referendum, we will need to see a better quality of debate from the industry, the government and the media. Everyone needs to look at the arguments for benefits and costs of remaining in the EU, and what we would face if we left."