UK access to EU market, labour key for chems post-Brexit – CIA

Interview article by Jonathan Lopez

LONDON (ICIS)–Access to the EU’s single market while curbing the right of free movement of people will be the trickiest part of the UK’s negotiations to leave the bloc following the 23 June referendum vote, which showed “something will need to change” in the economic system, the CEO of the country’s chemical trade group said on Monday.

Steve Elliott at the Chemical Industries Association (CIA) said the discomfort showed by the vote in the EU referendum, with large parts of northern England voting to leave the bloc while metropolitan areas in the south voted to remain, will need a national effort to spread economic welfare to all areas.

“If your reason to vote leave was economic, related to the austerity impact [implemented by the previous UK government], then something will need to change for people to feel differently, obviously. We’ll be pushing hard to ensure the Northern Powerhouse will mean something,” said Elliott.

The Northern Powerhouse is a project started up by the previous UK Chancellor of the Exchequer (ministry of economy), George Osborne, aiming to boost manufacturing in northern England, in many areas in which a sharp deindustrialisation process occurred during the 1980s and 1990s.

Many of those areas which fall under the scheme voted to leave on 23 June, in what political analysts have come to see as a protest vote by those who felt left behind by the UK’s economic recovery in the last six years.  

“The CBI [largest UK trade group] ‘prosperity for all’ agenda relates to that [growth spread around the country] and we [chemicals] need to play our part. We have well-paid, sustainable jobs in parts of the countries which don’t have many of those,” said Elliott.

“We need to boost young people coming into our industry. An encouraging sign is the increase of people studying chemistry and chemical engineering, both male and females students, and we need to make sure we give them career opportunities.”

However, currently the chemical industry, like many other skilled manufacturing sectors in the UK, could not fulfil its employment requirements with only UK nationals as both university and vocational training lags behind the industry’s needs – that is where the EU, so far, has played a vital role.

A fundamental right within the EU is the free movement of people – any citizen in any country can establish within the 28-country bloc without any other requirements for residence or work permits. It is estimated there are 3m EU nationals working in the UK, while 1.5m UK nationals are estimated to live in the other 27 EU countries.  

However, the EU referendum campaign in the UK was dominated by immigration and how the free movement of people, especially since the bloc’s expansion to the east in 2004, had brought downward pressures to low-skilled worker’s salaries, putting UK nationals at a disadvantage.

The CIA’s CEO says once the EU referendum’s passionate arguments settle down, the UK will realise the need for skilled workers will persist. Were UK manufacturers in need of skilled labour unable to get it without additional work permits – and therefore costs – the country’s industry would suffer.

The “trickiest” part in the negotiations between the UK and the EU will be, he added, how to combine the widest access possible to the EU single market – where the UK chemical industry exports 60% of its production – with some curbs in free movement of labour with the bloc. Elliott recognises, however, that will be a difficult balance to achieve.

While a number of Leave campaigners in the UK pointed to the Norwegian model as a potential example to follow post-Brexit – outside the EU but inside the European Economic Area (EEA) – CIA’s Elliott warns Norway is the ninth largest financial contributor to the EU and has to accept free movement of labour to keep access to the single market.

“I’m not sure that [outcome] is why people voted to leave [the EU],” he said.

“Would the governments of France or Germany allow the UK to secure single market access and restrictions on movement of people? If they did, I can see other countries queueing up asking for the same deal. Why would a country be given better terms than its existing ones?”

Interestingly, Elliott said the chemical industry is comfortable with the proposals made by the new UK prime minister, Theresa May, after being appointed by the UK’s head of state Queen Elisabeth II on 13 July.

May delivered a speech with those who feel left behind from economic recovery in mind, promising her government will “be driven not by the interests of the privileged few” and it will “think not of the powerful” but ordinary people when passing laws.

Before that, she had delivered an economic speech on 11 July in which she proposed to give employees a seat at companies’ executive boards – a practise already established in major EU countries – or curb executive pay. 

Elliott said the chemical industry is well placed to absorb those potential changes.

“We [chemical industry] are relatively strongly unionised. One of the challenges with Brexit will be about employers and employees’ relationships. That’s why Unite [a UK major trade Union] is part of the Chemistry Growth Partnership [a chemical industry’s body to promote businesses],” he said.

Theresa May’s appointment also brought a deep reshuffle in the UK government. The former prime minister, David Cameron, already resigned the morning after the UK referendum, but there was speculation about how many members of his cabinet would survive a new leader. Not many did.

The former Chancellor George Osborne was fired soon after May took office, naming in his place Phillip Hammond, who despite having a reputation as a fiscal hawk – and therefore supportive of austerity in order to slim down the state – has already said the aim of achieving a fiscal surplus by 2020 has been scrapped.

The UK’s expected economic downturn related to the Brexit vote will need expansionary fiscal policies together with monetary measures, according to the Bank of England’s governor Mark Carney.

The end of austerity has been music to the CIA’s ears, as it could boost infrastructure projects, a key end market for chemicals.

Equally, the ministerial change gathering under the same umbrella Business, Energy and Industrial Strategy, with Greg Clark as secretary, has widely been welcomed by manufacturers.

“For us, having ‘industrial strategy’ in the [department’s] title is very encouraging. Although it’s early days, my main issue will be to see how this department works with the newly created Brexit and International Trade departments,” said Elliott, referring to the new secretaries appointed to take charge of the EU exit negotiations.

However, UK environmental groups and the opposition Labour and Green parties have showed dismay at the scrapping of the Department for Energy and Climate Change (DECC), warning it could mean a shift of policy resulting in less engagement towards reducing greenhouse emissions and the Paris agreement achieved in December 2015 to contain the global temperature increase.

“I can understand that people who have historically seen something in the title and now don’t, will be irritated. It doesn’t really change things – the UK is trying to play its role fighting climate change [but] we think that should be done at least with one eye addressing competitiveness and your ability to compete with the rest of the world,” said Elliott.

As post-Brexit times are all about uncertainty, Elliott added a clear energy policy will also be needed, adding shale gas should continue to be explored as a source of energy and feedstocks for the industry.

“If we were to adopt a Norwegian model, Norway is within the EU’s ETS [Emissions Trading System]. On shale gas, the previous government did a good job in terms of licensing and approvals but I think a lot of the work remains to be done by others who sit outside government [local authorities] by engaging with local communities, reflecting their concerns by working with regulators, etcetera.

“In energy, if we are no longer part of the EU, what are the implications in regards to security of energy supply? We probably need to accelerate our thoughts and actions to make sure that we have a secure and competitive supply of energy,” concluded Elliott.

The short-term impact of Brexit has been positive for chemical companies in the UK as the pound sterling has plummeted against the US dollar and to a lesser extent against the euro, providing a boost for exports, but CIA warns it is early days to know what the full extent of Brexit will mean for the country – always subject to the resulting deal once the UK as exited the EU as well.

“How much will the exports boost last? Raw materials come from other parts of the world and will get more expensive, we’ll see how that export bounce lasts.”

The National Formulation Centre (NFC), for which the CIA has been lobbying and which future funding was unclear under the previous austerity-driven government, also counts with the favour of the new cabinet and funding seems to be guaranteed, according to Elliott.