Crossing The Border Or Sitting On The Fence? The EU Referendum for SMEs

by: January 12, 2016

This week1 David Cameron, the British Prime Minister, announced that he is confident he can reach a deal on the UK’s terms of EU membership next month, paving the way for a summer referendum on the UK’s relationship with the bloc. British SME owners will now recognise it’s time for them to make a decision.

Crossing The Border Or Sitting On The Fence

The topic, so divisive that families argue over it and friends refuse to discuss it, is hard to confront in a dispassionate manner. But this is exactly what every business owner must do. So what is the right answer? Is there a right answer? We have broken down the business debate into its three main facets below.

Regulation

No doubt the biggest current EU business worry, over-regulation can at worst strangle your business and at best make day-to-day work tedious. Many Leave campaigners state the EU has introduced regulation in all spheres which make it harder for British business to operate2.

There is truth in this statement – there are around 3,580 EU regulations that affect business. For example, agency workers didn’t have full employee rights after 12 weeks, working hours were not regulated and parental leave was different before the EU era. But many of the 5000+ regulations are inconsequential for SME business, and of those that are relevant, this is only half the story.

Much EU regulation disliked by business is not EU regulation at all. In 2013, the Institute of Directors released a report looking at the extent of UK ‘gold-plating’ of EU regulation – put simply – agreeing with EU regulation and then making it tougher on business than the EU intended3. They found the UK to be a serial offender.

They found that many regulations attributed to the EU were Whitehall-made law. The government have now stopped gold-plating EU legislation affecting business. Since they stopped (in the last Conservative government), what new EU laws are SMEs complaining of? The overwhelming majority are from the gold-plating era.

Of those regulations that aren’t gold-plated, it is important to remember that EU regulations collapse 28 national standards into one uniform standard. This means legal consistency all-round: from Spain to Croatia, Denmark to Malta. This uniformity makes it easier to expand a UK business across the EU, saving millions of pounds in legal compliance.

Over-regulation would be better addressed by relaxing the trigger finger of UK civil servants and actively shaping legislation in Brussels to aid business rather than choosing a Brexit. But what if we did leave, and we didn’t adhere to EU regulations after a Brexit?

Trade

The key to many British businesses’ growth is their ability not just to tap into the large UK population but also to access the potential 503 million inhabitants of the EU who may become your next best customer4.

49% of British produced goods and 37% of British produced services are exported to the EU5. To state that the UK would be better off out of the EU involves a level of statistical neglect. If Brexit is chosen, eliminating any trade tariffs against British business would be an absolute requirement to prevent Britain’s economy collapsing. Even a 0.5% average tariff rate would amount to billions of extra pounds levied on British business6.

To achieve a zero tariff trade arrangement with Europe on Brexit the UK would require either bilateral free-trade agreements with each EU country individually (politically unrealistic and economically asymmetrical) or an EU free trade agreement similar to that which Switzerland or Norway enjoy.

Leave campaigners favour the second option. However to get such a free trade agreement requires complying with all EU regulations – not just those the UK agrees with.

There is no escaping reality: to avoid EU tariffs means (i) to comply with all existing EU regulations, (ii) to pay the EU to access the single market and (iii) to adopt all new EU regulations (business or otherwise) promptly. At the same time – and crucially – we would have no say, no veto, no vote on the EU regulations themselves during the drafting or consultative stages. We would lose our EU rebate negotiated three decades ago. We would have to adopt what is currently disliked, but with no power to change or reform it.

This is a key misunderstanding of the Brexit campaign and one your writer (who has spoken with top backbench Conservatives on the issue) has not seen wholesomely answered. Some say that the UK can build relationships with the Commonwealth and not worry about EU trade. How many SME businesses are ready for that? It is commercially unrealistic. The countries next-door to us will be key trading partners by nature of lower transport costs and cultural understanding. It is not possible to uproot and move 49% of a country’s goods trade in an instant. The Commonwealth is a supplement, not a replacement for the EU.

On the issue of trade it is very difficult to see a fair, reasoned and evidence-based alternative to the EU, and this is why the CBI is in favour of remaining in the EU7. When you are making your decision, for you and your business, trade is key. Your business may be a national business – but what about those businesses that are affected? Will they, or their staff, be willing to spend money on your business after their financial loss?

Immigration

This final point is crucial because it is subject to much (often unfair) attention in the British press. British businesses know that the ability to attract top talent from the EU’s pool of half a billion citizens is important to their ability to remain competitive, both nationally and globally.

Whether it’s the cultural understanding a European team member brings to your business in Europe, or the creative ideas that diversity brings to your business in the UK, immigration helps British business.

It’s true: if we did not comply with EU immigration law on a Brexit, it would hinder our ability to trade with the EU (as explained above). But the standalone benefit of the EU’s right of free movement is in both the calibre of applicants British businesses enjoy as part of the EU and the ability of European entrepreneurs to work in Britain at a time when continental Europe is stagnating.

For people who say that immigration is taking British jobs, or is costing the British economy money: the majority of studies in the past three years found that the impact of immigration on the UK was either fiscally neutral or net positive8. There is no fiscal or business argument to restrict immigration. It is therefore clear that British SME business should favour the liberal immigration landscape that the EU currently maintains.

It is only after consideration of these three points above, with solid answers in your mind providing your business certainty, that you can decide whether to vote in or out of the EU. 

 

FOOTNOTES

1. 10 Jan
2. http://businessforbritain.org/eu-excessive-business-regulation-2.pdf 
3. http://www.iod.com/influencing/press-office/press-releases/gold-plating
4. http://europa.eu/about-eu/facts-figures/living/index_en.htm
5. http://www.economist.com/news/leaders/21651214-winning-referendum-keep-britain-europe-should-be-start-reform-not-end-sweat
6. http://www.ons.gov.uk/ons/rel/international-transactions/outward-foreign-affiliates-statistics/how-important-is-the-european-union-to-uk-trade-and-investment-/sty-eu.html
7. http://news.cbi.org.uk/business-issues/uk-and-the-european-union/
8. http://www.theguardian.com/uk-news/2015/oct/06/reality-check-is-theresa-may-right-about-immigration


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About Author

Seb is an associate in the corporate department of a major law firm in the city of London. He writes in his personal capacity. At work, he advises clients of all sizes on corporate legal aspects of their business and strategy. He is a fluent Spanish speaker and has a keen interest in European and Latin American affairs.



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