By Aniruddh Vadlamani
Brexit was an unprecedented political decision by the United Kingdom to leave the European Union. Policymakers took this decision considering that it would economically benefit the UK businesses in the long-term. However, due to Brexit the SMEs have been exposed to systematic economic risks. This article examines the impact on the UK’s SMEs as a result of Brexit and whether the current economic policy framework is equipped to alleviate the adverse effects of Brexit. Further, certain policy suggestions have been highlighted which could help mitigate the risks faced by the SMEs.
The most unexpected economic shocks throughout history have to be the 9/11 attacks, the 2007 stock market crash or the 1973 OPEC oil prices crash. However, Brexit, i.e. Britain’s decision to leave the European Union (EU), has to be added to this list because it generated a surge of uncertainty which has till date recorded a 6% reduction in Foreign Direct Investment and around 2% reduction in employment in the first two years. The 2016 referendum in which Britain decided to exit the EU was an unprecedented political event with potentially seismic economic and societal consequences. The idea of Brexit was introduced by the then government for the reason that it would help alter the rules governing the UK firms. Subsequently, it would also help them conduct business activities freely both internationally and domestically. Brexit in its initial stages was more of a political shock rather than an economic one.
However, one need not be an economist to foresee that this decision to leave the EU had a negative impact on the UK’s economy, which can be predicted as far-reaching and long-lasting.
The small and medium business enterprises represent 99% of all the businesses in the UK. Before Brexit, through the EU, the UK had access to the ‘Single Market’, which meant that there would be free movement of goods and services without any regulatory procedure or internal restrictions. This benefitted the small businesses as they had stimulation of trade, control over the quality of the items being traded, and prices. However, now, the situation of Small and Medium Enterprises (SMEs) has become uncertain, unpredictable, and loss driven. The Multinational Corporations have received disproportionate attention while SMEs have been overlooked even though they are the backbone of the UK’s economy and crucial for productivity growth, innovation, and job creation. Due to Brexit, SMEs have been exposed to the same risks as the MNCs. Thus, the SMEs should be given the same amount of study and observation as the larger companies. This paper examines the impact that the UK’s SMEs have encountered as a result of Brexit and whether the current economic policy framework is equipped to alleviate the adverse effects of Brexit.
IMPACT ON SMEs
UK’s SMEs account for 60% of the total private sector employment, and because of the unprecedented exit of Britain from the EU, these SMEs have faced financial instability and uncertainty. This is a massive concern for the British businesses as due to stagnant economic growth during this period, there will be a fall in demand for the goods and investment by the foreign entities. Pre-Brexit has observed that SMEs with high investment from foreign investors are adversely affected when there is an unexpected shock. Thus, innovative ideas by these SMEs are being neglected or cannot be implemented because of the failure of the SMEs to secure the required funding. Therefore, the firms are struggling to produce goods required by society and are falling behind their EU counterparts.
Further, due to the exit from the Single Market, the European Union Trade Regulations are no longer applicable to the British SMEs. They are not getting the benefit of free trade with the members of the European Union and are being hit with Tariffs barriers which they were exempted from before. This economic shock has also disrupted the supply chain of raw materials across the European Union as the increased tariffs lead to an overall increase in the cost of production. At the same time, the reduction of non-tariff barriers, which were instrumental before in the Single Market, is not applicable anymore, and the UK goods and products have to necessarily go through border controls and cross-country checks, which further increases the costs of trade.
Moreover, changes in immigration laws, which were among the main reasons for people voting to leave the European Union, are further expected to have an adverse effect on the economy. It will lead to job cuts and unemployment. The SMEs now have to pay high wages because the cheap labour they used to get from other EU countries won’t be accessible anymore courtesy of stringent immigration laws. Further, the businesses which thrive on skilled migrant labourers are having a hard time finding workers, and are closing down due to heavy losses.
Last, the study suggests that SMEs in specific sectors like professional services and the food industry are more adversely affected than the other industries. This is because these sectors are primarily dependent on the European Union markets for goods and services, and human capital. For example, food corporations like McDonald’s and Burger King would require goods from the European markets, but with the exit, they would have to pay hefty tariffs. However, it is imperative to note that the local SME business services like arts and education, which solely depend on the expertise of local people, are not being adversely affected by Brexit.
The SMEs had flourished when the United Kingdom was part of the European Union, and its economy was almost around $3Trillion. The decision of the UK to exit the European Union has had a significant impact on its economy in the short and medium run. But with efficient policy decisions, the economy will thrive in the long term. To cover the loss it has suffered, the UK has to devise a mechanism and frame policies to protect the SMEs from running out of business. In the short run, the government needs to engage with the SMEs and help them survive potential losses. In the medium run, the government should come up with business-friendly policies which will help them in the international market with other European Union members. The government should also protect the businesses for a certain number of years from liability of taxes and duties. It should also protect intellectual property rights and provide funding benefits to the SMEs that require financial assistance to carry on the businesses as they were before the exit. The government should create funds and bring in reforms in customs, tax, and the labour market in order to make the products manufactured in the UK to be competitive internationally. Several strategic policy measures have already been made available like the public sector packages that have been designed to help the SMEs and the Brexit support grant which has been established to assist the SMEs in the Scottish region by providing financial support in the range of £2000 and £4000.
Further, it is imperative to note that three key policy measures should be suggested to help mitigate risks faced by SMEs. First, as Brexit will affect every region differently a strong regional policy is required. Before Brexit, the EU via its extensive regional policies like European Regional Development Fund (ERDF) acted as financial support for SMEs located in peripheral regions. However, with ERDF no longer able to assist the regional SMEs, a similar structural fund needs to be created. Second, some SMEs are trade-oriented and so they depend heavily on exports and imports. With increased tariffs on trade, an International trade policy should be pursued that lays down a structural export and import strategy. Further, a national telephone helpline assistance should be provided 24×7 so that it helps the SMEs navigate potential buyers and suppliers during this chaotic period. Last, skilled labour is the most essential component for a growth-oriented SME. However, with Brexit, the supply of skilled labourers has been affected. With FinTech, Blockchain and AI on the rise, the SMEs require high-skilled talent from around the world. So, it is necessary to either draft an independent immigration policy or take steps like fast-tracking visas to aid the import of high-skilled labour..
After analyzing this political event, we identify the impact that Brexit has had on the Small and Medium Enterprises and the policy decisions that are to be taken. It is imperative to understand that the decision to leave the EU will affect the strategic decision making done by SMEs in the future. The urban medium-sized enterprises are most vulnerable to the Brexit shock. If necessary precautions are not taken, then it would adversely affect the economy of the United Kingdom. The short-run, medium-run, and long-run policy decisions have to be taken by the government to minimise the risk in a very coordinated manner. As the UK is undergoing a turbulent phase both economically and politically, further research must be directed towards understanding the economic backlash that the UK economy might suffer in the future and then making policy decisions for a smooth transition.
Aniruddh Vadlamani is an undergraduate student at Jindal Global Law School.
Image credits – https://smallbusiness.co.uk/half-of-small-businesses-operating-below-capacity-2560596/