Coronavirus (COVID-19): the case for extending the Brexit transition period

Annex B - Examples of Difficulties for Businesses if the Transition Period Ends on 31 December 2020

Hospitality, Tourism, Leisure

The tourism sector has been severely impacted by COVID-19, with demand collapsing steeply. Recovery is expected to be gradual and slow, lasting far beyond 2020: any additional barriers to recovery, will make that process all the more difficult and carry additional risks to jobs, businesses and growth. For example, six of Scotland's top ten markets for overseas visitors were in the EU, and seven were in the EEA. Workers from the EU have been essential to the sector, especially in hospitality. The ending of free movement of workers from the EU will make it more difficult to recruit the necessary workforce.

Food, Drink and Fisheries

Failure to secure a comprehensive deal with the EU will pose risks to key areas of the food and drink sector in Scotland and the rest of the UK including high EU tariffs and non-tariff measures, including requirements for Export Health Certificates for Products of Animal Origin (POAO). These potential impacts would be exacerbated should measures be applied for trade between Scotland and Northern Ireland.

Failure to reach a deal on the prioritisation of perishable products at the Short Straits crossing in particular would be detrimental for Scotland's seafood exporters. These discussions were put on hold following the UK Government/EU agreement late last year, and our understanding is that they have not yet recommenced.

Iain Wright, CEO of the UK Food & Drink Federation noted, on 3 February 2020, that:

"The EU market is the largest source of UK food imports and the largest destination for UK food exports. This fact is driven by geography, shelf-life and customer tastes. Introducing friction into those supply chains will have implications for our largest manufacturing sector and for all food and drink consumers".

Some (EU) countries are already beginning to buy more locally as they look to restart and recover their national economies. As the UK leaves the EU's trading arrangements, goods from the UK could become less desirable in European countries.

The global markets that EU exit was meant to "open up" will be more difficult to enter with a reduced volume of air traffic (due to COVID-19). For example, over £100 million worth of Atlantic salmon from Scotland are flown out of London airports. Freight rates have doubled or tripled putting this at risk, until air travel recovers. This is likely to increase rather than decrease the reliance on easy access to EU markets. In the current situation, it is likely that many of these businesses and the exports they sell will collapse especially if EU markets cannot be relied on while the multi-year global recovery occurs.

The areas which will be hardest hit by marine industry disruptions from the double impact of Brexit and COVID-19 recovery time would be already vulnerable rural communities. For example, Peterhead, Fraserburgh, Kirkcudbright, Lerwick and Ullapool are all classed as highly vulnerable to seafood sector shocks due to having areas within their communities where more than 20% of employment is from the seafood sector. Similarly, this will be an issue for vulnerable island communities that rely on this sector for their food and income. Spain, in particular, is a big market for their live shellfish exporters.

The seafood sector in Scotland remains significantly dependent on non-UK labour; with EU nationals accounting for 58% of the workforce in the seafood processing sector, and non-EEA labour accounting for approximately 19% of crew in the Scottish fishing fleet. The ending of freedom of movement from the EU will, therefore, not only risk creating labour shortages in the seafood processing sector, it will also likely increase the dependence of the fishing fleet on non-EEA crew.

Without corresponding changes to immigration rules, it is almost certain that non-EEA labour will continue to be accessed through the use of transit visas. As well as creating an uneven playing field based on the geographic location and operational area of vessels, the transit visa route fails to provide basic employment rights and protections and may even be indirectly contributing to cases of maltreatment and exploitation. Along with "No Recourse to Public" status, this has also been the root cause of the significant hardship that non-EEA fishers have faced during the COVID-19 outbreak and will continue to leave non-EEA fishers in a position of acute, and wholly unacceptable, vulnerability.

One of the ways the fishing industry would have coped with the existing end of the transition period would be to temporarily adjust their operating models. For example Nephrops vessels could have reduced their catch/filled up cold stores and whitefish could have reduced their effort for a few months whilst things settled down. Having done this in response to COVID-19, it is unrealistic to expect surviving businesses to repeat this process for the end of the transition period.

The fishing and aquaculture sectors are also intrinsically linked to and heavily dependent on supply chains with the EU, for example the time critical delivery of ova from Europe. The trout sector is currently importing most of its feed supply from Europe. Any disruption could cause significant animal health and welfare issues. The sector is also dependent on imports of veterinary medicines and equipment.

From January 2021 EU seasonal migrant workers in the fruit and vegetables sector will be required to apply through the UK Government's Seasonal Agricultural Worker Pilot Scheme (SWPS), subject to inclusion on the approved list of recruitment countries. There are also fees for both growers and workers. In Scotland the soft fruit sector was worth £134 million in 2017. The pilot is currently capped at 10,000 workers for the whole of the UK, but it is estimated that around 70,000 workers are required across the UK annually.

Retail

For the retail sector, the current end of the transition period comes with the worst timing. It clashes significantly with the run up to Christmas and January to March is the period of highest imports for fresh food. While there was considerable consumer demand during COVID-19, there were no problems with the Short Straits and availability of food. However, in relation to the requirements of the Northern Ireland Protocol, there are huge concerns that the infrastructure will not be ready in time, and consumer experience of COVID-19 has increased the risk of stockpiling and panic buying. To prepare for Brexit, many food businesses, especially in the SME sector, may decide to stockpile supplies and ingredients and are likely to struggle with cash flow and working capital. Dealing with the outbreak plus not extending the transition may well mean many businesses will not survive both.

Downstream Oil and gas

The downstream oil & gas sector, and refining sector specifically, is experiencing unprecedented market challenges at present. Refineries are strategically important to both Scotland and the UK's economies, as are the significant employment and resilience contributions of the sector. Refineries operate in a global market predicated upon high volume product output, returning narrow margins. The collapse in crude price and plummeting demand for fuels (attributable to global travel restrictions in lockdown) are placing significant pressures on the sector, expected to endure throughout 2020 and perhaps into 2021. The economic landscape the sector operates within won't become clear until the lockdown ends - and probably well into the recovery. This means that the sector does not have time to properly plan for leaving the EU on 31 December 2020. Its previous plans may well no longer be suitable, as the impacts of COVID-19 on international trade and supply chains are presently unknown.

The end of the transition period brings with it the potential imposition of tariffs, should no FTA be concluded. This will mean that at a time when it is already vulnerable, and attempting to trade its way out of a COVID-19 depressed market, the refining sector will be met with a potential further increase in commercial and logistical pressure with alternative trading arrangements.

The consultation on a proposed UK Global Tariff included rounding down the import tariff for petroleum products, which would go from 4.7% to 2.5%. %. This would have meant that, should the UK not have a deal with the EU, then petrol being exported from the UK to the EU would be subject to import tariffs in the EU of 4.7% but petrol imports from the EU into the UK would have been set at only 2.5% - placing domestic refineries at a competitive disadvantage with the risk of flooding the domestic market with foreign product. This particular tariff has since been revised from 2.5% to 4% in the UK Global Tariff published 19 May - affording greater protection for UK refineries. However, the tariff levels for petroleum products are still not entirely reciprocal, and we do not yet know whether a 0.7% disparity between imports and exports on petrol will have a material impact on the UK refining market, or will be absorbed by the supply chain.

An extra period of time within the EU's trading arrangements would allow time for the refining market to plan for any forthcoming disruption to existing trading arrangements and understand more fully the long term changes imposed on them.

Trade in goods

Disruption is occurring at the EU-UK borders caused by COVID-19 response, with cold storage capacity nearly full and foreign sales crashing, particularly in seafood and red meat (which have lost 90% of their market). In addition, this disruption could result in excise goods being seized if they exceed the indicated journey time. The preparation businesses will have to undergo for new border arrangements will be complex, with new compliance measures that could implicate at least 200 hours of training, or outsourcing to customs intermediaries, of whom there is a shortage.

Property

A primary concern for the property market with regards to Brexit has been the loss of European Investment Bank (EIB) funding for infrastructure and further skills shortages due to lack of immigrant workforce. These concerns haven't changed, and if anything, COVID-19 will make them worse; firstly, because funding put to COVID-19 supporting measures (Job Retention Scheme, business grants etc.) might have to come out of the infrastructure investment funds; and secondly, the recession saw a significant decline in the construction workforce. This has been particularly true for SMEs, many of whom left the sector and didn't return. Unless construction support is provided now and post-pandemic, we could see an equally negative impact.

Manufacturing

There are serious longer term repercussions on the skills pipeline for manufacturing sectors. Currently, the pipeline of engineering skills is at risk as businesses have either slowed or ceased recruitment due to COVID-19. Graduates and apprentices that make up our future workforce and are looking to begin their careers are left unemployed, and as time passes their skills will also depreciate. In addition, cash-flow issues have severely impacted on manufacturers. The skills and training budgets tend to be one of the first areas to take a hit when businesses are pressed to make critical decisions around their budgets. This has resulted in redundancies where businesses have made cut-backs or closed permanently. Many of these redundancies will be affecting the older, ageing segment of the workforce. The restrictions on migration and uncertainty to the ability as to employ foreign skilled labour to supplement the workforce will exacerbate the problem further.

Many manufacturing industries rely on broad transnational supply chains for end products and skilled workers, and whilst the potential for onshoring and creating more localised supply chains may be attractive, in terms of their recent benefits to resilience - the reality is that this will be difficult to achieve on the short term and within the limit of the current transition period deadline.

In terms of border and customs arrangements, the UK Government has confirmed plans to introduce import controls on EU goods at the border after the transition period ends on 31 December 2020, meaning that third country controls will be in place from 1 January 2021. As a result, traders in the EU and GB, including the pharmaceutical industry, will have to submit customs declarations and will be liable to goods' checks. The situation for Northern Ireland and the associated protocol is even less clear. Whilst the UK Government is taking steps to encourage companies to be ready to ensure a smooth passage across borders, there are many interdependencies, such as the risk of lorries waiting in queues which could be critical for supplies such as medicines and pharmaceuticals.

Medicines and Pharmaceuticals

The UK government's Department of Health and Social Care (DHSC) has a dedicated commercial supply team that plays an important role in managing shortages, receiving information that companies are legally obliged to provide. This involves tracking a limited number of reasonably manageable situations (approximately 80-100 at any one time), with a small number that can involve more serious clinical implications. The current pandemic is testing the capacity to manage shortages, and layering on potential EU related shortages could exacerbate this for DHSC and the industry.

Construction

The complex supply chains required in the construction sector are being affected by steep falls in trade during the COVID-19 response; according to Scottish Enterprise 95% of Scottish construction firms are reporting supply chain impacts. If the EU withdrawal transition period is ended in December 2020, the new costs and administrative measures needed to import raw materials and equipment will intensify the challenges of managing the supply chain, reducing productivity just as recovery is needed.

Trade in Services and Digital

As a result of COVID-19, there is an increased resilience on digital trade, with a shift towards digital delivery of services. Digital trade is dependent on a trading environment which supports cross-border trade in services ('mode 1'). Currently businesses trading digitally from Scotland and the UK benefit from the EU's Digital Single Market. This allows for free flows of personal and non-personal data, minimal administrative burden and self-regulation on e-commerce, among other advantages. FTAs typically include fewer services commitments under mode 1 than the UK currently enjoys with the EU. Ending the transition period without a satisfactory EU-UK deal on mode 1 and on data flows, alongside a lack of preparations needed to enable the transition, will put at risk the opportunity for digital trade to contribute to the economic recovery in Scotland and the UK.

Services trade could be hit hard in Scotland by the impacts of COVID-19, through transport and travel restrictions, as evidenced by the latest IHS Markit/Cips flash UK services purchasing managers' index.^[31] There are now limitations in the way services can be provided internationally - services previously traded via mode 4 (movement of persons) may now have to be provided via mode 1 (cross-border trade in services) due to global restrictions on travel.

The end of the transition period will intensify these reductions, by increasing barriers to trade in services at a time when modes of service supply are already limited. Unless the EU-UK negotiations deliver a satisfactory outcome on cross-border trade in services, mobility, domestic regulation and Mutual Recognition of Professional Qualifications and sufficient support and communication to businesses on the practical detail of new trading arrangements, many businesses will struggle to adapt to the new way of working. This could include the requirement to have a physical presence in the EU to continue trading Businesses need time and support to transition, which will not have been provided by the end of the transition period.

ONS data shows SMEs have a higher reliance on imports from the EU, with the highest reliance on imports of computer programming services and to services auxiliary to financial services. Increased trade barriers would increase the cost of imports from the EU and result in increased costs for SMEs.

Transport

For some sectors such as ferry services in Scotland and rapid freight (HGV drivers), continued access to EU-based crew is important. For example, Eastern European crew are used extensively on the Serco Northlink Ferries' Freighter services from Aberdeen to Lerwick and Kirkwall and on the Pentland Ferries' services across the Pentland Firth. Before the COVID-19 pandemic, the road freight sector faced a shortage of HGV drivers, and any new barriers to employing EU drivers would exacerbate this.

EU goods and services, including parts, machinery and access to EU-based skilled engineers and technicians, are also important in order to build, maintain and repair ferries. Minimal delays are important in relation to the import of goods and to entry visas or permissions for specialists to enter Scotland, to keep ferry services running. Often, only EU nationals are allowed to repair and maintain specialist systems to maintain warranties on EU produced equipment such as engines, radar systems etc. Once the COVID-19 restrictions are relaxed, there will be a rush for the supply of materials and goods. That logistical challenge could be further compounded if new border restrictions are imposed following the end of transition, particularly where Scottish transport depends on contractors from Ireland and the rest of Europe, whose supply chains are often located within their home countries.

Brexit may lead to delays in ferry crossings between Scotland and Northern Ireland due to any increased checks for UK-EU traffic. The impact of these delays on freight traffic, and the consequent need to implement Operation Stack at Cairnryan, could be exacerbated if there are COVID-19 restrictions in place relating to physical distancing or there is reduced capacity to manage the challenges, due to sickness.

Culture and Creative

In the culture and creative sector, the COVID-19 pandemic has caused demand across the sector to severely decrease, following the introduction of restrictive measures. There have been severe disruptions to supply and the cross-border workforce. Recovery in some areas will be difficult, due to widespread lack of financial resilience and a reliance on public-facing activities such as performances which COVID-19 has halted. The sector is largely made up of freelancers, microbusinesses and SMEs which are often financially insecure. All of this will be exacerbated if EU funding streams, such as the Creative Europe Programme, are no longer available from January 2021.

Disruption to trade, and mobility, with EU countries from January 2021 would severely affect the sector's prospects of recovery, especially regarding the need for specialised overseas recruitment, and outward movement for touring and exhibiting. Scotland's international festivals have faced unprecedented disruption due to COVID-19, and immigration controls could severely hamper their recovery too. The important computer games industry also works extensively across borders and will be similarly affected.