techUK has laid out four top priorities for UK Government as part of forthcoming European Exit negotiations.
techUK asked Frontier Economics to undertake a major independent report 'The UK Digital Sectors After Brexit' on the impact of the UK’s decision to leave the European Union on its world leading digital economy. The report makes it clear that the UK’s successful tech sector is highly integrated with European markets and dependent upon legal and regulatory frameworks established at EU level over many decades.
It is extremely difficult to predict exactly what will happen when the UK extracts itself from such a complex political, economic and legal system. There is no precedent and there is much that we don’t know. However a disorderly Brexit would significantly increase the risk of demand- and/or supply-side shocks that would negatively impact consumers, businesses and the UK economy as a whole. It is vital therefore that the UK achieves a smooth exit from the EU that lays the ground work for the Government’s ambitions for a new Global Britain.
To achieve that ambition, techUK makes the following recommendations:
1. A REALISTIC AND ROBUST PLAN TO ENSURE THE UK’S DIGITAL INDUSTRIES CAN THRIVE POST BREXIT
1.1. Recognise the importance of the UK’s digital sectors and their exposure to Brexit
The UK’s digitally intensive sectors account for 16 per cent of domestic output, 10 per cent of employment, and 24 per cent of total UK exports. They contribute disproportionately to the UK economy in terms of innovation, growth, productivity, exports and entrepreneurship. We ask the Government to:
- Recognise of the strategic importance of digitally intensive sectors for the UK economy and the extent of their exposure to Brexit. Europe must remain a major export market post Brexit.
- Recognise that the UK has a world leading tech ecosystem that is at the forefront of digital innovation. That ecosystem could easily be undermined and weakened by Brexit.
- Recognise that businesses need to be able to plan ahead. March 2019 is not far away in business planning terms – contingency planning is already underway – investment decisions are being made.
1.2. Work with the digital sectors to understand what it needs from a new Free Trade Agreement
- About half of digital sector goods exports and one-third of services exports are with EU countries. It is in the vital interests of the UK’s digitally intensive sectors that a new comprehensive free trade agreement (FTA) is reached with the EU that can enable continued growth in the UK and innovation and transformation across the EU.
- The lack of any precedent means that there is still no deep understanding of the impact of leaving the Single Market. The Government should work closely with digital businesses to understand how a new FTA could ensure that the UK remains a leading exporter of digital goods and services to the EU. It is essential that new non-tariff barriers are avoided as the UK leaves the Single Market.
1.3. Prioritise a smooth transition from EU membership to an FTA
Even if the broad terms of a new FTA can be agreed within two years it will take several years to implement such an agreement. The implications of leaving the single market are complex and not easily predictable, particularly from a regulatory perspective where businesses need certainty and clarity. Comprehensive transitional arrangements will need to be put in place to provide a runway for a soft landing for Brexit.
- Business will need time to adapt and it is essential that there are phasing arrangements to ensure a smooth transition from EU membership to a new FTA. The Prime Minister’s recent speech gave a degree of reassurance on this point.
1.4. Detailed planning for the walk away option – how would UK government support UK tech?
Falling back on WTO rules would be a deeply unattractive option for UK tech companies – services are historically not well addressed under the WTO. For this to be a credible walk away option the government should:
- Work together with business to develop a robust fall back plan in case a Free Trade Agreement cannot be secured. This is in everyone’s interests. It will strengthen the UK’s negotiating position if the EU27 understand that there is a credible and understood option if negotiations fail resulting in a disorderly Brexit.
1.5. Develop a plan to expand trade in digital tech focused on strategic new high growth markets
Although the UK cannot start to negotiate new free trade agreements with third countries until it leaves the Customs Union there is much that can be done now to develop trading links with strategic high growth markets. Government can also work with businesses to retain and attract foreign direct investment
- DIT should work with the UK tech sector to identify key markets and understand how trade in those markets can be quickly scaled up.
- In light of recent approaches from international competitors, Government should develop a joined up strategy between DIT, DCMS, City Hall, London and Partners, and industry bodies to ensure that UK tech firms considering relocation to other markets have a clear case for why the UK remains a global hub for locating, scaling and investing in a tech business.
1.6. Calibrate the Industrial Strategy and forthcoming Digital Strategy to Brexit
- techUK welcomes the Industrial Strategy Green Paper published this week. In particular we welcome the focus on capability and capacity and the recognition that Industrial Strategy is a process and not a one-off announcement.
- Both the Industrial Strategy and forthcoming Digital Strategy will need to be calibrated with the impact of leaving both the Single Market and the Customs Union. A far more activist industrial strategy will be required if the government is unable to secure a comprehensive Free Trade Agreement.
2. ENSURE CONTINUED MARKET ACCESS AND REGULATORY CERTAINTY
2.1. Ensure maximum access to the Single Market for digital products and services
We encourage the Government to undertake substantial reviews in the following areas:
- Ensure legal and regulatory certainty: UK tech businesses need to be able to depend upon a robust and predictable legal framework from the moment that the UK leaves the EU. There is currently significant uncertainty about how the Great Repeal Bill will work in practice. For example it is not clear yet how the roles and responsibilities of the myriad of EU regulatory bodies would be fulfilled on the UK’s exit from the EU. The government needs to set out in detail how these responsibilities and powers would be fulfilled following the UK’s exit from the EU.
- Ensure market access post Brexit: 81 per cent of digital sector exports are in services. These will be vulnerable to non-tariff barriers once the UK leaves the single market. Some businesses will have to relocate significant business functions into the EU post Brexit to continue to benefit from single market access – particularly in areas where EU policy tends to be more protectionist, such as Audio Visual Services. Government needs to work with the sector to identify areas where regulation could present barriers to market access and understand the extent to which regulatory equivalence will be sufficient to ensure the ability of UK based firms to trade on an equal basis.
- Avoid regulatory divergence in key areas: Following the UK’s exit from the Single Market there will be a need to avoid regulatory divergence in many key areas – such as conformity assessment – and clear mechanisms will need to be put in place to avoid divergence once the Great Repeal Bill comes into force.
- Ensure continued collaboration with the EU on science, technology and innovation: The Prime Minister indicated that it would be part of the UK’s negotiating strategy to continue to pay in to the EU to participate in certain key collaborations for science and technology – this should include Horizon 2020, the European Investment Fund – so crucial to the UK’s venture capital and start-up ecosystem, the European Space Agency and the Unified Patent Court. All of these will be essential to maintaining the UK’s strong innovation ecosystem.
2.2. Ensure leaving the Customs Union doesn’t leave UK trade bound up in red tape
Tariffs for digital products are low and bounded by WTO commitments. However leaving the Customs Union does present tech businesses with significant concerns about the impact of the reintroduction of customs checks and additional bureaucracy that will slow down the cross-border flow of digital goods. Leaving the Customs Union must not result in a step backwards for the UK’s world leading just-in-time digital economy. techUK therefore asks the Government to:
- Work with the sector to model the impact of leaving the Customs Union and identify areas where specific mitigations will be required, including for ecommerce where the UK is a global leader.
- Ensure the UK can benefit from to the WTO Information Technology Agreement on leaving the EU.
- Work with the tech sector to develop technology solutions to ensure that UK businesses and consumers do not suffer from new customs delays and costs as a result of leaving the Customs Union.
3. SET OUT A CREDIBLE PLAN TO ENSURE THE UK REMAINS OPEN TO THE BEST INTERNATIONAL TALENT
The success of the UK tech sector in the last decade has relied on global talent: 18 per cent of the sector’s 3 million workers are foreign-born. One-third of those are from EU countries. We therefore call on the Government to:
- Recognise the need for the UK’s growing tech sector to continue to be able to access international talent as it grows and make the positive economic, social and cultural case for controlled immigration post-Brexit.
- Confirm that EU citizens currently working in the UK will have the right to remain and work in the UK
- Set out plans for developing a new low friction smart immigration system that will enable the UK to remain open to the best international talent.
- Recognise the importance of UK firms being able to locate UK nationals to work in EU member states to support business operations in those markets.
- Harness best practice in data and information sharing across government, utilising new clauses in Part 5 of the Digital Economy Bill, to expedite the high volume of right to remain applications that the Home Office will have to process as a result of the UK leaving the EU.
4. ENSURE THERE IS A ROBUST LEGAL PROCESS IN PLACE FOR CROSS BORDER DATA TRANSFERS
Cross-border data flows underpin a modern, services-oriented economy. The UK is a global leader: accounting for 11.5 per cent of global cross-border flows (three quarters are between UK & EU countries).
- When the UK leaves the single market there will need to be a clear and robust legal basis to underpin cross-border data transfers between the UK and the EU. The best way of achieving his would be a data adequacy decision by the EU.
- This needs to be achieved before the UK leaves the European Union to ensure that businesses have a robust legal basis on which to transfer personal data between the UK and the EU from the day that the UK leaves the EU.
- UK Government must urgently develop a watertight strategy to ensure that the UK is in the best possible shape to be recognised as having an adequate data protection regime. All other legal bases for data transfer in and out of the EU are unstable or subject to significant legal challenge.
For further details, contact Charlotte Holloway and Antony Walker.