Jack Harding 

Head of Political Risk

This week will define the economic and political future of the United Kingdom. On 12 March, MPs will gather in Westminster to vote on Theresa May’s Brexit deal. If it is accepted, then the UK will leave the EU on 29 March as planned. However, if it is rejected (and rumours suggest that this might be the case) then MPs will reconvene on 13 March to decide whether the UK will withdraw from the European Union without a deal in place.

The economic consequences of this could be dire; the OECD has warned that a no-deal Brexit, when coupled with issues such as Donald Trump’s Trade War and slowing growth in China, could plunge the UK into a recession. Nissan has already cancelled plans to produce the X-Trail SUV in its plant in Sunderland and carmakers such as Toyota, BMW, Vauxhall, and Bentley have all issued warnings that uncertainty over Brexit could lead to the relocation of their plants to outside the UK.

There are those that argue that the security implications of Brexit will be limited. The argument runs that sales to the EU in defence and security only account for around 4 per cent of total turnover and, therefore, the UK’s main contractors will be largely protected from the implications of a no-deal Brexit. However, this figure ignores the value of knowledge transfer, R&D, and innovation. Since 2007, one fifth of defence and security research grants awarded by the EU have been won by the UK – this has amounted to around £8 billion. EU funding has helped forge the UK’s reputation at the forefront of defence and security innovation.

Article 346 of the Lisbon Treaty states that ‘Any Member State may take such measures as it considers necessary for the protection of the essential interests of its security…’ – this is open to quite liberal interpretation and, to a large extent, defence procurement is driven by national, rather than multilateral agendas. However, supply chains are intricately linked across Europe in order to take advantage of technological and manufacturing expertise in each country and exiting the EU will make it harder and more expensive to acquire certain goods. This may drive the costs of manufacture up.

This brings us to the third point: the impact of a potential economic downturn. According to IISS, in value terms, the UK’s 2018 defence budget was the largest in the EU and, during the fiscal year 2018/19, the MoD received a £200 million boost taking the total to £36.7 bn.

Furthermore, according to ADS, the trade organisation which represents the UK aerospace, defence, space and security industries, the combined worth of these sectors in 2017 was £82 billion and provided an estimated 402,000 jobs.

Sector

Turnover 2017

(£bn)

Value of Exports

(£bn)

Direct Employees

Aerospace

32

28

120,000

Defence

23

8.7

142,000

Security and Resilience

13

3.4

100,000

Space

14

5

40,000

TOTAL

82

45.1

402,000

Source: ADS, Industry Facts and Figures (2017)

However, this level of expenditure is dependent on maintaining GDP growth at current levels and ‘no deal’ Brexit would certainly put this in jeopardy. The future of British defence is on a knife-edge at present; given wider issues related to defence supply chains, procurement, Research and Development, Intellectual Property rights, and, crucially, the UK’s role at the forefront of defence and security innovation through EU grants and projects such as Galileo, the UK can ill-afford any economic slips.

Tom Enders, the CEO of Airbus, the third-largest supplier to the UK Ministry of Defence, has already stated that, in the event of no-deal, the company may ‘be forced to redirect future investments’. Lower growth rates would mean a smaller defence budget. This will make it a serious challenging for the UK to compete with other global powers.

The issue is yet wider than this, however. The UK’s is currently deliberately going down a path of excluding itself from future Europe-wide discussions on defence procurement and innovation (see the recent withdrawal from the Galileo programme). This is a security outcome that stems from its political stance on Brexit. While uncertainties about the structure of our future relationships with the EU remain, our relationship with NATO and with the emerging security structures in Europe are also uncertain. In military terms, as in trade terms, the UK is increasingly isolated, and more worryingly, increasingly a small player on a large stage.

Top-10 MoD Suppliers

Headquarters

BAE Systems

UK

Babcock

UK

Airbus

Netherlands

Roll-Royce

UK

Lockheed Martin

US

Leonardo

Italy

QinetiQ

UK

General Dynamics

US

HP

US

Serco

UK

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