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Three threats (and three opportunities) Brexit will bring to Britain's businesses

The uncertainty around Brexit is beginning to reduce as the UK government produces a series of position papers on their preferred approach.

Ministers have stopped talking about the scenario where World Trade Organization tariffs are adopted due to no agreement between the UK and EU, which suggests a sort of soft Brexit is in our future.

But what are the implications for the UK’s small and medium-sized enterprises (SMEs), which account for 99% of all businesses in the country?

A recent Federation of Small Businesses survey suggested more SMEs expect trade, particularly imports, to be reduced after Brexit, in contrast to the expectations of the relatively few pro-Brexit economists, who cite the gains from trade if the UK can negotiate lower overall tariffs than those currently imposed by the EU.

Like other external changes to the environment Brexit presents both threats and opportunities but these may present themselves to different segments of the SME population.

99% of all UK businesses are SMEs (PA Images)

How these threats and opportunities favour different SMEs may determine how Brexit will boost or hinder SMEs; yet there is one corollary: what is good for SMEs as a group may not be good for individual SMEs and vice versa.

To consider SMEs and Brexit let’s examine three threats and three opportunities, beginning with the threats.

The threats

1: Imported inflationary costs.

The most noticeable sign following the Brexit vote has been the lower value of sterling, which undermines real wages in the UK and increases the costs of imported goods and raw materials. Increased costs are associated with lower supply at a given price and induce higher final prices. So the first threat to SMEs is how they deal with increased costs.

2: Leaving the customs union.

This would entail much more paperwork! The customs union means that goods can move freely without a great deal of form-filling. If the supply chains are complex, like in the automotive industry, then this puts a large question mark against participation by SMEs due to their lower management and administrative resources. Those SMEs in complex supply chain have suggested they might desert the UK.

3: The increased costs of labour.

Since one-in-five SMEs employ someone from the EU a threat to their job security would reduce the available labour force for SMEs, and given the lower wages that SMEs offer compared to their bigger brethren this may increase costs and constrain any growth prospects.

Threat 1 and 3 increase costs for SMEs irrespective of whether the firms are in tradable goods. Threat 2 depends on the supply chain. Faced with a squeeze on profit margins, SMEs will be forced to add value, but this is likely to lead to some firms closing down.

Brexit Secretary David Davis (Reuters)

Yet the pressure to change may improve SMEs as a group, but what of the opportunities?

The opportunities

1: Higher imported costs imply lower export prices.

Exporting SMEs with a price-sensitive product will increase their competitiveness. Many manufacturing SMEs are in this position, moreover, a lower currency boosts the value of overseas earnings, giving a stronger incentive to export. But given the importance of exports to the EU countries,  this requires a ‘soft Brexit’.

2: Increased costs of imports

For those who are faced with overseas competition then the increased costs of imports provides a competitive boost. The Brexit effect ‘shields’ the firms from competition – in addition the ‘hard Brexit’ option just makes this more true than ever. So if you are a domestic SME competing with European firms Brexit is great!

3: Europe – and beyond

Brexiteers argue that SMEs will gain opportunities through developing trade agreements that will increase access to foreign markets, although this is a distant prospect.

Making a success of Brexit depends on increasing the incentives for productive entrepreneurship. Threats 1 and 3 challenge SMEs as a group to increase performance. Where opportunities favour more productive SMEs in opportunities 1 and eventually 3 then Brexit can be positive but opportunity 2 favours and insulates lower productivity SMEs.

Kevin Mole, of Warwick Business School, is Associate Professor of Enterprise, and is part of the Enterprise Research Centre