Brexit strategy: what leaving the EU means for UK defence

15 December 2016

The UK’s historic decision to leave the EU took many by surprise and could have profound consequences for its defence industry. Colin Castle speaks with King’s College London’s Ben Wilkinson, a senior research fellow at the Policy Institute, and Matt Uttley, professor of defence studies, about the likely fallout from the referendum.

Almost no one, including its leading proponent Nigel Farage − who told reporters on the night of the referendum that he believed that “remain had clinched it” − thought that the British public would vote for Brexit. Everyone thought it would be close, but that common sense and instinctive conservatism would ultimately prevail.

As the election of Donald Trump in the US and the contentious presidential elections in Austria would underline, however, voters were in no mood to maintain the status quo in 2016, and on 24 June signalled ther preference for the UK to exist outsode the EU.

The pound took a predictable tumble, dropping to its lowest point in decades, and as the implications of the vote became clearer as the day wore on, key players in the British economy began to think ahead to how the future would look. Almost every major group representing business, from small and medium-sized enterprises to major banks, had opposed the Leave campaign, warning a victory for the Eurosceptics would mean decades of economic turmoil.

The British defence industry joined business in taking stock. After all, with a £65-billion annual turnover, 340,000 jobs, and £35 billion in exports, it’s a sector that makes a critical contribution to the economy. With the possibility of the end of free trade and free movement of people, as well as the potential British renegotiation of several key defence agreements, there was a lot to work out.

Hard or soft?

Matt Uttley, professor of defence studies at Kings’ College London, argues that there are two ways that the Brexit vote can be interpreted by the defence industry – arguments that have radically different outcomes. “In certain respects, defence is such a national and sovereign entity that the extent of EU involvement in it has been relatively limited,” he says. “Therefore, in the scheme of things – or if we compare defence with other sectors of public policy – the conclusion is that it won’t change things fundamentally.”

The flipside of this, however, is quite different, and points to the global and geopolitical consequences of the vote. the UK outside the EU could see its clout on the international stage significantly diminished and, as a result, be a less credible player within European security.

“[Brexit] also raises questions for the EU and its aspirations to have a larger and more visible footprint if one of its major contributors is no longer affiliated in the way it has been,” says Uttley. “It could be either of these, or something completely different, or some variant of both of them: there could be plusses and minuses in the more general sense.”

Much also depends on how Prime Minister Theresa May and her ministers negotiate the UK’s withdrawal from the EU. The Cabinet is currently split between hardliners who favour a ‘hard Brexit’ by which the UK completely cuts off ties to Europe and embraces an international future of free trade with the Commonwealth, and those who want a ‘soft’ deal that sees the country retain many of the benefits of EU membership, such as freedom of movement and goods, in return for certain concessions. At the moment, the preference seems to be for the former.

“We might end up with a Norway-style relationship with the EU,” speculates Ben Wilkinson, a senior research fellow at the Policy Institute and a colleague of Uttley’s. “The UK may continue to behave as it always has when it comes to defence procurement, and this wouldn’t necessarily signal any massive change.”

It would involve forms of access to the single market, as Norway has, with the UK continuing to pay into the EU in some way, and remaining compliant with any EU directives that relate to public purchasing and, therefore, directives from Brussels related to defence procurement.

“It’s possible to look at those two scenarios and begin to ask questions about what that might mean for the UK onshore defence industry and the EU,” says Uttley. “If we look at a Brexit settlement whereby the UK is still, in effect, paying into, or is part of, the EU, and it has all of its existing defence procurement legislation in place, it’s reasonable to suggest that there may be a reasonably high degree of continuity.”

As you were

In this scenario, not much changes. the UK would still continue to operate a relatively independent procurement policy outside of its EU commitments. It would continue to buy American defence equipment and be able to tender for low-price military goods via its European relations.

This is an outcome that would certainly reassure the UK’s onshore defence industry,  the only downside being that, while the UK would have access to the single market, its government – and, as a result, its business – would have no seat at the negotiating table, and no say in critical decisions related to how money was spent. The move by the Brexiteers to ‘take back control’ would, ironically, undermine the country’s ability to have a say in decisions that might dramatically affect its economy.

“From a technical perspective, it would reduce the British voice in terms of the allocation of things like R&D funds,” says Uttley. “The EU isn’t supposed to underwrite defence research and development using EU budgets, but it can underwrite dual-use-type initiatives.

“In general civil military application areas, like cyber, this could be done. Arguably, under that setup, the UK would have less influence over how different types of projects were priorities. That would, in effect, reduce the British voice in shaping what this European investment would look like.”

This wouldn’t mean UK-based companies would be deprived of access to this funding, but it might not chime with the UK’s national objectives, argues Uttley.

It could well be that major non-European contractors with big presences in the EU, particularly North American ones, choose to focus their direct investment in continental Europe, rather than the UK.

The defence industry could also be affected by its changing relationship with what’s referred to as ‘European defence and technological and industrial-based initiatives’. In short, EU institutions, from the European Commission to the European defence agency, are looking to develop existing initiatives and in effect create a Europe-wide defence industrial policy.

“Again, we’d have no control over the direction of travel with that... so that’s the UK in that sort of ‘Norway scenario’,” says Uttley.

Much of this depends on the future direction of the EU. After the UK’s departure, EU leaders might choose to bring more elements of the European defence space under the umbrella of Brussels.

“The flipside of this is whether it might attempt to increase integration, or attempt to increase market liberalisation in European defence market and the creation, or Europeanisation, of defence industries and defence industrial policy,” says Uttley.

Long-term effects

We may not see the impact on defence procurement for several years. The Ministry of Defence’s equipment plan is largely accounted for and, notwithstanding changes in the value of sterling, the cost of imported weapons systems or the state of the general economy, the consensus is that continuity is likely over the next few years.

A ‘hard Brexit’ could throw a spanner into the works, however.

“Leaving altogether will probably have more radical implications,” says Uttley. “A hard Brexit would enable the UK Government to be more ‘root and branch’ about reforming domestic procurement legislation. A government under those circumstances could dispense with certain bits of procurement law that we only have now because we’re EU members.”

The defence business could face significant hurdles outside the EU’s single market. A key issue is in terms of companies’ European supply chains, and whether there are new tariff or non-tariff barriers. Many firms may opt not to remain in the UK.

“Companies are going to think long and hard about where they base their production and R&D activities,” says Uttley. “It could well be that major non-European contractors with big presences in the EU, particularly North American ones, choose to focus their direct investment in continental Europe, rather than the UK, because of the potential difficulties of trading within a EU that no longer includes the UK.”

Whatever happens, it’s going to be a fascinating and complex route out of the EU for the UK and its defence industry and capabilities. While the future isn’t completely clear, there will certainly be much to talk about.


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