Global Britain

The coronavirus has affected post-Brexit talks, but it has not killed them. If trade deals can be closely tailored to UK strengths, the future could see growth for UK energy supply chain exporters, writes Jeremy Bowden

According to the UK government, post-Brexit Britain will be a global ‘force for good and an energetic champion of free trade’. There is also talk of ‘strengthening historic ties’ and embracing opportunities ‘in the rising economies of the future’. However, the optimism and positive statements hide considerable uncertainty, both over trade terms with the EU from 2021 onwards and with the 50 or so countries where trade had previously been covered by EU deals (most recently Japan and Canada) – and a new deal has yet to be put in place.

The most important trade deal is with the EU, which accounts for 44% of the UK’s international trade. The tight deadline (progress by June and finalisation by December) may limit its scope, which could potentially spell a painful adjustment in 2021 – especially if there is no deal, which would mean a switch to World Trade Organization (WTO) rules. This is by far the least attractive outcome, according to EIC CEO Stuart Broadley.

‘It’s clear that a deal is much better than no deal,’ he said. ‘The WTO terms sound simple, but there’s greater uncertainty. No one’s ready for no deal with WTO, especially between the UK and EU. In the energy sector, most companies are exhausted by Brexit, Covid-19 and the recent oil price crash, and unsure of what to do in such a difficult market condition. Some have set up offices in Europe.’

It is highly probable that, having taken such a decisive step, these companies will look to exploit their new locations and grow if there is a no deal Brexit – which could mean an acceleration of outward investment, Mr Broadley added. Most contracts have no contingency for ‘no deal’, so exporters are advised to identify key supply chain relationships and work through the risks if they have not done so already.

Away from the UK/EU talks, progress on other deals has been slow – although some has been made, including on a UK/US trade deal. However, with the government’s negotiating objectives identifying only a 0.16% improvement in potential UK growth from a good US deal, there do not appear to be substantial new opportunities for exporters here.

Fine-tune around strengths

Previously, trade negotiations would have occurred at the EU level. Now, UK negotiators can pay closer attention to the strengths and weaknesses of the UK’s industry and services, which may mean better-tailored trade deals in future – providing more opportunities for UK industry and services. Now that the UK can set its own internal regulations, it may also be able to amend certain working directives to provide a competitive advantage.

‘The UK may be able to negotiate better trade deals with third parties, because they can be structured more around UK strengths than EU strengths. That’s the number one opportunity,’ said Mr Broadley. This can cover not just basic industry capabilities, but also standards, processes and UK law, which can also favour UK companies.

Mr Broadley identified UK services in which the UK has established strengths as particularly important, along with specialist skills. This may mean that trade deals include skills agreements in which UK talent can be deployed overseas. He said deals should be built just as much around such services as on exportable goods. ‘From there, [the UK] can rebuild manufacturing as well, if agreements can focus on what we’re good at making – selected elements and clusters of our economy.’

While the UK may be able to be more agile in doing trade deals than the EU, the EU is a bigger economy, and can thus bring more weight to negotiations.

UK’S low-carbon advantages

  • Greatest penetration of low-carbon technologies and green energy (centred around cheap and plentiful wind)
  • Existing infrastructure, including depleted gas-fields for carbon storage
  • Tough low-carbon rules and a higher carbon tax than elsewhere
  • Grants and guaranteed payments for new generation renewable technologies
  • High levels of expertise and innovative companies
  • High profile of issue among UK population

Import taxes on embedded carbon?

Mr Broadley pointed out that, given the UK’s target to reach net-zero carbon by 2050 (the first major economy to commit to zero carbon), and as the largest wind market in Europe (in terms of coastline, wind capacity, established offshore wind production and a huge and experienced supply chain capability), the UK government should also be thinking about including embedded carbon import tariffs on all goods and services. ‘If we are to reach net-zero by 2050, this is essential, and Brexit gives us an opportunity to include this in new trade deals.’

He noted that lower-carbon energy was already an area where British industry was strong, given the UK’s lead in the energy transition: ‘[UK companies] are further ahead on producing low-carbon products, as UK regulations and legislation have pushed them faster than other countries.’

With import tariffs, UK energy supply chain companies would have to expand to meet demand, and this scaling would also cut costs and make UK low-carbon exports more attractive – especially as other countries adopt zero-carbon goals. ‘This 
is a strategic opportunity. Other countries, including the EU, may follow suit, but the UK has a lead, which can provide real competitive advantage. I hope the government will build this in, and with full confidence that it’s the right thing to do.’

Neil Golding, the EIC’s Head of Oil and Gas, cautioned that current low oil and gas prices will make it more difficult 
to back low-carbon options. ‘From operators and EPCs, the future is about reducing emissions, beginning with the supply chain, and that may indeed hold opportunities for UK companies. But [low-carbon] costs remain high and lower oil prices mean lower margins for EPCs, which still depend mostly on oil and gas, as well as more competitive hydrocarbons,’ he said. ‘It’s about finding the right balance – too many restrictions will push up costs. If we move too quickly to net-zero, we’ll price ourselves out of the market.’

The Department for International Trade declined to comment on either the potential for new overseas opportunities for UK businesses post-Brexit, or the possibility of an embedded carbon tax on imported goods.

Industrial policy tie-in

Any trade policy along the above lines would need to tie in with domestic industrial policy, according to Mr Broadley. This can help ‘make sure that investment inside the UK goes to the right places’. It could be directed to products or technologies, or geographically towards cities or clusters that can get to net-zero quicker. ‘This helps tackle UK emissions and creates technology hubs that can quickly switch to export hubs – which can be linked to the developing free trade zones strategy as well,’ he said.

Second-generation low-carbon technologies already receiving government funding include green and blue hydrogen, floating offshore wind, nuclear small modular reactors, energy storage and carbon capture utilisation and storage – 
all of which could lead to export opportunities in future. Mr Golding noted that by helping government build regulations around the zero-carbon goal, the UK energy supply chain could benefit from export opportunities, as these regulations could be replicated abroad. He also promoted collaboration such as that seen at Hinkley C, which enabled local companies to win more contracts.

Low-carbon moves in domestic industrial strategy and in trade deals could be linked into the UK’s COP26 hosting in Glasgow, when more stringent action on climate change may be forthcoming. ‘The biggest opportunity around Brexit is to work the energy transition into trade deals around COP26 and a net-zero target. The planets are aligning for us, and we could be five years ahead of the rest of the world,’ said Mr Broadley.

Whatever the UK government agrees in its trade negotiations, UK companies need clarity, consistency (across departments, as well as through time) and certainty, so they can plan and invest for a cleaner and more profitable future. 

In search of trade deals

UK ministers are travelling around the world working on the UK’s other trade possibilities. Foreign Secretary Dominic Raab has been active in Asia-Pacific, with an eye on areas such as Japan’s recent move into offshore wind, where the UK is a world leader, and the nascent offshore oil and gas decommissioning in Southeast Asia and Australia, where the UK also has considerable experience.

Similarly, International Trade Secretary Liz Truss led a recent summit in Africa on demand for clean energy. She says the UK wants to reinforce its economic partnerships with African nations ‘as part of a government drive to ensure the continent’s growing demand for investment is met by the UK’s expertise and innovation.’

Image credit | Alamy