Companies in the U.K. and the European Union would have to deal with an extra £58 billion in annual costs if Brexit negotiations end without an agreement, Oliver Wyman management consultants and law firm Clifford Chance said in a report.
A no-deal Brexit would mean that trade relations between the U.K. and the other 27 EU members would default to World Trade Organization rules and tariffs.
Additional annual direct costs would amount to around £31 billion for EU exporters and £27 billion for British exporters, with non-tariff barriers accounting for more of the effect than tariffs. The automotive sector would be the hardest hit in the EU, with a direct impact of 2% of gross value added. In the U.K., the financial services sector would incur around a third of the extra "red-tape" costs. Other sectors could be substantially hit, especially firms that are highly integrated into European supply chains, in the automotive, aerospace, chemicals and metals and mining sectors.
The clustering of certain industries would leave specific regions disproportionately impacted by additional costs, such as London, Britain's financial center, and Bavaria, the German base for many motorcycle and car manufacturers.
The report also gauged the ability of sectors and companies to mitigate the impacts of post-Brexit trade barriers. It showed that small firms would find it challenging to design an effective response especially where they have no non-EU trade experience and might be rendered uncompetitive. Automotive and aerospace companies would be able to localize supply chains and take advantage of domestic suppliers in some areas. However, the loss of financial services "passporting" financial would require the relocation of front and back-office staff to the EU.
"EU firms are generally better positioned to mitigate cost increases because a larger proportion of their exports are in goods rather than services. However, mitigations are not easy and will require concerted efforts and resources in planning and implementation," said Kumar Iyer, partner at Oliver Wyman and co-author of the report.
