Another curious Brexit side effect. Companies may get grants to move jobs out of the UK…

Nestlé has announced that they are to axe 300 UK jobs and move Blue Riband biscuit production to Poland. More than likely this is about cost saving and has nothing to do with Brexit but it does introduce some interesting questions.

Under EU rules member countries are not allowed to give subsidies that encourage companies to move jobs from one member state to another. So in the Nestlé example, Poland could not give grants to  Nestlé. You can only grant aid new jobs. Obviously, this is to discourage companies from moving jobs from Western Europe to Eastern Europe where costs are cheaper.

But what happens when the UK leaves the EU, and it is no longer a member state? Well, then it is open season on Eurozone members poaching jobs from the UK. Suddenly the Chech Republic will say to Nissan, why not move your factory to our country? We make very well built Skodas we will have no problem making lovely shiny Nissans. Not only are salaries cheaper, but we will grant aid you, and as we are part of the Eurozone there will be no import tariffs on your products.

You can see where this is going. Queue flood of companies leaving the UK to chase grant money and cheaper wages in the Eurozone. Remember all those companies Invest NI pumped millions into? But then they vanished when the grants ran out?

There is another factor in all this. Many factories in the UK are already highly staffed by migrant labour. It does not take a business genius to think hold on if 30% of our workforce is Polish why don’t we just move the entire factory to Poland and cut our production costs and have a ready supply of cheap labour? Maybe a future reduction in migrant labour into the UK will give factories no choice but to move to the Eurozone.

This is already happening. I know one company in Belfast based in a so-called economic blackspot that has a large Eastern European workforce because they could not get local workers. This company has recently opened a factory in Poland. Now in their case, the primary reason for the Polish factory was to be closer to markets but with improved transport links across Europe how long before they decide to move all production?

Now the UK government will say that after the UK is unleashed from its EU shackles, they will be an economic powerhouse, but what exactly does this mean? In simple terms to compete costs will need to come down. This means lower wages, longer hours and cuts in job benefits. What a bright new dawn awaits us 😊

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  • scepticacademic

    Cuts both ways though Brian. Post-Brexit UK may be freed from EU state aid rules, so grant aiding companies as part of an active industrial or regional policy is back on the table. Whether that’s a good thing or not is another issue of course (rent seeking etc). [Btw, fact check: Czech Rep is not in the Eurozone]

  • Brian O’Neill

    Oh I know it cuts both ways but what can the UK offer companies? Lower costs? There is no way they can match Eastern Europe for costs.

    You are right I meant EU not Eurozone. I have changed the post.

  • Brian Walker

    With our level of economic inactivity why do we need foreign labour? Answer that Brian and make yourself a fortune. Nissan and Peugeot it seems have been promised state aid. How many others will follow? It could become a lot more expensive than the EU budget contributions.

  • Brian O’Neill

    With our level of economic inactivity why do we need foreign labour?

    Two reasons:
    1: Many locals don’t seem to want to work in factories do shift work etc.
    2 The immigrants are harder workers and more reliable. Many employers actively prefer immigrant workers over locals.

    I know people will say tough companies should pay better wages and be forced to take on locals but this will increase costs and reduce productivity making companies even less competitive.

  • Kevin Breslin

    Yes we do need foreign labour …
    1. We don’t have all the skills that foreign labour provides.
    2. We don’t have enough labour in many sectors.
    3. We’ve relatively high employment anyway.
    4. We have still an EMIGRATION problem ourselves.

    Do I get a fortune?

  • runnymede

    This article is wrong on a basic point – state aid rules in the EU aren’t disapplied when dealing with non-EU countries because one EU state could be construed as gaining at the expense of others.

  • Jim Jetson

    Why exactly would a factory be moved from the EU market to the UK market, after Brexit? Seriously…

  • Brian Walker

    Indeed. Despite decades of experiment UK productivity remains stubbornly low, hardly budging since the war . Innovators who can raise it do well but the trouble is that it seldom appears to last across the generations. What’s the problem? A lack of ownership of the company or the product? There was plenty of the latter in H&W and look what happened.If the Finns could make a shipyard profitable why did we fail? Upskilling a bit in a vaccuum also doesn’t work.

  • Brian O’Neill

    I am happy to be corrected. Have you a source? I am seeing cases like this were even EU members are complaining about subsidies from other member states http://www.europarl.europa.eu/sides/getDoc.do?type=WQ&reference=E-2016-005504&language=EN

  • Brian Walker

    We didnt half try state aid from synthetic fibres through Shorts and H&W to Delorean…

  • runnymede

    Plenty of sources for you to look through, fella.

  • Jim Jetson

    Brian why aren’t you advocating for a united Ireland in that case, given that the ROI has a higher productivity level than the UK.

  • eamoncorbett

    Whatever about poaching ,if for instance a British built Corolla has a tariff imposed on it , how then can it compete with let’s say a Volkswagen Golf in the EU market . After she became PM the Japanese PM eyeballed Theresa May at one of their summits and indicated in no uncertain manner that Japanese cars built in Britain must be allowed to compete on a level playing field in Europe . The taxpayer may yet have to subsidise car exports to the EU.

  • scepticacademic

    What can the UK offer? How about a large and sophisticated domestic market for goods and services, large numbers of skilled and experienced workers, world leading capabilities in industries like bioscience, fintech and aerospace, a conducive regulatory environment and a very competitive tax regime? It’s not only about cost you know; otherwise Germany and the Nordics would be screwed. Also, the cost equation varies by industry and function. Plenty of activities where the cost savings of moving east are outweighed by other factors. I’m not saying leaving the EU is good news, far from it – but we do need to keep things in perspective.

  • scepticacademic

    It didn’t stop there Brian. (Non)selective financial assistance has been the cornerstone of NI economic policy for decades. Check out the appendices in the Invest NI performance reports and see how much money has been doled out to the like of Nortel, Seagate, Bombardier, Allstate, Citi group, etc.

  • scepticacademic

    Probably not. But the UK hasn’t attracted much manufacturing FDI in recent years (as a % of all projects) anyway. New FDI projects and re-investments/expansions won’t dry up after Brexit because the UK will still have many attractions (see above). One example, Boeing have recently announced a new advanced manufacturing investment in Sheffield (since Brexit) – their first in Europe.

  • scepticacademic

    In your example, it will depend on many things, including how big the tariff is, the relative productivity of the two factories (Japanese car factories in the UK are very productive) and the costs of production (e.g. UK auto factory wages and taxes are lower than those in Germany)

  • scepticacademic

    The state aid and competition regs will be a major issue in the Brexit negotiations, for sure.

  • scepticacademic

    Yes to all that. The skills and education deficit at the lower end of the UK and NI labour market is the elephant in the room when it comes to the free movement/migration debate. Why employ a semi-literate local when a better educated Pole, for example, will work for the same wage.

  • scepticacademic

    Relatively poor management skills is part of the story according to recent studies. I would add weak technical education.

  • Old Mortality

    How do you define productivity? I recall reading an article some years ago which asserted that most people who describe themselves as economists would struggle to explain it and that international comparisons are largely spurious. Dividing heterogeneous output by the number of people at work appears to be the accepted approach but it takes little account of differences in economies. For example, in the UK, I believe that productivity in the public sector is measured simply by dividing the wage bill by the number of employees which implies that a real rise in public sector pay leads to a similar increase in productivity which is clearly nonsense.
    Comparing productivity in the same industry across different countries is probably a more useful exercise and the amount of investment in the UK car industry in recent years suggests that its productivity is not out of line with other European countries, at least judged by the people who matter.

  • Old Mortality

    What’s new, Brian? EU states have always done their best to circumvent regulations that they find inconvenient. Although the RoI has hitherto been more compliant than most, it is now facing the unpleasant prospect of its lenient corporate tax arrangements being construed as unfair competition.

  • Old Mortality

    If languishing on benefits is the preferred alternative to factory work, perhaps it’s time to take a hard look at our social welfare arrangements, something our local politicians refused to contemplate.

  • Patrick O’Carroll

    Longer hours during/after BrExit ?
    Hmm.
    Will the days get longer too?
    24 x 70-minute hours would make days in the LateGreat Britain 240 minutes longer.
    What will that do to GDP?

  • Ciaran74

    U.K. workers 2004-2014 worked 1650 hours per year vs 1400 and 1450 for German and French workers respectively. We work 250 hours longer to be as rich as the Germans.

    Being more competitive post-Brexit probably means lower wages relative to competition and/or longer hours.

    Brilliant.

  • George

    A £20 million investment in Sheffield employing 30 people. Meanwhile, Boeing has just won two defence contracts from the UK worth a cool £5 billion.

  • Brian Walker

    Off topic..

  • Surveyor

    Is packing Blue Riband’s into cardboard boxes really fulfilling work anyway? Roll on automation and the Universal Basic Income.

  • Katyusha

    I’m all with you on this, but there’s one big problem. The Tories run our country, and they’re going to be no fans of a universal basic income.

    As ever, the rate of development of our politics is totally unable to keep pace with our technological development. The only saving grace is the UK is lagging about twenty years behind the rest of Northern Europe in terms of automation, so have got away without confronting the problem so far.

  • Katyusha

    How about a large and sophisticated domestic market for goods and services,

    So, a great customer base for other nations to sell things to at a profit to them (and loss to the UK firms that would have otherwise made the sale)

    large numbers of skilled and experienced workers

    Thank you very much. Ireland has been exporting skilled and experienced workers for many years, not sure how much it helped their economy though.

    lworld leading capabilities in industries like bioscience, fintech and aerospace,

    I’m not sure I would have described the UK as a leader in biotech. Like much UK research, we have great academic research going on but our transfer to industry is poor. Fintech can be easily transferred and rival cities are already salivating over the choice cuts. Aerospace has much better prospects, but outside of military capabilities we lag far behind the French, and the jewel in the UK aerospace crown, Rolls-Royce, has been for many years moving not just manufacturing operations, but also research and development functions, to Dahlewitz, outside Berlin.

    a conducive regulatory environment

    Built on EU regulations. I thought we wanted to scrap all of that red tape?

    It’s not only about cost you know; otherwise Germany and the Nordics would be screwed. Also, the cost equation varies by industry and function. Plenty of activities where the cost savings of moving east are outweighed by other factors.

    It is, to a degree. As someone who works for a major German industrial company, I often think the only reason we don’t move more capacity eastwards is the inertia of having the main plant already existing in Germany, the capital costs and difficulty of transferring an operation so large elsewhere, and the effect in will have on people currently employed.. If you were setting up a manufacturing operation from scratch, why would you locate it somewhere where the manufacturing costs are significantly higher? If anything, the trend seems to be to set up manufacturing plant somewhere that costs can be minimised, and have a small management and R&D centre somewhere where talented professional staff can be attracted to live. Even the labs and test facilities can be offshored.

  • Brian O’Neill

    Well there is a bit more to it than that and a lot of the processes are already mechanised. https://www.youtube.com/watch?v=kUjf__F6-hw&list=PLU-ls96SuuBjHARBRzGEdcZgUUezgqeUK

  • murdockp

    this is not new.
    I have been made aware that Invest Northern Ireland are giving out grants to companies who create jobs in NI, when all they have simply done are move the jobs across the border, i.e. no new jobs have been created.
    This has to be stopped and is simply an extension of unionist thinking that (1) we are no longer part of Europe and (2) Who cares if the jobs already exist, they are new to Northern Ireland

  • murdockp

    If you want to be a top classically trained musician, you start your training aged five – six. If your training was to start at sixteen, you don’t stand a chance.

    Same with technical manufacturing skills, if you want to be world class, your talent needs to be identified at aged 10 – 12 and worked on / nurtured through technical and vocational training and he presto, when you reach 18, you are world class.

    This is what the Germans do, and hey presto, they are the best manufacturers on the planet. Hardly a surprise. Ireland is now doing the same in the ICT sector

    What do we do, keep kids who are not suited to academia, in academia until they are 16 and with the best job they can hope for being a job in Sports Direct.or NI style ICT training where a time expired teacher, teaches kids how to use word and excel.

    We need more Germanic Thinking to solve our problems. At the moment NI is far too academic focused producing doctors, accountants and lawyers in large numbers who basically emigrate when the opportunity arises.
    I say this as a graduate from the system, who would have been far mare suited to vocational training but was pushed down the academic route like everyone else.

  • Tochais Siorai

    Ciaran, longer hours spent at work doesn’t mean more productivity. When Germans get to work, they go straight to work literally whereas in this part of the world many of us spend a fair part of the day faffing around.

    (Not me, of course………..except for the occasional visit to Slugger).

  • scepticacademic

    You seem to have inferred that I’m pro-Brexit. Quite the opposite. Just trying to flesh-out the debate and make the point that the UK will still have some key FDI attractors after Brexit (albeit diminished in some key areas).

    A few observations/comments in return:

    Me: How about a large and sophisticated domestic market for goods and services
    You: So, a great customer base for other nations to sell things to at a profit to them (and loss to the UK firms that would have otherwise made the sale)

    That’s a bit naive, if you don’t mind me saying. Surely you’re not advocating protectionism? First, much FDI is net additional; e.g. many market-seeking foreign investors in the UK won’t have any direct UK rival. Second, the UK consumer and wider economy benefits from diversity of competition. Having a protected economy dominated by UK owned firms did not (in the past) spur innovation, productivity growth, consumer choice or price competition. This is one of the upsides of an open economy that got lost in the Brexit debate.

    The regulatory and business environment is about more than EU regs. There are many still many areas where there is no EU standardisation. The UK has a Top 10 ranking in the World Bank’s “Doing Business” index and the WEF competitiveness index, for example, and still ranks no.4 in the world in AT Kearney’s FDI confidence index.

    Your anecdote about the German industrial firm is interesting. However, I think there are many other underlying reasons why Germany retains a strong industrial base, beyond inertia. It’s national institutional environment has many advantages over lower-cost locations.

    I take your points about biotech and aerospace but the UK is still a top10 nation in those industries and continue to attract FDI in both. Fintech might not be as footloose as you suggest. The symbiotic relationship with the City, wider technology and financial/business services industries and corporate HQ complex across London/SE England is a big pull.

    It’ll certainly be interesting to see how this all pans out over the next decade anyway.

  • scepticacademic

    How does the low initial number of jobs negate my point about the UK retaining its FDI attractiveness in some sectors?
    Also, what’s the defence contract got to do with this project and the point being debated? the Sheffield site is to manufacture high-tech components for Boeing’s Next-Generation 737, 737 MAX and 777 aircraft and will be collaborating with the engineering departments at University of Sheffield.

  • scepticacademic

    It’s a complex area for sure. As I understand it (I’m not an economist per se), economists try to measure ‘labour productivity’ growth [changes in real (inflation adjusted) output per hour worked] and also what’s called ‘total factor productivity’ or ‘multi-factor productivity’, which I think is an attempt to decompose productivity growth (output per unit of input) into parts attributable to additional inputs of capital, labour and a ‘residual’ that’s take as a proxy for improved economic efficiency due to technology, know-how, learning, etc. (the academic debate in this area seems to be quite fierce – perhaps any economists out there can enlighten us?).

    However, on the subject of international comparisons, ONS is doing some interesting work on this at present. This report highlights the UK productivity gap with other G7 economies but also notes that at sub-sectoral level, the picture is more complex (as you suggest, with your valid car industry point) https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/internationalcomparisonsofproductivityfinalestimates/2014

  • scepticacademic

    It’s a question worth asking, for sure, but we also need to ask if these folk are ’employable’ in the modern economy (and, if not, why – e.g. failings in the education and training system). Plus, there’s the sickness and disability aspect of non-employment, which is a very complex area.

  • Ciaran74

    I was a little tongue in cheek. U.K. Productivity has slowly dropped since 2015. The longer hours reflects lower wages per hour.

  • scepticacademic

    back to the productivity issue (see elsewhere on this thread)

  • scepticacademic

    which is already illegal under EU state aid rules off course; there is also a suspicion that this happens within the UK – e.g. certain companies being subsidised for moving jobs out of London

  • Kevin Breslin

    Yes to all that?

    Where’s my fortune?

    🙁

  • scepticacademic

    I fear it’s gone the same way as the extra £350 million per week for the NHS 😉