3. Brexit, Defence Expenditure and Defence Industries

The macroeconomic impact of Brexit on the UK is the subject of vigorous debate, including the potential ramifications for security and defence. One aspect that has gathered only scant attention is the impact of Brexit upon defence industries. In general terms, the overall impact will depend upon what trade and customs arrangements for goods are eventually negotiated between the UK and the EU. More specifically, the UK is a major arms exporter whose main markets are beyond the EU and it could be argued prima facie that Brexit will have a relatively minor impact on this segment of the UK’s manufacturing. This would, however, be mistaken since key defence industries, most notably the aerospace industries, rely heavily on access to research and development funding, overseas expertise and, more often than not, they are part of multinational industries. The potential exclusion of the UK from EU defence research funding as well as from potential partnerships may well harm this critical sector of the UK’s economy. A more major concern remains the UK’s heavy exposure to U.S. contracts and further fluctuations in exchange rates, alongside the possible need for European industrial partners based in the UK to relocate or for UK companies to move to the EU, or at least to co-locate.