Effect Of Brexit On Trade – Pragmatism calls for trying to make Brexit work better. It also requires an understanding of how much damage Brexit has done to the British economy. After Britain formally left the bloc in January 2020 with a bare-bones trade deal, optimists hoped some of its poor performance was due to Covid-19 and would disappear. The disruption associated with the new trade barriers may be short-lived as traders adjust to the new arrangements. It is still too early to assess the long-term effects of Brexit. But the evidence so far shows that it hurts.
John Springford of the Center for European Reform, a think tank, tries to isolate the effects of Brexit by constructing a phantom country that tracked Britain’s performance before the 2016 referendum result. Using an algorithm to select from 22 countries, rather than simply selecting, for example, a few economies of a similar size, it builds a compelling picture of the path Britain would take if it did not vote to leave the EU (see Figure 1). He estimates that Brexit will hit GDP by 6% in the second quarter of 2022 compared to this counterfactual. Using the same method, he estimates that Brexit reduced investment by 11%.
Effect Of Brexit On Trade
The impact of trade is a bit more complicated. Recent data suggest that Brexit has not had a major impact on trade in services at all (although all estimates should come with the caveat that trade in services is notoriously difficult to measure). But Brexit appears to have hit UK goods trade by 7% in the second quarter of 2022.
Services: The Neglected Part Of Brexit
These numbers are not gospel. Critics of Mr Springford’s model say some of his benchmark countries unfairly place Britain on edge: Australia and New Zealand were more likely to close their borders during the pandemic and avoid the worst effects of lockdowns; America became the energy exporter in 2019. They also point out that Britain’s productivity woes predate Brexit: it was already the worst investment performance among the G7 countries in the decade before the referendum. Mr Springford, for his part, argued that his approach was better than choosing countries based on rules of thumb. Whatever the exact scale of the blowback, the overall message is clear: Brexit has made a bad situation worse.
Leaving the bloc also raised the cost of living. A separate group of researchers at the Center for Economic Work, another think tank, analyzed food products that were more or less likely to come from the EU and concluded that Brexit would increase the average price of food in Britain by around 3% in 2020. and 2021. This is despite the fact that the British government has implemented only a subset of the promised import controls, and has repeatedly delayed the rest. If it ever implements the full package of controls (the latest deadline is the end of 2023), such effects are likely to worsen.
Brexit has affected both people flows and trade. EU nationals have moved on from being able to work or study in Britain because they are happy to have to secure visas in the first place. This had unexpected consequences. By June 2022, immigrants in Britain from the EU accounted for only a fifth of foreign-born people, although some of this reflects large numbers from Ukraine, as well as a special scheme for Hong Kong British citizens (overseas). In 2015, EU citizens probably accounted for half of the total, but a change in the methodology for calculating figures in 2020 makes comparisons difficult.
The public seems less concerned with immigration as a result (although the influx of people arriving in small boats puts it back on the political agenda). The share of people who say immigration has a positive effect on the country has risen from about 35% in February 2015 to 46% in July 2022, according to Ipsos, the pollster. In contrast, the attitude towards the Brexit project seems to have hardened. In August 2016, the proportion of adults who said Britain would vote to leave the EU was 52%, the same as it was in the referendum two months earlier. Today this share is 43%. ■Brexit has reduced the UK’s trade openness, foreign direct investment (FDI) inflows and increased immigration. New border disputes and high transport costs pose new barriers to trade, and foreign direct investment inflows are unlikely to return to the levels reached in the 1990s and 2000s.
The Impact Of Brexit, In Charts
The following charts compare UK trade, FDI inflows and immigration growth before and after Brexit and show the impact of leaving the EU on the UK economy.
UK trade is recovering from the shock of the pandemic much more slowly than its peers in Europe and the Pacific (Figure 1). Europe’s major economies recovered quickly; Trade as a share of GDP surpassed pre-pandemic levels in the fourth quarter of 2021 across all EU countries. Trade has largely recovered in the large developed economies of Asia-Pacific – the liberal Pacific. Meanwhile, UK trade as a share of GDP is still below pre-pandemic levels, at more than 6 per cent in the first quarter of 2017 (Figure 2).
In the early 2000s, Britain attracted and retained a steady stream of foreign-born migrants. But since 2018, EU immigration has fallen, and the number of EU-born residents leaving the UK each year outnumbered new arrivals (Figure 3). There has been no increase in compensation for non-EU immigration, which has reduced the size and diversity of the UK’s labor pool and may affect fiscal sustainability.
The UK is no longer one of the most open economies to immigrants among its peers (Figure 4). Between 2015 and 2020, the UK was the only major EU economy to report a slowdown in the growth of its immigrant population compared to the previous five-year period. Its recent trajectory mirrors that of the United States moving away from the global economy.
Understanding Post Referendum Weakness In Uk Import Demand And Uk Balance Of Payments Risks For The Euro Area
The UK has consistently attracted more foreign investment than other comparable economies since the 1970s, leading to higher wage growth, more innovation and technological progress, and the sharing of knowledge and skills. But FDI has retreated since the Brexit referendum and the UK is no longer a leader among its peers. Between 2017 and 2020, UK average FDI inflows as a share of GDP fell to their lowest level since the 1980s (Figure 5).
Before Brexit, the UK was the most open to immigration and foreign direct investment among the advanced economies in the sample, by relative trade volume as a share of GDP. Post-Brexit, the UK is the least open to trade among EU economies, and at the bottom end of the sample for FDI and immigration. Compared to liberal Pacific economies, the UK post-Brexit trade is holding up better, but it is no longer a leader in terms of inward FDI and immigration growth (Figures 6 and 7).
The effects of this reduction in trade, FDI and immigration are still to be seen and will depend on the UK government’s response. But it could do a lot of damage to the UK economy. Reduced trade openness can limit competition for domestic firms, which discourages innovation. A less diverse workforce and lower levels of foreign direct investment may also hamper productivity growth. The UK is a smaller player in the global economy than it was before Brexit and it must adapt to avoid the worst economic outcomes. Trade figures for January 2021, recently published by the Office for National Statistics, offer the first look at how the Trade and Cooperation Agreement (TCA), which governs the UK’s economic relationship with the EU, is affecting UK trade.
The headline numbers are amazing. Compared to the previous January, UK merchandise exports to the EU fell by 38% in January 2021, from £13bn to £8bn.
Brexit And The Economy: The Hit Has Been ‘substantially Negative’
As Figure 1 shows, the decline means exports to the EU were lower in January than they were in early 2020 during the short-term trade collapse following the start of the Covid-19 pandemic.
In comparison, exports of goods to non-EU countries were only eight percent lower in January 2021 compared to the previous year and higher than in December 2020.
Imports of goods from the EU also decreased, as shown in Figure 2. EU imports were 16% lower in January 2021 than in January 2020, while non-EU EU imports were down 9%. The geographical distribution of trade in services as of January is not yet available.
As the figures above show, UK goods trade fell by more than a quarter during the first lockdown at the start of 2020, before recovering rapidly in the second half of the year. However, the figures also show that the lockdown has led to a similar drop in both EU and non-EU trade, as well as exports and imports.
The Impact Of Brexit On The Processed Food And Drink Sector
In contrast, the decline in January was much larger for exports than for imports and for the EU than for intra-EU trade. It is not clear why the lock-in could lead to this pattern of changes. However, Brexit has a natural explanation.
The TCA led to the introduction of new barriers to UK-EU trade, but not to trade with non-EU countries. Consequently, we can expect EU trade to decline more than non-EU trade. In addition, customs inspect UK exports