UK Economy Feeling the Pain a Year on from Brexit

By Samantha Barnes, International Banker

It was a little over a year ago that the United Kingdom’s Brexit transition period was officially over—on January 1, 2021, the country was no longer subject to European Union (EU) rules. But as the island nation has attempted to chart its own course and “take back control”, its economy has suffered. And with more restrictions set to come into effect during the coming months, that pain is unlikely to be relieved to any great extent in 2022.

Even prior to last year, Brexit had already squeezed the UK economy by about 1.5 percent, according to estimates from the country’s fiscal watchdog, the Office for Budget Responsibility (OBR). And in a somewhat perverse outcome, proponents of Brexit have had some of their blushes spared on the economic front by a pandemic that continues to restrict economic activity within the United Kingdom and throughout the world, thus masking the specific impact Brexit has had on the country to some degree.

That said, the OBR’s chairman, Richard Hughes, stated that the impact from Brexit will be worse in the long run than that caused by the pandemic. Hughes told the British Broadcasting Corporation (BBC) in October that leaving the European Union would reduce the UK’s potential gross domestic product (GDP) by about 4 percent. “In the long term it is the case that Brexit has a bigger impact than the pandemic,” he said, adding that the OBR expected the effect of the pandemic to reduce output by a further 2 percent.

If accurate, then clearly 4 percent is a significant amount of output to be sacrificed. “A loss of 4-5% of GDP is a big deal,” wrote John Springford, deputy director of the Centre for European Reform (CER), in a research note, agreeing with the OBR’s prediction. “Governments everywhere would leap on a policy that would raise GDP by 5%.” Already, the UK economy lags most other major economies when comparing its GDP in the third quarter of 2021 to just before the outbreak of the pandemic in the fourth quarter of 2019.

One area of the economy in which the impact of Brexit has been most apparent is trade, particularly in relation to the UK’s trade figures with the EU. Since early 2020, it has been clear that a more basic free trade agreement (FTA) was likely to be agreed to than what was initially envisaged in October 2019’s Political Declaration that set out the framework for the future relationship between the EU and UK. And on January 1, 2021, when some but not all of the provisions of the Trade and Cooperation Agreement (TCA) came into effect, the EU imposed full customs controls on goods coming into the bloc, such as requiring formal certification of the origins of tariff-free imports from the UK.

But despite the UK’s reported investment of more than £1 billion to smooth the passage of goods over the border, last year’s trade activity with the EU slumped spectacularly. According to the OBR, UK goods exports to the EU fell by 45 percent in January 2021, greater than the fall in exports recorded early in the pandemic. What’s more, it was still down in August by around 15 percent against the level before the transition period ended. UK goods imports from the EU, meanwhile, fell by more than 30 percent at the start of the year and were still around 20 percent lower in August compared to December 2020.

Not all of this can be attributed to Brexit, of course, with the OBR observing that the UK’s goods trade with the rest of the world experienced similarly sharp falls at the start of the pandemic. However, a divergence emerged by August, when the UK’s goods trade with the rest of the world had recovered to 7 percent below average 2019 levels, whereas total goods trade with the EU remained down by 15 percent.

Indeed, the numbers highlight a clear divergence between the failure of UK trade with the EU to rebound and the more buoyant levels of EU trade with the rest of the world. Between January and October of last year, for example, there was $627 billion in bilateral trade between the EU and the United States, 18 percent higher than the same 10-month period in 2020. And EU-China trade registered a similarly robust recovery for the period, growing by 17 percent between the January-October periods of 2020 and 2021 to hit €558 billion. In stark contrast, however, the UK’s two-way trade with the EU recorded a mere 2-percent growth to £308 billion. “In other words, UK-EU trade has in this first year of the post-Brexit trade deal, failed to rebound unlike most of the rest of world trade,” BBC News’ economics editor Faisal Islam wrote in late December.

But again, how much of that is attributable to Brexit, and how much to the pandemic? The Centre for European Reform has attempted to answer this question by isolating the impact of Brexit using a “doppelganger UK” (constructed as a weighted average of other countries’ gross-goods trade flows) “as a counterfactual for what would have happened had the UK remained in the EU”. This analysis found that since the transition period ended, leaving the single market and customs union had reduced UK goods trade by 15.8 percent as of August 2021. And in a separate, more recent analysis, the think tank found that in October 2021, “UK goods trade was 15.7%, or £12.6 billion, lower than it would have been if the UK had stayed in the EU’s single market”. Although the coronavirus pandemic has also been significant in curtailing UK trade volumes over the past couple of years, the evidence strongly implies that Brexit by itself has had a profound impact on limiting the UK’s recent trading volumes with the EU.

Given the reported experiences and anecdotal evidence provided by UK firms attempting to conduct cross-border business with the EU over the past year, these declines in trading volumes become even more comprehendible. The British Chambers of Commerce (BCC) published a report in December 2021, “The Trade and Cooperation Agreement: One Year on; the Experiences of UK Businesses,” in which it surveyed 981 businesses on the impacts the UK-EU trade deal was having on British businesses a year after its implementation. When asked how easy or difficult it had been for the business or supply chain to adapt to changes flowing from the UK-EU TCA across certain broad areas, the responses were as follows:

  • Buying or selling goods: Very/relatively easy (15 percent), very/relatively difficult (45 percent), too early to say (9 percent), not applicable (32 percent);
  • Buying or selling services: Very/relatively easy (14 percent), very/relatively difficult (23 percent), too early to say (9 percent), not applicable (54 percent);
  • Moving people: Very/relatively easy (8 percent), very/relatively difficult (20 percent), too early to say (7 percent), not applicable (64 percent);
  • Transferring data: Very/relatively easy (17 percent), very/relatively difficult (9 percent), too early to say (12 percent), not applicable (62 percent).

“Overall, 21% of firms report difficulties in adapting to changes relating to movement of people, 46% report difficulties in buying/ selling goods, 24% report difficulties in trading in services, and 9% report difficulties in transferring data,” the report noted. And when confining the survey solely to UK exporters, “60% reported difficulties in adapting to changes in buying/selling goods. This is up from 49% in January”.

The report also highlighted some of the specific problems faced by a few of the British businesses surveyed by the BCC, such as supply chains—regarding which it quoted a Sussex-based micro manufacturer as saying, “The utter nightmare of trying to get product from the UK to our EU customers on time and at a cost that makes the business worthwhile. The utter nightmare of trying to get commercial samples sent to potential new customers. The utter nightmare of trying to manage a supply chain for a business that sources ingredients and packaging from ten different EU countries and manufactures in three more.”

The customs process stands out as a particular headache, as identified in the BCC report. “Each country appears to interpret the rules differently when we are exporting and so require different information on documents, even changing requirements from day to day,” according to a Greater Manchester-based manufacturer. “It has taken a long time to develop a document, and find a suitable carrier, which can cover all eventualities.”

For many of its supporters, Brexit was held up as the ideal solution for reducing EU-inflicted bureaucracy on businesses; instead, the opposite seems to have transpired, with the amount of red tape required on commerce between the UK and its neighbouring market having swelled over the last year—and set only to balloon further in 2022. The start of this year saw the companies importing goods into the UK having to make full customs declarations, while food products must now be pre-registered on a computer system. “It’s going to catch a lot of people out,” Tom Maddison, director of operations at Buckle Shipping (a Felixstowe-based freight forwarder operating between the UK and the EU), told Bloomberg in December. “It’s quite worrying that supposedly big companies have still got no idea really what’s going on.”

And much of the evidence of the time-consuming impact of these additional controls are already in full, painful sight as extensive queues of lorries frequently accumulated at the UK Port of Dover in January 2022. Many drivers have held the UK’s exit from the bloc and the resultant additional controls that have come into play exclusively responsible for the delays. “It’s entirely Brexit—you can’t blame it on anything else but Brexit,” one lorry driver told The Independent newspaper on January 21, adding that he has had to delay a number of deliveries. “People will get to grips with GVMS [the Goods Vehicle Movement Service, a UK government IT (information technology) platform for moving goods into or out of Northern Ireland and Great Britain] and the new paperwork in the weeks ahead. But even if they don’t take as long, checks still take time. So, the queues are bound to get worse when traffic flows pick up next month.”

With the full terms of the TCA yet to be applied in practice, one would reasonably assume that the trade barriers that will come into play in the future will only hamper UK trade further. In many ways, the UK’s first year out of the bloc has been a precursor of what is likely to be coming, particularly when it comes to the frictions that persist when trading with the bloc. Indeed, with the entire set of controls being applied in phases up until November 2022—with border checks on plant products, meats and meat products from the EU commencing in July 2022; similar checks on dairy and dairy products from September 2022 onwards; and fish and fish products from November onwards—the queues at Dover may well worsen throughout the year.

Such challenges could well be overwhelming for UK firms, particularly smaller businesses operating on tighter margins. “What we can say is that the notable loss of UK trade with continental Europe … was not mirrored in UK trade with the rest of the world,” Iain Begg, a professorial research fellow at the European Institute, London School of Economics and Political Science (LSE), told German publication DW on December 30. “It’s the small businesses that suffer from the excessive paperwork, not the giants like Nissan,” Begg added in reference to the Japanese automaker, which has confirmed its commitment to UK production.

As an example, Cheshire Cheese Company recently confirmed that Brexit and subsequent trade deals had cost its business £270,000. “It turns out our greatest competitor on the planet is the UK government because every time they do a fantastic deal, they kick us out of that market—starting with the Brexit deal,” the cheesemaker’s co-founder Simon Spurrell told The Guardian news publication in a late-December interview, describing the post-Brexit EU trade deal as the “biggest disaster that any government has ever negotiated in the history of trade negotiations”. Many of the problems arose for Mr. Spurrell after his online retail business was impacted by the failure of the UK to secure a frictionless trade deal addressing sales to individual EU customers. Requiring an additional £180 health certificate for each order, including gift packs costing as much as £30, he lost 20 percent of his sales virtually overnight.

“UK companies have no markets in which it is now easy to trade,” David Henig, trade expert and director of the UK Trade Policy Project at the European Centre for International Political Economy (ECIPE), told the political-news publication Politico on January 10. “The more positive spin on this is there is a lot of transition effect as we get used to the new. The really negative part is that trade in the rest of Europe was going up and ours was not. You can’t put a load of barriers up to 50 percent of your trade and not have an impact. There’s an inevitability there.”

So, what about elsewhere, then? Can other non-EU countries pick up much of the slack? Ultimately, the rest of the world may end up playing a much more significant role in trade with UK businesses than the EU, which means that as far as looking on the bright side is concerned, a reimagining of UK trade as being truly global in nature could be the answer for reinvigorating trade prospects in the end. The UK did sign its first wholly independent trade deal in December—with Australia—and reached an agreement in principle on a free-trade agreement with New Zealand in October, although it has yet to be signed off. But the economic injections to the UK from such agreements are likely to be modest at best, while the likelihood of concluding the most anticipated trade deal with the United States—its biggest trading partner by country—is unlikely to be reached anytime soon.

Elsewhere, the UK economy has suffered in the wake of Brexit through emerging labour shortages, with reports suggesting that those industries that most benefited from the freedom of movement for EU workers before Brexit are now feeling the pain the most. British agriculture, for instance, was a stand-out beneficiary of freedom of movement pre-Brexit, with a 2018 report by the Migration Advisory Committee (MAC) reporting that 99 percent of seasonal agricultural workers were from EU countries. Today, the majority of those imported workers have not returned. “The biggest issue is staff,” according to farm manager Kevin Haynes, who told Euronews in March that the bulk of his daffodil crop remained unpicked. “We would have had 100-150 people today picking—and it is down to, what, 25 now, because they’re just not coming over.”

Of course, the pandemic has provided a major incentive for overseas workers to return to their home countries and remain there for the foreseeable future. Indeed, even the International Monetary Fund’s (IMF’s) managing director, Kristalina Georgieva, acknowledged this double-whammy effect. “In the projections for the UK, we also recognize that the UK has made significant progress on getting labour market participation and that it is faced with some tightness of labour markets that we are in no position today yet to identify to what extent it is due to the pandemic and what role the Brexit may play in it,” Georgieva said in December.

Looking forward, the economic prospects of the UK lag those of other developed countries, with economists polled for a Financial Times (FT) survey of nearly 100 economists predicting that it will be held back in 2022 by political uncertainty and lingering aftereffects of Brexit. Deteriorating living standards are thus in the offing, with the country’s poorest households suffering the most as a result of soaring inflation and higher taxes. While many advanced economies face the same challenges brought on by the pandemic, some economists argue that the UK will find it harder to address because Brexit continues to damage trade and exacerbate supply bottlenecks.

According to Jagjit Chadha, director of the National Institute of Economic and Social Research (NIESR), a combination of “a ragged edge over Brexit and political uncertainty will continue to hamper what might otherwise have been a strong recovery”. And the FT also quoted Paul De Grauwe, professor at the London School of Economics (LSE), as saying, “Recoveries are driven by optimism about the future . . .. Brexit will impose chronic pessimism about the future of the UK economy.”

Ultimately, Brexit was meant to restore sovereignty and “take back control” for those who supported it. But with little upside to show for leaving the EU thus far—at least on the economic front—it would seem as if that notion of self-control is being somewhat relinquished. “The post-Brexit UK is poorer: a long-term drop of 4 percent in GDP is the estimated cost of leaving the EU. And this is over and above the economic cost of COVID-19. Labor shortages are the new norm. Trade with the EU is down, with small businesses finding it harder to export. Farmers and fishermen are feeling the brunt of the new relationship,” Arancha González Laya, Spain’s minister of foreign affairs during the Brexit negotiations, recently wrote in Politico. “A year later the United Kingdom itself is less united. And more sovereignty has led to a less sovereign UK. This is true whether on migration, climate change, innovation, the fight against coronavirus or foreign policy.”

The sheer fact that Brexit has rarely been discussed as being a potential net positive for the UK economy is also rather indicative of the damage that has been done, albeit expected. It has invariably focused on how sizeable the hit on the UK would be for severing its membership. But perhaps the clearest sign that Brexit is not going as well as was hoped is that the majority of Brits want to join the EU once more, according to a November poll by London-based market-research consultancy Savanta ComRes—and that includes around 10 percent of those who voted in favour of leaving in the 2016 EU referendum.

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