Brexit has cracked Britain’s economic foundations
- EU Investment
- December 24, 2022
- No Comment
It’s been two years since former Prime Minister Boris Johnson signed his Brexit trade deal and triumphantly declared that Britain would be “prosperous, dynamic and contented” after completing its exit from the European Union.
The Brexit deal would enable UK companies to “do even more business” with the European Union, according to Johnson, and would leave Britain free to strike trade deals around the world while continuing to export seamlessly to the EU market of 450 million consumers.
In reality, Brexit has hobbled the UK economy, which remains the only member of the G7 — the group of advanced economies that also includes Canada, France, Germany, Italy, Japan and the United States — with an economy smaller than it was before the pandemic.
Years of uncertainty over the future trading relationship with the European Union, Britain’s largest trading partner, have damaged business investment, which in the third quarter was 8% below pre-pandemic levels despite a UK-EU trade deal being in place for nearly two years.
And the pound has taken a beating, making imports more expensive and stoking inflation while failing to boost exports, even as other parts of the world have enjoyed a post-pandemic trade boom.
Brexit has erected trade barriers for UK businesses and foreign companies that used Britain as a European base. It’s weighing on imports and exports, sapping investment and contributing to labor shortages. All this has exacerbated Britain’s inflation problem, hurting workers and the business community.
“The most plausible reason as to why Britain is doing comparatively worse than comparable countries is Brexit,” according to L. Alan Winters, co-director of the Centre for Inclusive Trade Policy at the University of Sussex.
The sense of gloom hanging over the UK economy is captured by striking workers, who are walking out in ever larger numbers over pay and conditions as the worst inflation in decades eats into their wages. At the same time, the government is cutting spending and hiking taxes to fill the hole in its budget.
While Brexit isn’t the cause of Britain’s cost-of-living crisis, it has made the problem more difficult to solve.
“The UK chose Brexit in a referendum, but the government then chose a particularly hard form of Brexit, which maximized the economic cost,” said Michael Saunders, a senior adviser at Oxford Economics and former Bank of England official. “Any hope for economic upside from Brexit is pretty much gone.”
Although Britain voted to leave the European Union in June 2016, its exit from the single market and customs union was finalized only on December 24, 2020, when the two sides finally agreed a free trade deal.
The Brexit deal, known as the Trade and Cooperation Agreement, came into effect on January 1, 2021.
It eliminated tariffs on most goods but introduced a raft of non-tariff barriers, such as border controls, customs checks, import duties and health inspections on plant and animal products.
Before Brexit, a farmer in Kent could ship a truckload of potatoes to Paris just as easily as they might send it to London. Those days are no more.
“We hear stories every single day from small businesses about the nightmare of forms, transportation, couriers, things getting stuck for weeks at a time… the epic length of the problems is just gobsmacking,” said Michelle Ovens, the founder of Small Business Britain, a campaign group.
“The way things have panned out in the last two years has been really bad for small businesses,” Ovens told CNN.
Researchers at the London School of Economics estimate that the variety of UK products exported to the European Union declined by 30% during the first year of Brexit. They said that this was likely because small exporters had exited small EU markets.
Take the example of Little Star, a UK company that makes jewelry for children. Its business took off in the Netherlands and it had plans to expand to France and Germany next. But since Brexit, only two of more than 30 of its Dutch customers are prepared to handle the costs and paperwork to obtain stock from the company.
Products that took two days to ship are now taking three weeks, while import duties and sales taxes have made it much harder to compete with European jewelers, according to Rob Walker, who co-founded the business with his wife, Vicky, in 2017. The company is now looking to the United States for growth opportunities.
“Isn’t it mad that we have to look to the other side of the Atlantic to do business, because it’s so difficult to do business with people 30 miles away?” Walker said.
A British Chambers of Commerce survey of more than 1,168 businesses published this month reported that 77% said Brexit has not helped them increase sales or grow their businesses. More than half said they were finding it difficult to adapt to the new rules for trading goods.
Siteright Construction Supplies, a manufacturer in Dorset, told the Chamber that importing parts from the European Union to fix broken machines has become a costly and “time-consuming nightmare.”
“Brexit has been the biggest-ever imposition of bureaucracy on business,” according to Siteright.
Nova Dog Chews, a producer of snacks for canines, said it would have lost all its EU trade had it not set up a base in the bloc. “This has cost our business a huge amount of money, which could have been invested in the UK had it not been for Brexit,” it added.
A UK government spokesperson told CNN that the government’s export support service has provided exporters with “practical support” on the implementation of the Brexit deal. The deal is “the world’s largest zero tariff, zero quota free trade deal,” the spokesperson added. “It secures the UK market access across key service sectors and opens new opportunities for UK businesses across the globe.”
Britain won’t easily replace what it has lost by forfeiting unfettered access to the world’s largest trading bloc.
The only substantive new trade deals it has struck since exiting the European Union, which did not simply roll over the deals it had as an EU member, have been with Australia and New Zealand. By the government’s own estimate, these will have a negligible impact on the UK economy, increasing GDP in the long run by just 0.1% and 0.03% respectively.
By contrast, the UK Office for Budget Responsibility, which produces economic forecasts for the government, expects Brexit to reduce Britain’s output by 4% over 15 years compared to remaining in the bloc. Exports and imports are projected to be around 15% lower in the long run.
Initial data has borne this out. According to the OBR, in the fourth quarter of 2021, UK goods export volumes to the European Union were 9% below 2019 levels, with imports from the European Union 18% lower. Goods exports to non-EU countries were 18% weaker than in 2019.
The United Kingdom “appears to have become a less trade-intensive economy, with trade as a share of GDP falling 12% since 2019, two and a half times more than in any other G7 country,” the OBR said in the March report.
The decline in exports to non-EU countries could be a sign that UK businesses have become less competitive as they battle higher supply chain costs following Brexit, according to Jun Du, an economics professor at Aston University in Birmingham.
“The UK’s trading ability has been damaged permanently [by Brexit],” Du told CNN. “It doesn’t mean it can’t recover, but it’s been set back for a number of years.”
Research by the Centre for European Reform, a think tank, estimates that over the 18 months to June 2022, UK goods trade is 7% lower than it would have been had Britain remained in the European Union.
Investment is 11% weaker and GDP is 5.5% smaller than it would have been, costing the economy £40 billion ($48.4 billion) in tax revenues annually. That’s enough to pay for three quarters of the spending cuts and tax rises that UK finance minister Jeremy Hunt announced in November.
The United Kingdom is projected to have one of the worst performing economies next year among developed nations.
The Organization for Economic Cooperation and Development expects the UK economy to shrink by 0.4%, ahead only of sanctioned Russia. GDP in Germany is forecast to be 0.3% smaller.
The International Monetary Fund forecasts growth of just 0.3% for UK GDP next year, ahead of only Germany, Italy and Russia, which are expected to contract.
Both institutions say high inflation and rising interest rates will weigh on spending by consumers and businesses in Britain.
According to the Confederation of British Industry, a leading business group, the fall in private sector activity picked up pace in December and has now declined for five consecutive quarters.
The downward trend “looks set to deepen” in 2023, principal economist at the CBI Martin Sartorius said in a statement.
“Businesses continue to face a number of headwinds, with rising costs, labor shortages, and weakening demand contributing to a gloomy outlook for next year. ”
— Julia Horowitz contributed to this report.