A surprising result of the first annual post-Brexit trade review, conducted by four researchers from the Center for Economic Performance at the London School of Economics, is the collapse of British imports from the EU, its main trading partner, even though the share was down from years before Brexit. While UK trade with the EU and the rest of the world followed broadly similar patterns after the 2016 referendum, imports from the EU fell by around a quarter of those from outside the EU once it entered. the new trade agreement is in force, and this is all after eliminating the assets that would have been most affected by the pandemic.
As two-thirds of UK imports are used as inputs, higher priced imports fuel prices for other goods, including food. The UK think tank in a Changing Europe estimates that Brexit-induced trade barriers accounted for a 6% increase in UK food prices. Adam Posen, president of the Peterson Institute for International Economics in Washington and former policy maker at the Bank of England, told a conference panel hosted by the think tank last week that 80% of the reason inflation in the United Kingdom should stay higher longer than others Group of Seven economies can be blamed on the effects of Brexit.
Not everyone agrees that the impact on prices is so stark. Economist Julian Jessop acknowledges that Brexit will have increased cost pressures, but attributes most of the divergence from the EU to energy policy.
The export image is also more nuanced. UK goods exports to the EU declined after Brexit, but at first glance it doesn’t look that dramatic. The interesting thing here is that the researchers have noticed a sharp decline in the number of export relationships.
The new trade agreement appears to have reduced the variety of goods (identified by an eight-digit commodity code) exported to the block by about 30%. While large exporters could absorb the increase in fixed costs, many small businesses simply exited the less profitable markets in the EU.
A few percentage points of GDP spread over many years is something Brexiters have always been willing to accept. But focusing only on the direct hit to growth risks losing the broader impact that lower FDI will have on innovation, talent diversity and productivity. When small businesses are hit – and they are Brexit’s biggest losers – the dynamism needed to rebalance the UK economy weakens (Johnson’s ‘step up’ agenda).
Although the labor market shortage may drive some wages up, EU immigrants have also made a net contribution to the UK government’s finances. And while there has been an increase in non-EU net immigration, the decline in EU net migration after the referendum has already exacerbated labor market shortages, such as the shortage of truck drivers and fruit pickers, but also of health workers. It may be politically useful as a demonstration of regaining control, but it is not clear what other purpose it serves.
Despite the promise of “global Britain” – essentially a free trade nation – Britain’s trade openness has declined more markedly than in other advanced economies.
In a tacit acknowledgment that gravity does matter, after all, the UK government announced last week that it would not impose controls on goods entering the UK from the EU for the remainder of the year, which would accumulate 1 billion. of pounds ($ 1.25 billion) in additional costs for importers.
Finding ways to improve this image won’t be easy. Take the new UK Conformity Assessed (UKCA) mark, which all companies selling in the UK must have from January next year, rather than relying on the EU “CE” marking, which testifies that companies have met the regulations EU on health, safety and environment.
There is no suggestion that the UK deviates from the overwhelming majority of EU standards as UK manufacturing is fully integrated into EU supply chains. The EU has refused to recognize UKCA marketing, so Britain is imposing a cost on its businesses and consumers by creating a largely redundant system. If Britain were to loosen some of its rules, consumers would recognize the EU standard as potentially superior. If the UK tries to impose stricter regulation in some areas, companies may simply not respect the EU recognized brand and bypass it.
Brexiters were always ready, at least in theory, to sacrifice some economic advantage for the sake of regained sovereignty. But no one predicted that our world would change so dramatically in ways that would make these sacrifices so much more expensive. This may not hurt Boris Johnson at the polls, but it makes his job of providing growth and opportunity much more difficult.
More from Bloomberg’s opinion:
• Banking Jobs in London, Bonuses Look Safe – For now: Mark Gilbert
• Brexit five years after the vote shows mostly pain: Matthew Winkler
• Warning from a former Trump adviser to Boris Johnson: Therese Raphael
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Therese Raphael is a Bloomberg Opinion columnist. She was editor of the editorial page of the Wall Street Journal Europe.
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