Britain currently has the worst economic growth forecast among the G7 countries, the highest inflation amongst advanced economies, and is facing a myriad of other massive problems, such as its broken and parasitical housing and renting market, which is pushing families out of the most expensive areas like the capital, where primary school closures are the result. This is not even mentioning the real ‘wicked problems’ like the destruction of our natural environment (including our water) in the name of deregulation and an ill-understood pro-business attitude after Brexit.
Despite the distress signals, Brexiters want us to be patriotic and believe in sovereignty, as Tory MP Adam Holloway explicitly stressed this week during the parliamentary debate about a public inquiry into the impact of Brexit. Indeed, pro-Brexit politicians and media outlets seem to have gone into overdrive to defend the indefensible. The Telegraph seems to be spewing out columns and editorials at an increasing pace trying to explain why post-Brexit Britain is busted rather than booming; blaming the ‘Europhile establishment,’ the civil service, and the ‘Nanny state’ for the lack of positive impact of our departure from the EU on the British economy and society.
The British public, however, increasingly seems to be connecting the dots between the countries’ many woes and the single biggest change to its position in the world economy in over a generation. This week, the Parliament debated an online petition asking for a public inquiry into the impact of Brexit that had been signed by over 180,000 people. The view that Brexit was a mistake is now consistently – and by a 20% point margin – the majority view.
Deep down Brexiters know it too of course. Secretary of State for Business Kemi Badenoch’s plea for us to stop talking about Brexit, surely is the clearest admission of failure there can be. Had Brexit delivered on any of the promises that were made during the Referendum campaign, surely Brexiters would want us to talk about it.
The welcome government U-turn on the Retained EU Law bill (REUL), which would have seen up to 4000 pieces of legislation lapsing by the end of 2023 unless they had been reviewed and explicitly retained, can also be categorised as an admission of failure. The government has now decided that only around 800 pieces of ‘unnecessary’ EU law would be removed. The REUL bill had alarmed businesses and trade unions alike due to the regulatory uncertainty and the potential negative impact on workplace safety. The government’s new realism that has been at display at various points since Sunak took over from Liz Truss – most importantly regarding Northern Ireland – indirectly constitutes an admission of failure of the Brexit ultras’ approach.
Brexit ultras like Jacob Rees-Mogg and their newspapers read the situation very differently of course. They see Badenoch’s call for realism as the words of a weak minister who has not got the stature to stand up to the ‘Remainer civil service’ that is bullying her into becoming more moderate.
But the government knows that as a political and electoral project Brexit has run its course. A new poll shows that 59% of people think Brexit has made the UK worse off and a meagre 9% think it is better off. Calls for patriotism, belief in Global Britain, and sovereignty will not be enough in the long run to convince people that it was worth it. Especially because things are going to get worse, not least in terms of the economic impact of Brexit.
Alarming trade damages
The damage that Brexit is doing to UK businesses is ever more evident and now increasingly also documented and analysed in peer-reviewed academic publications. Two recent papers published in the academic journal Contemporary Social Sciences reach alarming conclusions for UK businesses.
A study by Jun Du and her colleagues uses the synthetic difference-in-differences (SDID) methodology to estimate the impact of the UK’s exit from the EU on UK trade compared with a synthetic, counterfactual case where the UK had not left the EU.
The two key findings are – firstly – that overall exports not just to the EU, but also to the rest of the world (RoW) have dramatically declined as a result of Brexit. Prof. Du and colleagues find that ‘exports to the EU since January 2021 are 22.9% lower on average, while exports to ROW are 11.3% lower as a result of [the Trade and Cooperation Agreement (TCA)].’ And no, this is not due to Covid or the war in Ukraine, as the study also shows that ‘the UK is an outlier [amongst advanced economies], with zero export growth during 2019Q1–2022Q1.’
Secondly, the decline in export volumes goes together with a decline in the variety of goods exported. The study shows that ‘the post-TCA average for exported varieties between 2021Q1 and 2022Q2 was only 42 thousand varieties; this is equivalent to a staggering 40% reduction on the December 2020 figure.’ These findings on trade variety are broadly in line with findings from other studies that also found a very significant decline in the number of exporting relationships with the EU, e.g. here. Worse still, this decline in exporting has primarily hit small companies who often rely on a small variety of goods and stopped exporting to the EU altogether or went out of business.
The study also finds that imports from the EU were initially down too, but then rebounded so that the gap between the real UK and the counterfactual UK has now closed in terms of imports from the EU. That, however, may change with the introduction from October of new border checks in the UK for goods coming from the EU.
Non-tariffs, hidden tariffs, and the struggles of small businesses
Several points are noteworthy here. The negative impact of exiting the EU has taken place despite the fact that the TCA guarantees largely tariff and quota free trade with the EU. Tariff and quota-free trade was indeed one of the alleged victories of Boris Johnson’s deal. Yet, it is his false claim that there would not be any non-tariff trade barriers that now turns out to be the key issue.
Non-tariff trade barriers in the form of customs checks and paperwork are enough to reduce trade very significantly. So, they are not some sort of limited nuisance for exporters, but a very real and in many cases existential problem.
Worse still, another study by Prof. David Bailey and colleagues finds that even tariff barriers come back into play indirectly due to the TCA. Small companies often simply do not have the capacity to deal with the additional paperwork and costs (estimated at between £5.5bn-£6bn years) for rules of origins (ROO) auditing and certification that are needed to benefit from tariff free exporting into the EU Single Market. An estimated quarter to one third of exports from the UK to the EU that could benefit from tariff free exporting under the TCA, actually do not enter the EU under zero tariffs! So, organisational resources and capacity are a key prerequisite for companies to be able to benefit from the tariff free trade under the TCA, which small companies do not have; putting them at a disadvantage compared to large companies.
This economic effect of Brexit on the population of UK businesses is often hidden in arguments about aggregate figures (such as the forecasted .08% GDP increase due to the UK joining the CPTPP). Behind the aggregates and the averages are very real businesses; and smaller ones are the ones that bear the brunt of hard Brexit. At the same time, small businesses are particularly important for employment in the UK, employing approximately 3/5th of all employees in the country. They are more prone to employ people throughout the UK’s regions and less inclined to downsize and relocate workforce abroad compared to large multinationals.
Teething problems v. structural damage
The findings of these studies also seem hardly compatible with the teething-problems hypothesis, which suggests that what we are observing are short-term adaptations to the new arrangement, which will allow firms to return to levels of exports like before Brexit. This may be true for large companies who have the organisational resources to cope with the additional red tape and have the financial resources to simply absorb the additional costs associated with exporting. Bailey’s and colleagues’ interviews with larger exporters hint at this to some extent. Yet, overall things seem to be getting worse not better.
Intriguingly, Du and colleagues note that “the negative impact of TCA on imports from the EU and ROW since January 2021 had mostly dissipated by the beginning of 2022 […]. The decline in export, however, has remained deep and persistent since January 2021. While the gap between the actual UK exports to the EU and the exports of the counterfactual seems to be narrowing in 2022, the gap in the UK exports to ROW is widening.”
So, the impact on UK exports to non-EU countries may be worse than the impact on exports to the EU. This finding once again belies the facile Brexiter idea – last on display when the UK joined the CPTPP – that lost trade with the EU can simply be made up for by more trade with the RoW (I have commented on this several times before e.g. here).
Brexiter trade economics are implicitly based on the simplistic assumption that the UK exports finished consumer goods that largely rely on ingredients and input factors available in the UK and that are largely produced, transformed, and assembled inside its borders. This idea may apply to certain produce, like Scottish whisky perhaps (although even that industry relies on imported Barley from Canada). The vast majority of manufactured products, however, are produced in complex supply chains spanning many countries. While a whiskey producer may be able to simply overcome trade barriers by internalising the costs of exporting to any given consumer market, for a producer relying on international supply chains of intermediary goods, the costs and complexities are multiplied by the number of border crossings.
Here, Prof Bailey and colleagues’ study of the impact of Brexit on just in time (JIT) supply chains in advanced manufacturing in the Midlands provides important insights. A key finding is that just-in-time supply chains are extremely sensitive to trade barriers, because they rely on little or no stockpiling and multiple border crossings of unfinished intermediary goods before final assembly. Here, Brexit has caused multiple problems that are not limited to paperwork, but also due to congestion and delays at ports.
Looking at supply chains more closely also leads us to relativise the rebound in imports from the EU. Here Bailey and colleagues’ work shows that while imports from the EU may have recovered in the aggregate, ‘in sectors with high non- tariff barriers (including motor vehicles and their supply chains), there have still been significant falls in imports.’
These disruptions to JIT supply chains, in turn, have knock-on effects on companies in the UK relying on these imports for their own production, leading to ‘lost orders from EU customers that in turn had triggered plant shutdowns and hence work- force redundancies,’ e.g. in Worcestershire (a 54% leave-voting constituency). Rather than ‘teething problems,’ the TCA seems to be causing structural damage to the supply chains UK businesses are part of.
Labour market and skills
The labour market impact of Brexit is arguably the most alarming aspect of the new post-Brexit trading arrangements with the EU. Prof Bailey’s study shows that ‘[…] there will be significant changes and challenges moving forward,’ because manufacturing companies in the midlands are facing ‘[…] gaps in terms of skillsets – and these will only become more difficult to plug now that they have lost access to a broader pool of European talent, even with a relatively liberal post Brexit immigration policy.’ This is confirmed by business leaders like Ryanair’s Michael O’Leary who recently talked about the “huge challenges” his company is facing in the UK largely due to its broken labour market and the costs associated with getting visas for EU workers.
An obvious adaptation to this lack of skills would be to train people in the UK. This strategy had indeed at one stage become semi-official Tory policy. Back in 2021 when labour shortages started to hit various sectors of the UK economy, PM Johnson and Chancellor Sunak tried to convince us that the shortages were part of the Brexit plan to move from a low-skill, low-productivity, and low-wage economy to one where all three would be high. They accused British companies of being drunk on cheap labour and suggested Brexit would lead to higher wages.
Prof Bailey’s work shows that we are a far cry from such a situation also because small manufacturing businesses ‘[…] are still completely oblivious to how apprenticeships work, the benefits and how they could access them.’
More generally, the dream of a high-skill, high-wage, high-productivity equilibrium will remain a fantasy as long as the government does not get real about the necessary policies to achieve this goal, which – as I and my colleague Chiara Benassi argued a while ago – must include policies that ‘encourage’ business to invest in their workforce and in productivity-enhancing technology. Like in many other areas, here too the UK is moving in the wrong direction with business investment on a long-term decline trajectory.
Without these policies and investments in productivity and training post-Brexit shortages in workers and skills will not magically lead to a high-skill, high-wage, high-productivity equilibrium, but to increasing labour costs for businesses that many – such as those in the hospitality – cannot afford, which necessarily will lead to companies going out of business.
Inflation
The TCA is impacting not only on businesses’ ability to export and on labour markets, but also on the prices of consumer goods. Here, too, we can expect things to get worse before they get better.
With 19.2% last month, Britain has the highest food inflation in Europe while also being one of the countries that relies most on food imports (30% of all the food consumed). Given that wages are not rising at a similar pace, more poverty is the logical result from this trend.
The new customs checks on food imports that will come into force from October this year under the government’s ‘target operating model’ (TOM), will make things worse. Like their UK counterparts, EU businesses may stop exporting to the UK, which will lead to reduced choice for British consumers. Worse still, while Jacob Rees-Mogg had promised that costs for businesses would be minimal, it now becomes clear that all goods that are eligible for border checking will have to pay a fee of £23 to £43 from January, not just those that are actually being checked, as initially promised. Another broken Brexit promise with very real implications for the businesses concerned.
Brexit opportunity (costs)
Beyond the economic impact of trade barriers, another key finding of Bailey and colleagues’ study concerns opportunity costs. The respondents cited in the study refer to both Covid and Brexit as ‘really unhelpful distractions,’ which prevent the company from focussing on the real issues of getting ready for ‘net zero’ by making their production more climate friendly and preparing for digitisation of manufacturing (‘manufacturing 4.0’).
This is a crucially important point. While politicians still debate Brexit opportunities or lack therefore, it is time that we start talking about the Brexit opportunity costs. Brexit is a distraction and a waste of resources at a monumental scale. As I noted previously, all the time, resources, and energy that went into Brexit since June 2016 – and indeed before – could have been spent on solving the real issues we are facing, such as water quality, child poverty, the crumbling care sector, the NHS, not to mention climate change. Instead, the UK affords itself the luxury of using up much of its political and state capacity to fight windmills! I suspect future generations will look back on Brexit Britain and puzzle over how a country – famed for its pragmatism – could get caught up in a mass wish psychosis that made it blind to the ever louder distress signals.
May Day
Taken together, recent academic studies on the impact of Brexit on the UK economy provide alarming findings. The triple whammy of reduced exports, increased prices, and opportunity costs caused by the Brexit distraction means that the declinism that Brexiter Daniel Hannan decries is more than appropriate.
To halt the downward spiral the British economy and society is caught up, we do not need ‘patriotism’ and a belief in ‘sovereignty.’ We need to take the distress signals from UK businesses seriously and we need politicians to start adopting the right kind of policies to address these issues.
Given that it is International Workers’ Day today, one important step in this direction would be to recognise the importance of decent working conditions and wages for a prosperous post-Brexit Britain. Not only would that improve social peace and societal cohesion in the country (‘levelling up’ and all that), but also it would increase domestic demand and thereby provide a boost to the economy. Yet, as long as not only the Tories and their vile media backers, but also Labour, engage in union bashing and deny workers their right to fight for decent wages, there is little hope that this will ever happen.
Despite all the rhetoric, other than patriotism and sovereignty, Brexiters have nothing to offer to working people. Tory MP Adam Holloway believes that “it is easy to disdain patriotism if someone is economically and socially mobile and derives their self-worth from a well-paid job, or if their life is made easier by cheap labour as a result of free movement." Yet, while he lauds the end of free movement for its effect on the price of labour (and hence wages), his party continues at every turn to deny workers the right to demand precisely that. If Brexiters were serious about improving working people’s living standards, supporting trade unions who are the main instrument to achieve that would seem like the only logical stance. Yet, claiming Brexit will end cheap labour, while denying workers the wage rises they need and deserve is perfectly in line with the now very familiar pattern of dishonesties, logical distortions, and gaslighting that Brexit has come to epitomise.