According to the Office for Budget Responsibility’s (ORB’s) latest economic and fiscal outlook report, the effects of Brexit are impacting on the recovery of the UK economy.
The financial watchdog has released its latest report about the economic and fiscal outlook, and predicts that international trade will continue to be down by 15%, as a result of Brexit. This reduction in international trade will slow down the recovery of the UK economy.
Overall UK trade volumes are down by about 15% compared to what would have happened if we had stayed in the EU, because we have made it more expensive to trade with our single largest trading partner.Richard Hughes, Chairman of the OBR
Why The Recovery Of The UK Economy Is Impacted By Brexit
Since 2019, when Brexit came into force, the trade share of GDP in the UK has fallen by 12%, according to the chairman of the ORB. As a result, the ORB predicts that over time, the UK will become a “less open” economy.
In the final quarter of 2021, exports were 13% lower than in 2019. And imports were down by 12%.
The forecast suggests, that in the medium-term, the growth in experts and imports will be weak, which will slow down the recovery of the UK economy. However, the ORB does predict a rise in imports and exports by 9% and 7% in 2022, when markets have recovered from the pandemic.
The reason that international trade has fallen since Brexit, is because the EU is the UK’s biggest trading partners. And the new rules have made it complicated and expensive to trade with the EU. Especially for small and medium businesses, the added cost and bureaucracy Brexit has brought, means trading with the EU is less viable than before.
Over 90% of UK businesses fall into the category of small and medium enterprises (SME), which means that their performance is vital to the recovery of the UK economy after the pandemic. So, if they lose business because they can no longer afford to trade with the EU, the recovery of the UK economy will slow down.
While the ORB acknowledges that global trade had collapsed in many countries at the start of the pandemic, the recovery of international trade in other countries has been much faster, with export levels of advanced economies being already 3% higher than before the pandemic.
The slow recovery of the UK economy is due to Brexit, according to the ORB. The financial watchdog further suggests, that this fall in trade could lead to a 4% reduction in productivity in the next 15 years.
Are New Trade Deals Helping To Minimise The Impact?
Since Brexit, the UK Government has been busy agreeing and signing new trade deals with non-EU countries. However, the majority of these weren’t new trade deals, but copies of agreements that UK already had with these countries as part of the EU. This means, that there are no new benefits to these deals.
As a result, most of the deals agreed by the UK Government since Brexit, will not be able to counteract the loss of trade with the EU.
What about the new agreements? New deals agreed by the UK Government include deals with Australia, New Zealand and Japan. Will these help to boost the recovery of the UK economy?
According to the ORB, the economic impact of these new free trade agreements (FTAs) will not be big enough to counteract the loss from trade with the EU. For example, the deal with Australia would only increase UK imports and exports by 0.4% over a period of 15 years.
Although, the UK might make FTAs with other countries in the future, that could replace trade with the EU. However, this will not help the recovery of the UK economy now.
Why Has Brexit Made Trading With The EU So Difficult?
While the UK does have a trade deal with the EU, the EU-UK Trade and Cooperation Agreement (TCA), it has introduced new rules that did not exist while the UK was a member of the EU.
These rules include the end of free movement, which means businesses who need to travel to the EU for work now need visas for their employees. In addition, the immigration rules are different in each of the 27 member states, which can add further complications.
The added bureaucracy is difficult enough if you have a large HR department, but for small businesses, this could pose an unsurmountable hurdle.
EU rules about the country of origin and customs declaration regulations also make it more complicated and expensive to export to EU countries. A burden that mostly small UK businesses have to carry. As a result, in February 2022, 9% fewer UK companies exported than the year before, according to data by the Exporter Monitor.
5% fewer small businesses and 6% fewer micro businesses in the UK have exported in that time. For medium-sized businesses, the reduction is 3%.
This reduction in international trade of small and medium businesses since Brexit does not only have an impact on their performance, but is also slowing down the recovery of the UK economy after the pandemic.
It is no wonder, that various organisations, such as the British Chamber of Commerce, are calling for a review of the EU-UK TCA before the official review date in 2026.
Businesses can’t afford to wait until the TCA review in 2026William Bain, Head of Trade Policy at the British Chamber of Commerce