In the run-up to the Brexit referendum there was a lot of talk about the opportunities UK businesses would gain by the UK leaving the EU. The Big Brexit report by the think tank Resolution Foundation has analysed the impact on the UK so far.
Six years ago, the UK decided to leave the EU. The immediate impact of this decision was the depreciation of the pound. A new analysis by Resolution Foundation now explains in detail what impact Brexit had on the UK economy, businesses and the British people in the past six years.
They also look ahead and predict how the UK will fare in the next few years outside the EU and what the challenges will be.
How Brexit Has Changed The UK Since The 2016 Referendum
After the initial fall of the pound straight after the results of the referendum were announced, the pound settled down a year later at more than 12% below the levels before the referendum.
This led to higher import costs, which increased inflation and as a result the cost of living rose by £870 per year. Thereby exacerbating the current cost-of-living crisis.
Businesses faced uncertainty about how they will be trading with the EU, the UK’s biggest trading partner, after Brexit. This uncertainty led to a decrease in investment, with UK business investment falling by 0.1% per quarter in the three years following the referendum.
However, the expected fall in direct foreign investment and exports to and imports from the EU did not materialise before the implementation of the Trade and Cooperation Agreement (TCA).
After The Implementation of the TCA
The analysis of the impact of Brexit after the implementation of the TCA is complicated by the emergence of the pandemic. Because Covid-19 affected global trade, causing supply chain issues and global travel disruptions, which caused a rise in freight costs and transport delays.
As a result, global trade fell by 8.9% in 2020 and trade in global services fell by 20% in the same year. The implementation of the TCA came during this upheaval caused by the pandemic.
Therefore, the think tank looked at the UK’s trade performance with the EU compared to other countries during this period, rather than looking at the changes in level of trade between the UK and EU.
And the results are surprising. While it was widely expected that UK exports to the EU would decline after the implementation of the TCA, this is not borne out in the data.
A similar picture emerges with the services trade. While both exports and imports have fallen, the fall in exports is much smaller than in imports. Also, the decline in exports is consistent with the longer-term decline.
It’s Not All Good News
While the expected decline in exports to the EU did not materialise, there are signs that the UK is less open and competitive since Brexit. In particular the decline in trade openness is serious, falling by 8% between 2019 and 2021.
In comparison to other countries, this decline is much bigger. France, for example, only had to content with a 2% decline, despite having a similar trade profile to the UK.
And while trade openness did fall in France, since 2020 it has risen again by 4%. And the same is true for other large European countries. Which means the UK is the only large European country whose openness has declined since 2020.
The think tank sees a correlation between the decline in trade openness and goods trade. With UK goods exports as a share of GDP falling between 2020 and 2021, while it has risen for all other EU countries, except Ireland.
Even more concerning, the UK lost competitiveness across several of the most important markets, the US, Canada and Japan. While part of this loss can be explained through changes in global demand, it only accounts for the loss of £6.7 billion. The remaining £11.7 billion of lost annual exports is down to a decline in the UK’s competitiveness.
While it is not yet clear how long-lasting these changes in non-EU trade will be, it could be a sign that Brexit caused a bigger impact on the UK’s openness and competitiveness than initially expected.
What Is The Future Outlook?
The research has shown that UK firms are finding ways to cope with the change of the trading landscape with the EU. One such way is by reducing the number of export relationships with the EU, which has fallen by 30% after the TCA came into force.
This has been caused by the additional administrative burden connected with trade with the EU under the TCA. As a result, many UK companies decided to ship only to one EU destination and use an EU-based distributor. Whereas before they would have shipped to the individual countries.
Resolution Foundation suggests that it will take the UK economy many years to adjust to the changes caused by Brexit. This means that some sectors will have to adjust the way they trade, however, the report does not suggest that the nature of the economy will change.
The biggest impact of Brexit will be on real wages and productivity. This means, because of the UK’s exit from the EU, it is expected that worker’s pay and productivity will decline.
Because a UK that is less open is also poorer and less productive. Which seems to contradict former Brexit minister Lord Frost, who recently declared that Brexit “is working”.
[The] view that Brexit is hitting us from an economic and trade perspective is in my view generated by those with a bit of an axe to grind on this subject and cannot be supported by any objective analysis of the figures.Lord Frost, former Brexit Minister