One surprising result of the first full year review of post-Brexit trade, by four researchers from the Center for Economic Performance at the London School of Economics, is the collapse of UK imports from the EU, its largest trading partner. , although that turnout had been declining for years before Brexit. While UK trade with the EU and the rest of the world followed largely similar patterns after the 2016 referendum, EU imports fell by around a quarter relative to those from outside the EU once The new trade deal went into effect, and that’s after removing goods that would be most affected by the pandemic.
Since two-thirds of UK imports are used as production inputs, higher-priced imports influence the prices of other goods, including food. The UK in a Changing Europe think tank estimates that Brexit-induced trade barriers accounted for a 6% rise in UK food prices. Adam Posen, president of the Peterson Institute for International Economics in Washington and a former Bank of England policymaker, told a conference panel organized by the think tank last week that 80% of the reason that UK inflation will stay higher for longer than other Group of Seven economies can be blamed on the effects of Brexit.
Not everyone agrees that the impact on prices is so clear. Economist Julian Jessop acknowledges that Brexit will have added to cost pressures, but attributes most of the EU’s divergence to energy policy.
The export image is also more nuanced. UK goods exports to the EU fell after Brexit, but at first glance it doesn’t seem that dramatic. What’s interesting here is that the researchers noted a sharp decline in the number of export relationships.
The new trade deal appears to have reduced the variety of goods (identified by an eight-digit product code) exported to the bloc each quarter by around 30%. While the large exporters were able to absorb the increase in fixed costs, many smaller companies simply left the less profitable EU markets.
A few percentage points of GDP spread over many years is something that Brexiters have always been willing to accept. But just focusing on the direct impact on growth risks missing the broader impact that lower foreign direct investment will have on innovation, talent diversity and productivity. When small businesses are hit, and they are the biggest losers from Brexit, the dynamism needed to rebalance the British economy (Johnson’s oft-cited “levelling” agenda) is weakened.
While labor market shortages may push up some wages, EU immigrants also made a net contribution to UK government finances. And while there has been an increase in net immigration outside the EU, the drop in net migration from the EU since the referendum has already exacerbated labor market shortages, such as shortages of truck drivers and fruit pickers, but also of health care workers. It may be politically useful as a show of taking back control, but it’s not clear what other purpose it serves.
Despite the promise of a “global Britain,” essentially a freer-trading nation, Britain’s trade openness has fallen more steeply compared to 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 rest of the year, which would have accumulated 1 billion pounds ($1.25). billion) in additional costs for importers.
Finding ways to improve this image will not be easy. Take for example the new UK Conformity Assessed (UKCA) mark, which all companies selling in Britain must have from January next year, instead of relying on the EU’s ‘CE’ mark, which attests that companies have complied with EU health, safety and environmental standards. .
There is no suggestion that the UK will deviate from the vast majority of EU standards given that UK manufacturing is fully integrated into EU supply chains. The EU has refused to recognize the marketing of the UKCA, so Britain is imposing a cost on its own businesses and consumers by creating a largely redundant system. If Britain relaxed some of its own rules, consumers would recognize the EU standard as potentially higher. If the UK seeks to impose stricter regulation in some areas, companies could simply default to the EU well-known mark and avoid them.
Brexiters were always willing, at least in theory, to sacrifice some economic advantage for the sake of regaining sovereignty. But no one predicted that our world would change so dramatically in ways that would make those sacrifices that much more costly. That may not hurt Boris Johnson at the polls just yet, but it makes his job of creating growth and opportunity that much harder.
More from Bloomberg’s opinion:
• London banking jobs, 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 editorial board or of Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion. She was an editorial page editor for the Wall Street Journal Europe.
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