How Brexit shattered the UK’s economic underpinnings

It’s been two years since former Prime Minister Boris Johnson signed his Brexit trade deal and triumphantly declared that Britain would be “prosperous, dynamic and content” after completing its exit from the European Union (EU).

The Brexit deal would allow British companies to “do even more business” with the European Union, according to Johnson, and would leave Britain free to strike trade deals around the world while continuing to export seamlessly to the EU market. 450 million consumers.

In reality, Brexit hurt the economy of the UK, which remains the only member of the G7 – the group of advanced economies that also includes Canada, France, Germany, Italy, Japan and the US – with an economy smaller than it was before. of the pandemic.

Years of uncertainty over the future trading relationship with the European Union, Britain’s biggest trading partner, hurt business investment, which in the third quarter was 8% below pre-pandemic levels despite a UK-EU trade deal. been in effect for almost two years. 🇧🇷

And the pound took a beating, making imports more expensive and fueling inflation while failing to boost exports, even as other parts of the world enjoyed a post-pandemic trade boom.

Brexit erected trade barriers for British and foreign companies that used Britain as a European base. It is weighing on imports and exports, undermining investment and contributing to labor shortages. All of this has exacerbated Britain’s inflation problem, hurting workers and the business community.

“The most plausible reason why Britain is doing comparatively worse than comparable countries is Brexit,” according to L. Alan Winters, co-director of the Center for Inclusive Trade Policy at the University of Sussex.

The sense of gloom that hangs over the UK economy is captured by striking workers, who are leaving in ever-increasing numbers over wages and conditions as the worst inflation in decades eats away at their wages. At the same time, the government is cutting spending and raising taxes to fill the hole in its budget.

While Brexit is not the cause of Britain’s cost of living crisis, it has made the problem more difficult to resolve.

“The UK chose Brexit in a referendum, but the government then chose a particularly difficult form of Brexit that maximized the economic cost,” said Michael Saunders, senior adviser at Oxford Economics and a former Bank of England official. “Any hope of economic upside from Brexit is all but gone.”

Companies count costs

Although Britain voted to leave the European Union in June 2016, its exit from the single market and customs union was only finalized on December 24, 2020, when the two sides finally reached a free trade agreement.

The Brexit deal, known as the Trade and Cooperation Agreement, entered into force on January 1, 2021.

It eliminated tariffs on most products, but introduced a series of non-tariff barriers, such as border controls, customs checks, import duties, and health inspections on plant and animal products.

Before Brexit, a farmer in Kent could ship a truckload of potatoes to Paris as easily as he could to London. Those days are no more.

“We hear stories every day from small businesses about the nightmare of forms, shipping, mail, things sitting around for weeks on end. The epic duration of the issues is simply staggering,” said Michelle Ovens, founder of Small Business Britain, a campaign group.

“The way things have gone over the past two years has been very bad for small businesses,” Ovens told CNN 🇧🇷

Researchers at the London School of Economics estimate that the range of UK goods exported to the European Union shrank by 30% during the first year of Brexit. They said this was likely because small exporters had moved out of small EU markets.

Take Little Star, a British company that makes jewelry for children. His business took off in the Netherlands and he had plans to expand to France and Germany next. But since Brexit, only two of its more than 30 Dutch customers are prepared to deal with the costs and paperwork of getting company stock.

Products that used to take two days to ship now take three weeks, while import and sales taxes have made it much harder to compete with European jewelers, according to Rob Walker, who co-founded the business with his wife, Vicky, in 2017. The company is now looking to the US for growth opportunities.

“Isn’t it crazy that we have to look across the Atlantic to do business because it’s so hard to do business with people 30 miles away?” Walker said.

A British Chambers of Commerce survey of over 1,168 companies published this month reported that 77% said Brexit had not helped them increase sales or expand their business. More than half said they had difficulty adapting to the new rules for trading goods.

Siteright Construction Supplies, a Dorset-based manufacturer, told the House that importing parts from the European Union to fix broken machines had become a “time-consuming nightmare” and expensive.

“Brexit was the biggest imposition of bureaucracy on business,” according to Siteright.

Nova Dog Chews, a maker of dog treats, said it would have lost all EU trade had it not established a foothold in the bloc. “This has cost our business a huge amount of money, which could have been invested in the UK had it not been for Brexit,” he added.

A UK government spokesman told CNN that the government’s Export Support Service provided exporters with “hands-on support” in implementing the Brexit deal.

The deal is “the world’s largest zero-tariff, zero-quota free trade agreement,” the spokesperson added. “It secures access to the UK market in key service sectors and opens up new opportunities for UK companies across the world.”

Permanent damage to trade

Britain will not easily replace the losses of losing unrestricted access to the world’s largest trading bloc.

The only substantial new trade deals it has struck since leaving the European Union, which not only rolled over the deals it had as an EU member, were with Australia and New Zealand.

By the government’s own estimate, this will have a negligible impact on the UK economy, increasing GDP over the long term by just 0.1% and 0.03% respectively.

On the other hand, the UK Office of Budgetary Responsibility, which produces economic forecasts for the government, expects Brexit to reduce British output by 4% over 15 years compared to staying in the bloc. Exports and imports are projected to be around 15% lower in the long run.

Initial data confirmed this. According to the OBR, in the fourth quarter of 2021, UK merchandise export volumes to the European Union were 9% below 2019 levels, with EU imports 18% lower. Goods exports to non-EU countries were 18% weaker than in 2019.

The UK “appears to have become a less trade-intensive economy, with trade as a share of GDP falling by 12% since 2019, two-and-a-half times more than in any other G7 country,” the OBR said in the March report. .

The decline in exports to countries outside the EU could be a sign that UK companies have become less competitive as they face higher supply chain costs after Brexit, according to Jun Du, professor of economics at Aston University, in Birmingham.

“The UK’s ability to trade has been permanently damaged [pelo Brexit],” Du told CNN. “That doesn’t mean it can’t recover, but it’s been delayed for several years.”

Research by the Center for European Reform, a think tank, estimates that, in the 18 months to June 2022, UK merchandise trade is 7% lower than it would have been if the UK had remained in the European Union.

Investment is 11% weaker and GDP is 5.5% lower than it should be, costing the economy £40bn ($48.4bn) in tax revenue annually. That’s enough to pay for three-quarters of the spending cuts and tax increases that UK Chancellor Jeremy Hunt announced in November.

economic toll

The UK is expected to be one of the worst performing economies next year among developed nations.

The Organization for Economic Co-operation and Development expects the UK economy to shrink by 0.4%, ahead of sanctioned Russia only. Germany’s GDP is expected to be 0.3% lower.

The International Monetary Fund (IMF) predicts growth of just 0.3% for UK GDP next year, ahead of Germany, Italy and Russia, which are expected to contract.

Both institutions say high inflation and rising interest rates will weigh on consumer and business spending in Britain.

According to the Confederation of British Industry, a leading business group, the decline in private sector activity accelerated in December and has now fallen for five consecutive quarters.

The downward trend “seems to deepen” in 2023, CBI chief economist Martin Sartorius said in a statement.

“Businesses continue to face multiple headwinds, with rising costs, labor shortages and weakening demand, contributing to a bleak outlook for the year ahead. 🇧🇷

*Julia Horowitz contributed to this story