Brexit: some early evidence and irony

The UK Brexit referendum was held back in 2016 (here are my thoughts at the time). The British government hesitated for a while about what the referendum meant before eventually signing the EU-UK Trade and Cooperation Agreement (TCA), which came into effect on 1 January 2021. five years when nothing was determined, and a little over a year with both the new treaty and the global pandemic. However, it is too early to start gathering evidence and looking for patterns.

The Center for Economic Research had one of its useful discussions on evolving data in The Economics of Brexit: What Have We Learned?, with nine authors offering readable summaries of their research and a synopsis by volume editor Jonathan Portes. It is clear at this point that the dire predictions of immediate catastrophe have not come true, but what has happened contains a number of political ironies. Here I rely on the review of Portes’ chapters. He wrote:

The TCA, while providing for zero tariffs and quotas on tradable goods, contains very little
provisions of any economic importance relating to the mutual recognition of regulatory
standards, regulatory equivalence of services (including financial services), or
mobility. Compared to EU membership (and its Single Market and Customs
Union), therefore, this implies a significant increase in trade barriers and trade costs in relation to goods.
and services, as well as new restrictions on migration flows.

With regard to trade in goods, the study appears to have shown that while large British firms had international links to largely continue their previous trading patterns, many smaller firms were less able to do so.

[T]they find no evidence of a statistically or economically significant reduction in UK trade with the EU compared to the rest of the world prior to the introduction of the FTA. On the contrary, the actual introduction of TCA caused a major shock to trade between the UK and the EU, with a sudden and permanent drop in UK imports from the EU of 25% compared to the rest of the world. There has been only a slight and temporary decline in the relative UK exports to the EU, but a significant and sustained decline in the amount of trade between UK exporters and EU importers nonetheless. This suggests that the introduction of the TCA caused many smaller UK firms to stop exporting to the EU, but larger firms were generally able to cover any additional costs.

There is some significant irony here. One of the driving political forces behind Brexit was the feeling in many parts of the UK that globalization and the EU only benefited London and big business. But as it turned out, London and big business did a great job with Brexit.

However, as [Theimo] Fetzer notes that cumulative impacts are not everything. His analysis shows not only that the costs of Brexit are very unevenly distributed, but that, perhaps paradoxically, those regions that voted most for Brexit suffered the most, while London remained largely unscathed. at least so far.

One common promise by Brexiteers was that if the UK managed to avoid Europe’s Common Agricultural Policy, food prices would fall. This prediction does not seem to have come true either.

Focusing on the food industry, Bakker et al. show that goods that were more dependent on imports from the EU in 2015 rose in price more than those that were less dependent on the EU, as just after the 2019 election, when it was confirmed that the UK would leave the single market and the Customs Union, and after the implementation of the HOA in January 2021.
Using the difference-by-difference method, they estimate a 6% rise in food prices.
due to Brexit for two years until the end of 2021.… [T]The apparent upward pressure on food prices as a result of Brexit is certainly a far cry from the claims of some Brexiteers that withdrawing from the EU Common Agricultural Policy will lead to a sharp drop in food prices…

Another major political factor in the Brexit vote was concerns about immigration within the EU. In this case, British immigration policy seems to have changed in such a way that while immigration from the EU has indeed become more difficult, immigration from non-EU countries has become easier. Overall, Brexit appears to have led to more openness to immigration in the UK. Here Portes describes his own research.

I am describing a new system that is indeed a very significant tightening of controls on EU migration compared to free movement. Migrants coming to work in less-skilled and low-paid occupations can, in principle, no longer gain access. However, compared to the current system – and in contrast to earlier projections – the new proposals represent a significant liberalization for non-EU migrants, with a lower wage and skill threshold and no overall cap on numbers. This means that about half of all full-time jobs in the UK labor market can in principle qualify for a visa. This represents a very substantial increase – perhaps a doubling from the previous system – and also makes the new system significantly more liberal towards non-European migrants than most EU Member States, which typically apply much stricter (de facto and/or or de jure) qualification or wage thresholds, and often subject to a labor market test of the resident. Regulations for international students after graduation are also relatively liberal.

Thus, the new system does not represent an unequivocal tightening of immigration controls; rather, it balances the system from one that was essentially laissez-faire to Europeans and rather restrictive to non-Europeans, to a single system that, at least on paper, has relatively simple and transparent criteria. And this analysis appears to be supported by data from the system’s first year of operation, when there was a significant increase in work visa problems from pre-pandemic levels, especially in the healthcare sector, and an even greater increase in the number of international students displayed. …

Ultimately, a key factor in the consequences of Brexit will be the big hole created by the TCA: EU countries have many of the same rules, which greatly simplifies trade in services. Over time, UK and EU regulations are likely to diverge, and this trade barrier is likely to increase over time. Portes writes:

Looking ahead, the key question is to what extent the UK’s regulatory regime differs from that of the EU, and the possible implications. While some discrepancies are likely, such as in insurance, London has little appetite for a “race to the bottom”; instead, a gradual and partial divergence is more likely. In the medium term, it is assumed that London will retain its position as Europe’s leading financial center for the foreseeable future, but this dominance will gradually weaken over time.