Brexit made Boris Johnson. Now he has to face his costs

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It’s a good thing for Boris Johnson that most Britons aren’t thinking about Brexit when they vote in local elections on Thursday. While many of those who supported Britain’s departure from the European Union will still credit the prime minister, the costs of separation add to the economic pressures they currently face.

It is too early to assess the full impact of the deal which defined the new trading relationship between the UK and the EU some 16 months ago. But as the forces of globalization begin to work in reverse, the UK trade situation provides a real-world laboratory for the impact of newly erected trade barriers and economic decoupling.

One of the striking results of the first full-year review of post-Brexit trade, conducted 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 biggest trading partner, although that share had been declining for years before Brexit. While UK trade with the EU and the rest of the world followed broadly similar patterns after the 2016 referendum, imports from the EU fell by around a quarter compared to those from from outside the EU once the new trade deal comes into force – and that is after removing the goods that would be most affected by the pandemic.

Since two-thirds of UK imports are used as production inputs, the higher priced imports affect the prices of other goods, including food. The UK in a Changing Europe think tank estimates that Brexit-induced trade barriers have led to a 6% rise in food prices in the UK. Adam Posen, president of the Peterson Institute for International Economics in Washington and a former policymaker at the Bank of England, told a conference hosted by the think tank last week that 80% of the reasons inflation in the UK expected to remain higher for longer than other Group of Seven economies can be attributed to 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 divergence with the EU to energy policy.

The export image is also more nuanced. Exports of goods from the UK to the EU declined after Brexit, but at first glance this does not seem so dramatic. What is interesting here is that the researchers noted a sharp drop in the number of export relationships.

The new trade deal appears to have reduced the variety of goods (identified by an eight-digit commodity code) exported to the bloc each quarter by around 30%. While large exporters could absorb the increased fixed costs, many smaller companies simply left the less profitable EU markets.

A few percentage points of GDP spread over many years is something Brexiters have always been willing to accept. But focusing only 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 – it weakens the momentum needed to rebalance the UK economy (the “upgrade” program often cited by Johnson).

While labor market shortages may drive up some wages, EU immigrants have also been net contributors to UK government finances. And while there has been an increase in net immigration from outside the EU, the fall in net migration from the EU since the referendum has already exacerbated shortages in the labor market, such as the shortage of lorry drivers and fruit pickers, but also health workers. It may be politically useful as a demonstration of regaining control, but it is unclear what purpose it serves.

Despite the promise of a “global Britain” – essentially a more trade-free nation – Britain’s trade openness has fallen more sharply compared to other advanced economies.

In a tacit acknowledgment that gravity matters, after all, the UK government announced last week that it would not impose checks on goods entering the UK from the EU for the rest of the year, which who reportedly raised 1 billion pounds ($1.25). billion) in additional costs for importers.

Finding ways to improve this image will not be easy. Take the new UK Conformity Assessed (UKCA) mark, which all businesses selling in Britain are required to have from January next year, rather than relying on the ‘CE’ mark of the EU, which certifies that companies have complied with EU health, safety and environmental regulations.

There is no indication that the UK will deviate from the vast majority of EU standards, as UK manufacturing is seamlessly integrated into EU supply chains. The EU has refused to recognize the UKCA’s marketing, so Britain is imposing a cost on its own businesses and consumers by creating a largely redundant system. If Britain were to relax some of its own rules, consumers would recognize the European standard as potentially superior. If the UK seeks to impose stricter regulation in certain areas, companies could simply settle for the EU-recognized mark and bypass them.

Brexiteers were always prepared, at least in theory, to sacrifice economic advantage for regained sovereignty. But no one predicted that our world would change so drastically in a way that would make those sacrifices that much more costly. It may not hurt Boris Johnson in the polls just yet, but it does make his job of growth and opportunity that much harder.

More from Bloomberg Opinion:

• Banking jobs in London, bonuses seem safe – For now: Mark Gilbert

• Brexit five years after vote mostly shows pain: Matthew Winkler

• Warning from a former Trump adviser for Boris Johnson: Thérèse Raphaël

(Updates data in charts.)

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Thérèse Raphaël is a columnist for Bloomberg Opinion. She was editor-in-chief of the editorial page of the Wall Street Journal Europe.

More stories like this are available at bloomberg.com/opinion

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