Some early evidence and ironies

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The UK Brexit referendum passed in 2016 (here are my thoughts at the time).

The UK government dithered for some time over what the referendum meant, before finally signing the EU-UK Trade and Cooperation Agreement (ATT) which entered into force from 1 January 2021. So, the evidence for the effects of Brexit is quite early, based on five years where nothing had been determined and just over a year with both a new treaty and a global pandemic. However, it’s not too early to start collecting evidence and looking for patterns.

The Center for Economic Research has produced one of its helpful discussions on the evolution of evidence in The economics of Brexit: what have we learned?, with nine authors offering brief readable overviews of their research, and a summary overview by editor Jonathan Portes. At this point, it’s obvious that the gloomy and catastrophic predictions of immediate disaster didn’t happen, but what did do offer a number of political ironies. Here I will rely on the overview of the chapters of Doors. He writes:

The ACT, while providing zero tariffs and quotas on traded goods, contains very few provisions of economic significance relating to the mutual recognition of regulations
standards, regulatory equivalence for services (including financial services) or labor mobility. Compared to EU membership (and its single market and customs
Union), it therefore implies a significant increase in trade barriers and the costs of trade in goods and services, as well as new restrictions on migratory flows.

With regard to trade in goods, a trend in research seems to be that while large UK firms had the international connections to largely continue their previous business models, many smaller firms proved less able to do so.

[T]They find no evidence of a statistically or economically significant decline in UK trade with the EU relative to the rest of the world prior to the implementation of the ATT. On the other hand, the effective introduction of the TCA caused a major shock to trade between the United Kingdom and the EU, with a sudden and persistent fall of 25% in British imports from the EU, compared to the rest of the world. There is only a small and temporary decline in relative UK exports to the EU, but nevertheless a significant and sustained decline in the number of trade relationships between UK exporters and EU importers. This suggests that the introduction of the TCA caused many small UK businesses to stop exporting to the EU, but larger businesses were on the whole able to absorb the additional costs.

There is substantial irony here. One of the political forces driving Brexit was the feeling in many parts of the UK that globalization and the EU only benefited London and big business. But it turns out that London and big business handled Brexit very well.

However, as [Theimo] Fetzer points out that global impacts are by no means everything. His analysis suggests not only that the costs of Brexit are very unevenly distributed, but that, perhaps paradoxically, the regions that voted the most for Brexit are the most affected, while London emerged largely unscathed, from less so far.

One of the common promises of the pro-Brexit movement was that if the UK could escape 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 products more dependent on imports from the EU in 2015 experienced larger price increases than those less dependent on the EU both immediately after the 2019 elections – when it was confirmed that the UK would leave the single market and customs union – and the implementation of the ATT in January 2021.
Using a differences-in-differences approach, they estimate a 6% increase in food prices due to Brexit over the two years to the end of 2021. … [T]The apparent upward pressure on food prices resulting from Brexit is certainly a far cry from the claims by some Brexit supporters that an exit from the EU’s Common Agricultural Policy would cause food prices to fall sharply…2018 ).

Another main political driver of the pro-Brexit vote was concerns over immigration within the EU. In this case, UK immigration policies seem to have pivoted so that while immigration from the EU has indeed become more difficult, immigration from non-EU countries of origin has become easier. Overall, Brexit has apparently led to greater openness to immigration in Britain. Here, Portes describes his own research.

I am describing the new system, which indeed represents a very significant tightening of EU migration controls compared to free movement. Migrants who come to work in less skilled and less well paid professions are, in principle, no longer able to enter. However, compared to the current system – and contrary to previous forecasts – the new proposals represent a considerable liberalization for non-EU migrants, with lower wage and skill thresholds and no overall cap on the number. This implies that around half of all full-time jobs in the UK labor market could in principle qualify a visa applicant. This represents a very substantial increase – perhaps a doubling of the previous system – and also makes the new system considerably more liberal towards non-EU migrants than that of most EU Member States, which apply usually much more restrictions (de facto and/or de jure) on skill or salary thresholds, and often impose labor market testing of residents. Provisions for international students after completing their studies are also relatively liberal.

Thus, the new system does not represent an unequivocal tightening of immigration controls; on the contrary, it rebalances the system from a system that was essentially laissez-faire for Europeans while being quite restrictive for non-Europeans, towards a uniform system that, on paper at least, has relatively simple criteria and transparent. And this analysis seems to be confirmed by data on the operation of the system during its first year, when there was a significant increase in work visa problems compared to pre-pandemic levels, in particular in the sector of the health, and an even greater increase in the number of international student visas. …

Ultimately, a key factor in the effects of Brexit will be the major hole created by the ATT: EU countries have many of the same regulations, which greatly facilitates trade in service industries. Over time, UK and EU regulations are likely to drift apart, and this barrier to trade is likely to increase over time. Doors writes:

Looking ahead, the key question is to what extent the UK regulatory regime diverges from that of the EU, and the likely consequences. While some divergence is likely – for example, in insurance – there is little appetite in London for a ‘race to the bottom’; instead, a gradual, piecemeal divergence is more likely. The medium term implication is that London will retain its importance as Europe’s leading financial center for the foreseeable future, but this dominance will gradually erode over time.

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