Brexit has led to a slow decoupling


Sunderland’s resounding vote, announced early on the night of Britain’s 2016 Brexit referendum, was a harbinger of the final outcome. Last week, six months after the end of the post-EU transition period, Nissan’s plans for a giant battery factory as part of a £1billion investment in the north-east city England have been seized by the government as a sign that the UK has retained its attractiveness and competitiveness. A Nissan boss noted the company “was moving forward to use Brexit as an opportunity”.

Six months into this new era, Brexit has failed to fulfill the prophecies of near-term disaster. Queues of 7,000 lorries in Kent that pro-leave minister Michael Gove predicted as a ‘reasonable worst-case scenario’, even if the UK gets a new trade deal with the EU from 1st January, never materialized. Medicines have not disappeared from the shelves of pharmacies, car factories have continued to operate, bankers have not decamped by the tens of thousands to Frankfurt.

Yet, as the Financial Times has reported in recent days, while the disruptions have not been visible, they have been significant. Almost a third of UK businesses trading with the EU have suffered a decline or loss of business; 17% who previously did business with the block have discontinued it, either for now or for good. Businesses face costs related to the reorganization of operations and supply chains. The pandemic, which suppressed business and leisure traffic, masked the upheavals. A revival of the economy will make the government’s sacrifices in market access in pursuit of sovereignty more evident.

Moreover, the real impact of Brexit was always going to be longer term. Early evidence supports the consensus of economists: erecting barriers with the UK’s closest and largest market – for which there is no comparable substitute – will hurt growth over time. Although companies are adapting, the signs point to an inexorable decoupling. Heightened frictions in EU trade and the costs of traveling to more distant non-EU markets are prompting many small businesses, in particular, to look to the UK. Overall, firms will benefit less from economies of scale, which will reduce productivity growth.

The financial services industry lost less business than expected. But she, too, is turning away from the EU, no longer pushing for the equivalence deal she was seeking – largely because she accepts the EU not granting it.

The regained sovereignty of the United Kingdom will not compensate for these losses. Post-EU trade deals with countries like Australia provide only a small economic boost. Hopes for an American agreement, intended to anchor a series of such pacts, have faded. Chancellor Rishi Sunak’s urge to trade more with China is uneasy with warmongering towards Beijing from key Brexit allies such as the United States. The market rules established by China may be less acceptable than those of the EU.

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The real success of post-Brexit Britain will depend much more on a level of economic policy-making expertise that few post-war governments have shown. Ways must be found to boost productivity and innovation, and revitalize lifelong learning to equip workers with the necessary skills.

This will also require a gradual reconciliation with the EU. “Getting Brexit done” did not lead to a cathartic reset, but to new tensions, especially over the Northern Ireland protocol. Breaking this deadlock will be impossible without compromise on both sides. Sustaining growth will require reducing frictions in EU trade through new agreements on facilitation and market access, ensuring that decoupling is not a permanent state. Boris Johnson’s government, closely tied to the Brexit mast, gives such measures a low priority. Future governments may one day be more willing.

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