New CEPR/UK in a Changing Europe eBook: The Economic Impact of Brexit

Thursday, June 23, 2022

Six years after the Brexit referendum, and over a year since the implementation of the UK-EU Trade and Cooperation Agreement (TCA), a new CEPR eBook in collaboration with the UK in a Changing Europe network assesses the economic impact of Brexit on trade, immigration, and the political economy to date, and suggests policy solutions for the UK to avoid becoming a poorer, more insular, and more divided country.

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The eBook, edited by Jonathan Portes (King's College London and UK in a Changing Europe), with contributions from leading academic researchers, describes how the politics of immigration and free movement were the key driver of the shape of the UK-EU post-Brexit economic and trading relationship, as now enshrined in the TCA. The desire to pursue a ‘hard’ Brexit has resulted in a major increase in trade barriers and trade costs in goods and services, as well as new restrictions on migration flows. The costs of Brexit so far also appear to be unevenly distributed, with areas that voted most heavily for Brexit the worst affected. While comprehensive data on the economic impacts of the agreement are still relatively nascent, the chapters within the eBook provide preliminary findings on three key areas of impact: trade in goods, trade in services, and migration. 

The effect on trade in goods was limited between the referendum and 2021, with no economically significant decline in the UK’s trade with the EU. The introduction of the TCA, however, caused a major shock to UK-EU trade, with a sudden and persistent 25% fall in UK imports from the EU, relative to the rest of the world. The research shows that there is only a smaller and temporary decline in relative UK exports to the EU, but there is nevertheless a large and sustained drop in the number of trade relationships between UK exporters and EU importers. The shock has impacted sectors and regions unevenly. It is estimated that there has been a 6% increase in food prices due to Brexit, over the two years to the end of 2021.

In contrast to trade in goods, there was a significant fall in UK exports of services after the referendum and the implementation of Brexit, amounting to 6% in 2019. The authors find no evidence to suggest that UK businesses have redirected exports from EU markets to those outside the EU. Instead, the apparent beneficiary is Ireland, which has experienced rapid growth in its exports of services over the same period. The research shows that there has been some relocation of financial service activity to locations in the EU, although no single centre has gained disproportionately. While around 10% of total assets of the UK banking system have moved, a far smaller proportion of jobs or value added has been lost. Looking forward, the authors highlight the extent to which the UK regulatory regime diverges from that in the EU as a key issue which will influence the growth and trajectory of the service sector. 

The new UK migration system represents a substantial tightening of controls on EU migration compared to the free movement which existed prior to Brexit. The analysis shows that many employers in industries that previously relied heavily on EU workers are finding it difficult to recruit. Surprisingly, there is little evidence to suggest that shortages are translating into sustained higher wages in the affected sectors. The new system does represent, however, a considerable liberalisation for non-EU migrants, with lower salary and skill thresholds, and no overall cap on numbers. Indeed, there has been a significant rise in the issue of work visas, compared to pre-pandemic levels, particularly in the health sector, and an even larger rise in the number of international student visas. Overall, the new system does not represent an unequivocal tightening of immigration controls; rather, it rebalances the migration flow between non-Europeans and Europeans. 

The last chapters include policy suggestions for strategies to address both the economic and political implications of Brexit. These include calls for a greater focus on attracting skilled labour and productive capital, combined with a reengagement with the EU, based on regulatory convergence. Policymakers should also consider the need for much greater devolution and greater redistribution, geographically and between generations as well as from rich to poor. The alternative, the authors suggest, is a poorer, more insular, and more divided country. 

You can also read a VoxEU column here

To reach the authors, or for more information, please contact CEPR Press Officer Alexander Southworth