5 Years Later: Is the UK Regretting its Decision to Leave the EU?
A Shockwave
Just over five years ago, the citizens of the UK went to the polls to vote on whether or not to leave the European Union. A non-binding referendum that most onlookers saw as little more than an opportunity to silence a vocal minority shocked the world when it came back in favor of a decision to leave.
Nearly 3.5 years later, after a long and drawn-out period of negotiations, the UK finally left the EU, ending its 47 years of membership. At the time, there were widespread concerns that this would prevent people from traveling back and forth into the UK, it had the potential to shut down certain businesses, especially those catering to frequent travelers from the EU, and above all else, it threatened the living standards of average Brits who had benefited from the EU membership whether they realize it or not. Of course, these concerns came true to an extent, but not necessarily because of Brexit.
COVID-19
The global pandemic hit the country particularly hard during the lead-up to the actual exit day, making it difficult to assess which hardships resulted from Brexit and which hardships would've occurred inevitably from the pandemic. By the same logic and in the same interest of fairness, it makes it difficult to determine if the promises made by Brexit supporters were realistic, given that even the best economic plans would be struggling in the global economic environment of 2021.
Impact on Trade
One of the most significant issues facing the UK in the years between the referendum and leaving the EU was the uncertainty around the post-Brexit UK. There was a range of conflicting theories suggesting everything from it being some kind of pommy utopia finally free from the shackles of the continent: to it being Armageddon, complete with rioting in the street and empty shelves. Of course, the second option doesn't sound great, but what might have been worse is not knowing which way the country would go. The most significant and most immediate impact of Brexit would be on trade.
The European Union is first and foremost a union of free trade. The countries within the union all agree to trade amongst one another without levying tariffs or imposing import quotas. On the opposite side of the same coin, the EU poses heavy restrictions on trade with non-member countries to incentivize EU nations to trade with one another rather than to trade with an outsider. There are exceptions for certain goods and materials not abundant within the EU; natural gas from Russia fed to Germany is a perfect example.
I will not get into the benefits and drawbacks of free trade in this article because it's really beside the point. Regardless of if this kind of free trade region is beneficial to its members, the UK is now an outsider. They've gone from being the beneficiary of free trade agreements to the victim of harsh trade restrictions; this wouldn't be good for any country. But it's dreadful and possibly detrimental for the UK, given just how dependent they are on trade to support their economy.
Trade Intensity
To understand just how important, we need to look at a figure called trade intensity. When economists look at trade figures, they usually focus on net trade, as in, (exports - imports). Net exports also make up the balance of trade, and by extension, things like current account balances, so it's easy to see why it gets much attention, but consider this:
Country A has no imports and no exports; it's completely isolated
Country B has $1 trillion worth of imports of goods in a given year and exports $1 trillion
Both of these countries would have the same net export figure, but Country B would likely be doing much better for itself. $1 trillion worth of exports would require the employment of millions of people and $1 trillion worth of imports would massively improve the average living standards for those same workers. The second country would also naturally be far more dependent on free trade agreements.
Economists need to consider trade intensity figures.
If we take our oversimplified example of these two countries and assume they both have a GDP of $4 trillion, Country A would have a trade intensity of 0%, whereas Country B would have a trade intensity of 50%. The bottom line: trade intensity is a much more indicative figure of what is going on in an economy.
Why is it Important to the UK?
Well, the UK has one of the highest trade intensity levels in the world. The UK's trade intensity was 63% in 2019. Compare that to other major advanced trading nations like Australia at 46%, Japan at 35%, in the US at 24%, and we can start to see just how important trade is for the UK.
Recommended by LinkedIn
Historically this makes sense. The UK itself is a relatively barren rock in the middle of the Atlantic, devoid of the natural resources it would need to fuel its economy properly. It's also historically been a tremendous colonial power, so trade came naturally to it as it became more and more critical to the world economy throughout the last few decades; this is where that uncertainty about what Brexit would look like becomes essential again.
The worst-case scenario like the feared no-deal Brexit with stiff borders, and no free trade at all between the EU would not have been good, obviously, but it would have been possible to plan for. The combination of a drawn-out decision to leave followed by a year-long transition period combined with the existing economic fallout from the global pandemic made it incredibly hard for individuals, businesses, and even entire governments to plan much beyond the immediate future. But of course, now we have the benefit of hindsight.
Trade
Trade in the UK has dropped significantly; no surprises there, especially considering the impact of the pandemic on things like travel and general business activity. During the so-called Brexit Transition Period, intensity fell from 63% in 2019 to 55% in 2020. That might not sound like a tremendous drop, and it still puts the UK well ahead of most other countries.
Trade Agreements
The EU-UK Trade & Cooperation Agreement, or TCA for short now defines the UK's trade relationship with the EU. The timeline is that the UK officially left the EU at the beginning of 2020, the transition period agreement was then in place until the end of 2020, and now the TCA has been in place for just over 11 months. The terms of the TCA (which is only partially in effect at this point) are, in general, much more limiting than the terms of the Transition Agreement. The terms of the transition agreement were, in turn, much more limiting than being a full member of the EU. It is a course less limiting than a no-deal Brexit but perhaps not by much.
Trade What-If Analysis
Goods exports to the EU are down significantly this year, meaning trade intensity may very well see another 10% slide in 2021 on the conservative side. The Centre for European Reform has attempted to isolate the impact of Brexit using a statistically modeled, "Doppelganger UK" to assess what would happen had the UK remained in the EU. That analysis concluded that since the transition period ended, leaving the single market and customs union had reduced UK goods trade by 15.8% as of August 2021. 15.8% is huge; this will directly impact hundreds of thousands of workers and not for the better. Despite being the first thing everybody thinks of, lost trade might not be the biggest hit to the British economy. Consider the lost manpower.
The European Union Shared Labor Agreement
We keep seeing headlines about empty shelves and gas stations turning away customers in the UK at the moment. Well, this is a result of a severe labor shortage. The UK is down about 100,000 truck drivers, many of whom used to be non-British citizens who worked in the UK under the EU shared labor agreement. Before Brexit, any citizen from any EU Country could live and work in any other country they wanted to within the EU.
This agreement had some advantages, like companies leveraging the best and brightest from a larger labor pool. But the agreement also had its disadvantages, like the brain drain pooling promising young workers from developing countries to more prosperous countries where they could earn more money, furthering the divide. There are viable arguments of both sides here, but regardless of all of that. Truck drivers were one of the most represented groups of workers taking advantage of this policy.
Logistics and Free Trade
Truck driving, in general, is the lens itself to being on the move. When we combine that with free trade agreements across a relatively small landmass and language barriers not being a massive issue to driving a truck around, European truck drivers just went where the demand was, this meant that overall the EU needed a smaller trucking fleet than what would exist if all of these countries maintain all of the trucks they needed year-round. The downside is that as the UK left this shared labor pool, it was shut-off from the workers necessary to keep the country running.
A Labor Shortage
The same problem is becoming apparent with other seasonal workers, especially in agriculture, where workers from across the channel were responsible for a large portion of harvesting activities, occurring only once or twice a year. This problem raises concerns over empty tables at Christmas this year, which leads to panic buying, further accelerating supply chain shortages the country is facing. The government has tried to fix these issues by granting five thousand three month emergency visas to truck drivers and putting military drivers on standby if things get dire. Altogether this drop in trade, employment, and consumption has cost the government around £30 billion, just over $41 billion, in lost tax revenue.
Coincidentally, that figure is roughly the same amount raised by introducing new taxation measures earlier this year. Heavy taxation during economic turbulence is the opposite of what most economists recommend, but the money needs to come from somewhere. The UK's fiscal watchdog, The Office for Budget Responsibility, has projected that all of these factors working together will mean that Brexit will result in a 4% reduction in the UK's long-run GDP, this is on top of the 2% reduction in GDP projected to be caused by the pandemic. Again this might not sound like much, but the UK hasn't had sustained growth since the Global Financial Crisis; this 4% hit could genuinely push its economy back over a decade.
Summary
The UK is going through some turbulence, but it has historically been one of the most stable nations in the world, especially for things like banking. It's still an advanced nation of robust laws, an excellent financial system, a well-regulated currency, and a functioning democratic system.