The Cost of Brexit OPENING CASE short run the uncertainty surrounding the form and timing of Brexit has already imposed economic harm on the On January 1, 1973, the United Kingdom joined the Euro- UK economy. pean Economic Community (as the European Union was One study from a Bank of England economist suggests known then). The belief was that by joining the Community, that, since the referendum in June 2016, the cost to the UK the UK would be able to strengthen its trading ties with has been running at $40 billion a year, which implies a loss other member states in Europe and enjoy substantial gains of about 2 percent of GDP by the end of 2018 compared to from trade, which would result in greater economic growth where the country would have been. The study suggests going forward. However, the decision was politically con- that a primary reason for lower economic growth in the UK troversial, with many in the UK fearing that membership would limit the country's national sovereignty. A 1975 refer- has been the stagnation of business investment due to the uncertainty surrounding Brexit. Of primary concern to endum reaffirmed Britain's commitment to staying in the many UK-based businesses is how their access to the EU's Community, with 67 percent of the electorate voting in single market will be impacted by any Brexit deal, given favor of continued membership. that tariffs on exports to the EU rates might rise after Brexit. Fast forward to June 2016, and the UK held another ref- Another estimate from economists at Standard & Poor's erendum on membership of the European Union. The core suggests that, by the end of 2018, the UK economy was issue was the same as that which produced the 1975 refer- around 3 percent smaller (a loss of $66 billion) than it endum; a significant proportion of the country felt that would have been had the decision been to remain in the membership of the EU was negatively impacting the coun- EU. The S&P team suggests that, in addition to lower business try's national sovereignty. Flash points included (1) surging investment, a depreciation in the value of the British pound immigration from EU member states in Eastern Europe, following the referendum contributed to higher inflation such as Poland, and concerns that expansion of the EU to in the UK, which put a damper on household spending, include Turkey would lead to even more immigration, (2) depressing demand in the economy. The S&P study also the growing power of the EU bureaucracy in Brussels, and noted that while currency depreciation would normally be (3) the inability of Britain to make its own trade deals while expected to boost exports, no such effect was observed a member of the EU. Those who wanted to leave argued in the UK case. One explanation for this may be that that Britain would be economically better off in the long businesses in other EU countries were unwilling to run if it exited the EU. Those who wanted to remain argued increase their purchases of UK goods and services, even that, by exiting, Britain would suffer substantial economic at lower prices, given the uncertainty surrounding Brexit. harm from the loss of easy access to the EU's large single Looking forward, there is ample anecdotal evidence market. In the end, the "leave" campaign won the referen- that many firms with substantial UK assets will move some dum over "remain" by 51.89 percent of the vote to 48.11 production out of the country if the final Brexit deal is not percent. This narrow victory did little to ease political ten- to their liking and the country loses preferential access to sions in the country, but the ruling Conservative govern- the EU single market. Among those threatening to relocate ment, which itself was deeply split on the issue, now had facilities to mainland Europe or reduce UK investments are to negotiate an exit deal with the EU. automakers Honda, Nissan, Land Rover, and Ford; the con- Negotiating an exit deal that minimizes the economic sumer electronics companies Sony and Panasonic; Dyson, dislocation of exit while satisfying those in the leave camp the innovative British consumer products company; who want to quickly sever ties with the EU proved to be aircraft-maker Airbus; and banking giant J.P. Morgan. anything but easy. Facing political chaos, the country re- quested an extension beyond the original March 29, 2019 Sources: R. Partington, "Cost of Brexit to UK Economy Running at $40 exit date in order to try and broker a deal that could pass Billion a Year," The Guardian, February 15, 2019; Felix Todd, "From muster in the UK Parliament. The EU agreed to extend the Dyson to JP Morgan, Here Are the Companies that Could Leave the UK deadline until October 31, 2019, and then January 31st, 2020. After Brexit," Compelo, February 19, 2019; E. Nelson, "In an Alternative Notwithstanding this, it has already become apparent that Universe Without Brexit, the UK Economy Is 3% Larger," Quartz, April 4, 2019; J. Edwards, "The Price of Brexit Has Been $66 Billion So Far, whatever the long-run impact is of exiting the EU, in the Plus an Impending Recession," Business Insider, April 7, 2019.Benefiting from Brexit Growing apart Brexit brings precious few advantages, but there are some. The government should exploit them IN JANUARY BRITAIN faced two simultaneous problems. Its de- ern Ireland's half-in half-out position raises the costs of diver- parture from the European Union's single market and customs gence, for a bigger gap between Britain and the EU hardens the union on the first day of the month hit trade. Early data have sug- border in the Irish Sea and angers unionists committed to keep- gested that exports to France, for instance, were 20% lower in Ja- ing the province inside the United Kingdom. And British voters nuary than six months earlier. (That does not seem to have been do not have much appetite for the hyper-liberal economy which due to the pandemic: trade in 2020 was higher than in the previ- some Brexiteers advocated. Britons want their food safe and ous year.) The second blow came from a surge in covid-19 cases. their employers to be required to treat workers well. Britain, which already had the highest death rate in any big In most ways, therefore, Britain should aim to stay close to economy, saw deaths peak at 1,361 on January 19th. Europe. Yet there is scope for it to diverge in both damaging and The way Britain managed the second of these problems holds beneficial ways. Britain could, for instance, abandon the EU's re- lessons for how it should deal with the first. The speed with strictive state-aid regime; indeed, the government is already which its medical regulator approved covid-19 vaccines allowed consulting on how to go about it. Britons should be wary of these a swifter roll-out than in any other large country, which has moves. No doubt, Britain has room to improve on the EU's rules, helped slash the daily death toll to around 200. If Britain is to de- which are pernickety, but voters should regard the prospect of rive any benefit from leaving the EU, nimble regulation is one of ripping up limits on state aid as a risk, rather than a benefit, of the ways of doing so (see Britain section). Brexit. Shovelling money in the direction of pri- Britain's economy has experienced other big vate companies is not a habit that taxpayers shocks in the past century, but the one brought should want their governments to acquire. about by Brexit is different from those inflicted In other ways, divergence could work in Bri- after the second world war and in the 1980s. tain's interests. The process of regulation can Clement Attlee's and Margaret Thatcher's gov- be faster for one country than for 27 and, as the ernments had clear ideas about the direction in medical regulator showed with vaccines, there which they were taking the country. Boris John- is much to be said for speeding it up. The nature son's does not. Brexiteers burbled about a Brit- of rules can be different, too. Where Britain has ish economic model, distinct from the European social-demo- critical mass-as in finance-and in others in which it has inno- cratic model, without specifying what it should look like. The vative companies, such as fintech, life sciences and artificial in- budget speech on March 3rd by Rishi Sunak, the chancellor, in- telligence, the country can help set the standard for liberal, nim- cluded a single reference to Brexit; the m-page "plan for growth" ble regulatory regimes, rather than taking whatever rules Brus- that was published alongside the budget offers only a couple of sels makes. And Britain can sharpen up competition. It will need pages of platitudes about Brexit at the end. Rather than produc- to, since Brexit will reduce competitive pressure and thus un- ing a plan, the government has been going out of its way to pick dermine productivity. The Competition and Markets Authority fights with the European Commission instead. has offered a number of wise proposals for opening up sectors to This failure has several causes. Britain's scope for diverging new challengers-by, for instance, overhauling antiquated EU from the EU is limited. The trade deal agreed on Christmas Eve rules that shield airlines from competition. The turmoil in the between the two commits Britain to staying close to European travel business makes this an excellent time to do so. norms. If it does not it may be punished by trade restrictions; This newspaper still regards the decision to leave the EU as a anyway, most businesses are fine with the EU's standards. To sell self-inflicted wound. But Britain will, for the moment at least, into the bloc, they need to stick to its rules, and working with have to live with it. It should therefore grab advantages from one set of regulations is cheaper than working with two. North- Brexit where it can find them, and exploit them thoroughly. "