(Bloomberg Opinion) -- It's a good thing for Boris Johnson that most Britons won't be thinking about Brexit when they vote in local elections on Thursday. While many who backed Britain's departure from the European Union will still credit the prime minister, the costs of the separation are adding to economic pressures they're now facing.
It's too early to examine the full impact of the deal that set out the new U.K.-EU trade relationship some 16 months ago. But as the forces of globalization begin working in reverse, the U.K.'s trade picture offers a real-world laboratory for the impact of newly erected trade barriers and economic decoupling.
One striking result of the first full-year review of post-Brexit trade, conducted by four researchers from the Center for Economic Performance at the London School of Economics, is the collapse of U.K. imports from the EU, its biggest trade partner, though that share had been declining for years before Brexit. While the U.K.'s trade with the EU and the rest of the world followed largely similar patterns after the referendum in 2016, imports from the EU declined by about a quarter relative to those from outside the EU once the new trade agreement came into effect — and that's after stripping out goods that would be most impacted by the pandemic.
Since two-thirds of U.K. imports are used as production inputs, higher-priced imports feed into the prices of other goods, including food. The think tank U.K in a Changing Europe estimates that Brexit-induced trade barriers accounted for a 6% increase in U.K. food prices. Adam Posen, president of the Peterson Institute for International Economics in Washington and a former Bank of England policy maker, told a conference panel hosted by the think tank last week that 80% of the reason U.K. inflation is forecast to remain higher for longer than other Group of Seven economies can be put down to Brexit effects.
Not everyone agrees the impact on prices is so clear-cut. Economist Julian Jessop acknowledges that Brexit will have added to cost pressures but attributes most of the divergence from the EU to energy policy.
The export picture is also more nuanced. U.K. goods exports to the EU declined post-Brexit but at first glance it doesn't look so dramatic. What's interesting here is that researchers noted a sharp decline in the number of export relationships.
The new trade agreement appears to have reduced the variety of goods (identified by an eight-digit commodity code) exported to the bloc each quarter by around 30%. While large exporters could absorb increased fixed costs, many smaller businesses simply exited less profitable
EU markets.
A few percentage points of GDP spread over many years is something Brexiters were always willing to accept. But just focusing on the direct hit to growth risks missing the broader impact that lower foreign direct investment will have on innovation, diversity of talent and productivity. When small-businesses are hit – and they are the biggest losers of Brexit – it weakens the dynamism needed for rebalancing Britain's economy (Johnson's oft-cited “leveling up” agenda).
While labor-market shortages may push up some wages, EU immigrants were also net contributors to U.K. government finances. And while there has been a rise in net non-EU immigration, the fall in net EU migration since the referendum has already exacerbated labor-market shortages, such as a dearth of truck drivers and fruit-pickers but also workers in health care. It may be politically useful as a demonstration of taking back control, but it's not clear what other purpose it serves.
Despite the promise of “Global Britain” — essentially a freer-trading nation — Britain's trade openness has fallen more sharply compared to other advanced economies.
In a tacit acknowledgement that gravity does, after all, matter, the U.K. government announced last week that it would not be imposing controls on goods entering the U.K. from the EU for the rest of the year, which would have heaped 1 billion pounds ($1.25 billion) in additional costs on importers.
Finding ways to improve this picture won't be easy. Take the new U.K. Conformity Assessed (UKCA) mark, which all firms selling into Britain are required to have from January next year, rather than rely on the EU's “CE” mark, which testifies that firms have met EU health, safety and environmental regulations.
There is no suggestion that the U.K. will deviate from the vast majority of EU standards, given that U.K. manufacturing is thoroughly integrated into EU supply chains. The EU has refused to recognize the UKCA marketing, so Britain is imposing a cost on its own firms and consumers by creating a largely redundant system. If Britain were to relax some of its own rules, consumers would recognize the EU standard as potentially superior. If the U.K. seeks to impose stricter regulation in some areas, firms could just default to the recognized EU trademark and bypass them.
Brexit-supporters were always ready, at least in theory, to sacrifice some economic advantage for the sake of regained sovereignty. But no one predicted our world would change so dramatically in ways that make those sacrifices far costlier. That may not hurt Boris Johnson at the polls yet, but it makes his job of delivering growth and opportunity much harder.
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- An Ex-Trump Adviser's Warning for Boris Johnson: Therese Raphael
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.
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