Koyuki Lowe - British Japanese
I Introduction
The United Kingdom’s decision to leave the European Union in 2016 and its official withdrawal in 2020 has generated significant debate and speculation regarding the associated economic implications. The disentanglement from the EU’s single market and customs union has theoretically restored the UK’s autonomy over its trade policies, enabling it to negotiate independent deals with non-EU countries and offered potential flexibility for the labourmarket by attracting non-EU immigrants. However, these benefits appear minimal compared to the substantial economic challenges that have emerged. Disruptions in supply chains,imposition of new trade barriers with the EU,and the emigration of skilled workers has led toconsiderable costs to the economy. The resulting trade friction suggests that the economic challenges of Brexit far outweigh any potential benefits.
II Pre-Brexit and Immediate Consequences
Throughout its membership in the EU, the UK benefited from frictionless trade, free movement of goods, services, capital, labour, and a shared regulatory framework (Tetlow and Stojanovic, 2018). Analysing the initial data following the UK's entry into the European Communities in 1973 reveal a consequential elevation to the UK’s GDP per capita, as postulated by economic historian Nicholas Crafts. Crafts attributes this growth primarily to productivity gains stemming from heightened competition within product markets as trade barriers diminished. Domestic firms' monopolistic advantages eroded, encouraging increased investment in productivity-enhancing measures to maintain competitiveness. This analysis finds corroboration in the quantitative assessment conducted by Campos, Coricelli, and Moretti (2014), employing the synthetic control methodology. Their estimates indicate that within a decade of joining the European Community, the UK's GDP per capita had surged by 8.6 percent compared to projected levels had the nation remained outside the bloc.In more recent years, it has become evident that the EU has made up a substantial portion of the UK'strade, with exports in 2015 contributing to 12% of GDP (ONS, 2024). The UK's tradeopenness, a measure derived from the total of its exports and imports relative to its GDP,stood at 0.57—significantly higher than the United States' 0.28 and slightly lower than Germany's 0.86 (World Bank, 2017). Post Brexit, the UK's lost access to the single market under World Trade Organisations rules has triggered the imposition of tariffs and non-tariff barriers on trade, increasing costs and bureaucratic complexities for businesses engaged in cross-border transactions. Between £2.5 billion and £3.5 billion of British exports faced tariffs in the first quarter of 2021, affectingabout 10% of goods exported to the EU (Islam, 2021). Additionally, disrupted supply chainsunder the EU’s protectionist regulations meant higher costs for imported and capital goods, leading to higher consumer prices. Industry leaders raised concern, with one food manufacturing executive predicting potential losses of up to “£100 million” and “lost
competitiveness” if tariffs persist (Gysegom et al., 2019).
Furthermore, Brexit ended the free movement of labour between the European Economic Area (EEA) and the UK: challenging businesses reliant on European workers in sectors such as hospitality, agriculture, and healthcare. The NHS has particularly suffered with the The Guardian reporting losses of 4,000 European doctors along with 58,000 fewer nurses than if the pre-Brexit trend had continued (Campbell, 2022). The increased costs and bureaucracy have created uncertainty around staffing and patient safety in an already struggling system, with 89% of NHS trust leaders believing the NHS lacks robust plans to tackle the workforce shortages, with 97% stating that current shortages are having a serious, detrimental impact onservices (Cordery 2022). This also implies that any financing redirected to the NHS from savings on EU contributions may have less impact as resources are diverted to minimise Brexit-related issues.
III Potential Long-term Economic Benefits of Brexit
Brexit has led to a sizeable shift in migration patterns, with an increase in non-EU immigration and, as touched on previously, a decline in inflows from within the EU—inferred from Figure 1 (Cheatham, 2023). To understand the long-term impact of immigration ongrowth, consider contrasting views from the Solow-Swan neoclassical growth model and theSchumpeterian innovation model.
Figure 1, Source: Office for National Statistics
The Solow-Swan model asserts that continuous immigration, as a sustained labour supply shock can permanently reduce a country’s per capita income, highlighting that growthachieved by factor accumulation cannot sustain long-term improvements in living standards. Instead, continuous enhancements in per capita income can only be realised through technological progress (Bodvarsson, 2009). In contrast, the Schumpeterian model of innovation suggests immigration is likely to stimulate technological progress in the hostcountry, leading to efficiency improvements, ceteris paribus (Aghion, 2014).
Bodvarsson (2009) has identified four distinct channels through which immigration may influence technological advancement:
(1) facilitating technology transfer
(2) fostering innovation, entrepreneurial activities, and worker participation
(3) altering the scale of economies
(4) intensifying innovative competition by reducing the ability of vested interests toimplement protectionist measures that hinder the process of creative destruction.
Notably, while the Schumpeterian model elucidates the potential growth-enhancing effects ofimmigration in destination countries, the implications for source countries remain ambiguous. Nevertheless, in the context of post-Brexit Britain, the influx of non-EU migrants may catalyse technological progress and foster economic growth, provided that the appropriate conditions and policies are in place to harness the potential benefits outlined by the Schumpeterian model and the Solow-Swan model. Leaving the EU also allows the UK to independently negotiate trade agreements, as exemplified by the 2021 UK-Australia Free Trade Agreement (FTA). This agreement eliminates tariffs onover 99% of Australian exports to the UK and relaxes visa rules to create more job opportunities. However, recent extreme weather has been attributed to climate change, notably the wettest 18 months since 1836 in the UK, have led to flooded fields and waterlogged ground, affecting agricultural productivity and yield (Prior, 2024). With imports already accounting for 40% of domestic food consumption, according to the UK Food Security Index 2024, the UK's capacity to export agricultural goods is undermined, potentially undercutting the intended benefits of the FTA. Despite these challenges, the UK-Australia agreement, as the first post-Brexit FTA, demonstrates potential for future agreements with other economic powerhouses such as China, India, and the United States, attracting foreign direct investment (FDI) and diversifying the nation's trade portfolio (Van Reenen, 2016). Nonetheless, the prospect of securing preferential access to new markets through tailored deals could stimulate export growth and attract FDI, thereby boosting the UK's aggregate demand. This potential increase in net exports (X-M) might counterbalance the contractionary effects of Brexit on other components of aggregate demand, such as consumer spending (C) and investment (I). But given that consumption and investment constitute a majority of 75–80% of aggregate demand, while net exports account for only around 5%, the overall impact is doubtful. Additionally, the status of the UK as a net importer and itspersistent trade deficit in its annual balance of payments current account since Brexit (figure2) indicates that leaving the EU has not provided the anticipated benefits.
Figure 2, Source: Office for National Statistics
IV Conclusion
While Brexit has granted the UK greater autonomy over trade policy, regulatory frameworks, and migration patterns, the overriding consensus among economic researchers suggests that leaving the European Union may not yield substantial net benefits for the British economy. Despite the potential opportunities from increased non-EU migration and the ability to negotiate tailored trade agreements, these advantages are offset by the challenges and risks posed by Brexit. A significant concern arises from the fact that many of the "new" trade deals secured by the UK are mere "rollovers" replicating previous EU agreements, rather than creating novel trading arrangements. Further, agreements such as the UK-Australia and UK-New Zealand trade deals have raised apprehensions about the influx of cheap imports adversely impacting domestic industries (Edgington, 2024). Economically, it is likely that Brexit will render the UK poorer due to the loss of EU exemptions and trade-offs, with income per capita losses estimated at between 1% and 10% (Tetlow, 2018). EU countries are also expected to experience reduced trade, albeit to a lesser extent. While continued EU single market membership would be optimal for both British and European economies, it is unlikely to reoccur in the near future. Therefore, British policymakers must use strategic policymaking and effective implementation to minimise adverse effects and capitalise on emerging opportunities in this grand-scale economic shift.
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