Brexit is incurring the biggest costs on British businesses, because it affects the business model. Capital flows, including direct investment in the UK, will be severely disrupted. This will impose restrictions on the free movement of people and the flow of migration, which will put pressure on the labour market and the economy. In addition, regulatory freedoms for the business environment will be called into question.
Among the costs imposed by Brexit will be a reduction in the UK’s real per capita income. In terms of attractiveness for foreign direct investment (FDI), experts believe that the UK will be among risky countries to invest in. The direct result of reduced investment is the reduction of business prosperity. The UK, meanwhile, has been a major recipient of FDI from the EU. Brexit will put the UK in a long-term recession.
Long-term Economic Effects
The UK decision to leave the EU will inevitably lead to higher trade costs as compared to staying in the EU, which means less foreign trade and investment, resulting in a reduction in the UK average income. These trade costs are due to a combination of tariff and non-tariff barriers.
In fact, on the one hand, the UK wants full sovereignty, and on the other hand, it wants to enjoy free trade. But the weak and immature trade-economic arrangements of this country in the post-Brexit period will lead to many economic problems and costs.
It is true that there is talk of a British trade agreement with the EU. But experts say the UK will lose 5.2% of GDP in 15 years by concluding a “normal” trade deal with the EU in the post-Brexit period because of the coronavirus and slowing global growth. This is due to increased trade friction, immigration restrictions and the like. According to the former head of the World Trade Organization (WTO), although trade negotiations between the UK and the EU are within the framework of free trade, there are discussions about creating trade barriers. In fact, these problems are rooted in the immaturity of British trade laws.
The Problem of the Immaturity of Economic Regulation After Brexit
In the post-Brexit period, the UK will face a long process to complete its trade rules with the EU. This means that until this is developed, the UK will be largely deprived of all the privileges that other countries have in relation to the EU. Financial services, cross-border issues, how goods are priced, freedom of movement and the issue of trade in services will be important as the post-Brexit period takes effect. In fact, despite being an important trading partner for the EU, the UK has to negotiate small and large issues, which will be very costly in terms of time, money and economy. The UK’s withdrawal from the EU will affect the increasing uncertainty of growth, exports and public assets.
The Costs of the New British Trade Regime
The goal of Prime Minister Boris Johnson’s new immigration regime is to stop the influx of low-skilled workers from the EU. But if we look at the two-pronged equation, according to British economists, the new regime will significantly increase borrowing costs.
Another obstacle to the new trade regime, according to experts, is the reduction in imports and exports over a ten-year period to about 15%, which will reduce productivity itself.
Brexit has created uncertainty that has led to delays in investment and employment for British companies. Economists estimate that the UK economy will produce 2-2.5% less in 2021 than when it was in the EU. In fact, due to higher tariffs and other restrictions, trade becomes more expensive and immigration decreases. These effects seem to combine over time, because less trade and less immigration means less innovation, resulting in less growth and less revenue.
The European single market, which the UK left after Brexit, revolves around the “four freedoms” of goods, services, people and capital. The movement of services and people has been completely destroyed. The other two have been seriously affected. For example, imports of goods and exports of services have disappeared due to a lack of freedom in providing services. Chemicals, mining and electrical equipment are at the top of the list of sectors that will be most affected in the long run. Although an 11-month transition period was set for the UK’s post-Brexit preparations, it did not resolve the resulting turmoil, which mainly affects trade, finance, industry and trade, and the UK still faces these problems. The service supply chain is fragmented and there is the possibility of a severe recession in the UK economy in 2021. Even under the post-Brexit trade agreement scenario with the EU, UK companies will face new tariffs when trading with the EU, forcing the economy to increase the cost of its products and services. The labour market will be weaker, the number of unemployed workers will increase, and unemployment insurance claims will rise.
Of course, the cost of Brexit for the UK economy depends on how trade issues are resolved. That is, what trade arrangements are ultimately formed and what is the cost that the UK will pay under each scenario? Although it is said that an agreement has been reached with the EU, due to the immaturity of the post-Brexit UK trade and economic regulations, all other scenarios remain the same as before the agreement with the EU. Due to difficulties in implementing the agreement, it is possible for the UK to move to other scenarios. There are eight different trade scenarios to analyze for the economic implications of Brexit. These determine the type and amount of money the UK will pay as a result. The costs cover a wide range of areas related to GDP growth, trade volume, inflation, household expenditures and employment.
- The order in which UK trade is governed by WTO rules
- Successful negotiation of UK-EU Free Trade Agreement (FTA) (which removes tariff barriers)
- UK-EU-US FTA Deployment Based on the Transatlantic Partnership and Investment Proposal (TTIP)
- Creating international US and UK FTAs with the exception of the EU
- A long period of transition in which EU and UK tariffs do not change but other non-tariff barriers to trade apply
- The Norwegian model (membership in the European Economic Area)
- The Swiss model (a set of bilateral agreements in which market access is subject to bilateral negotiations)
- A customs union (such as with Turkey)
Experts believe that the UK will be the main loser in each of these scenarios. According to the first scenario, when the UK trade arrangements are under WTO rules, it will lead to a sharp reduction of up to 5% of GDP compared to EU membership. The WTO trading scenario raises non-tariff standards in the UK. This means that by selling services to EU countries, British jobs will suffer. It is noteworthy that the services sector, especially the financial services sector, dominates the UK economy and accounts for about 80% of its GDP.
Hence, none of the scenarios will be useful for the UK. However, the extent of the damage to the economy will be different under each of these scenarios. But the trade scenario under WTO rules will cost the most.