It’s been two years since former prime minister Boris Johnson signed off on a Brexit trade deal and triumphantly declared that the UK would be “prosperous, vibrant and content” after Brexit.
Johnson said the Brexit deal would enable British companies to “do more business” with the EU and would free Britain to strike trade deals around the world while continuing to export seamlessly to the EU market of 450 million consumers.
In fact, Brexit is holding back the UK economy, which remains the only member of the G7 (a group of developed economies that also includes Canada, France, Germany, Italy, Japan and the US) with a smaller economy than Brexit Before the pandemic.
Years of uncertainty over the future trade relationship with the EU, Britain’s largest trading partner, has hurt business investment, which remained 8% below pre-pandemic levels in the third quarter despite nearly two years of a trade deal with the bloc.
Sterling has been hammered, making imports more expensive and fueling inflation, while failing to boost exports even as the rest of the world trades booming in the wake of the pandemic.
Brexit has created trade barriers for British businesses and foreign companies using Britain as a European base. It puts pressure on imports and exports, undercuts investment and creates labor shortages. All of this has exacerbated Britain’s inflation problem, hurting workers and businesses.
L. Alan Winters, co-director of the Center for Inclusive Trade Policy at the University of Sussex, said that “the most plausible reason why Brexit is worse than its peers is Brexit”.
The pessimism hanging over the UK economy is reflected in striking workers, who are increasingly striking over wages and working conditions as the worst inflation in decades erodes their wages. Meanwhile, the government is cutting spending and raising taxes to fill the budget gap.
While Brexit is not the root cause of the UK’s cost of living crisis, it makes it harder to fix.
“The UK voted to leave the EU, but the government then opted for a particularly difficult form of Brexit that maximized the cost to the economy,” said Michael Saunders, a senior adviser at Oxford Economics and a former Bank of England official. “Any hope that Brexit would be good for the economy has all but been dashed.”
Although the UK voted to leave the EU in June 2016, it was not until December 24, 2020 that the two sides finalized a free trade agreement to withdraw from the single market and customs union.
The Brexit Agreement, the Trade and Cooperation Agreement, came into force on January 1, 2021.
It removed tariffs on most goods but introduced a range of non-tariff barriers such as border controls, customs inspections, import duties, and sanitary inspections of animal and plant products.
Before Brexit, a farmer in Kent could ship a truckload of potatoes to Paris as easily as they could to London. Those days are no more.
Michelle Ovens, founder of Small, said: “We hear nightmares from small businesses every day about forms, shipping, couriers, things stuck for weeks at a time…the epic length of these problems It’s just jaw-dropping,” said Business Britain, a campaign group.
“The way things have gone over the last two years has been really bad for small businesses,” Owens told CNN.
Researchers at the London School of Economics estimate that in the first year of Brexit, the variety of products Britain exports to the EU has fallen by 30%. They said this could be due to the withdrawal of small exporters from the small EU market.
Take, for example, Little Star, a British company that makes jewelry for children. Its business took off in the Netherlands, with plans to expand to France and Germany next. But only two of its more than 30 Dutch clients have been prepared to deal with the cost and paperwork of getting stock from the company since Brexit.
Rob Walker, who co-founded the company with his wife Vicky in 2017, said products that used to take two days to ship now take three weeks, while import duties and sales taxes are making it harder to compete with European jewelers . The company is now looking for growth opportunities in the US.
“Isn’t it crazy that we have to do business across the Atlantic because it’s so hard to do business with someone 30 miles away?” Walker said.
In a survey of more than 1,168 businesses published this month by the British Chambers of Commerce, 77% said Brexit had not helped them increase sales or grow their business. More than half said they found it difficult to adapt to the new rules for trade in goods.
Siteright Construction Supplies, a Dorset-based manufacturer, told the Chamber of Commerce that importing parts from the EU to repair broken machines had become an expensive and “time-consuming nightmare”.
According to Siteright, “Brexit is the greatest bureaucracy ever imposed on business”.
Canine treat maker Nova Dog Chews says it will lose all trade with the bloc if it does not establish a base there. “This has cost our business huge sums of money that could have been invested in the UK had it not been for Brexit,” it added.
A British government spokesman told CNN that the government’s Export Support Service provides exporters with “practical support” in enforcing the Brexit deal. The spokesman added that the deal was “the world’s largest zero-tariff, zero-quota free trade agreement”. “It secures market access for key UK services sectors and opens up new opportunities for UK businesses globally.”
Britain will not easily make up for what it has lost by giving up unfettered access to the world’s largest trading bloc.
The only substantive new trade deals it has struck with Australia and New Zealand since its exit from the EU are deals that do not simply extend the ones it struck as an EU member. According to the government’s own estimates, these would have a negligible impact on the UK economy, with GDP growth of just 0.1% and 0.03%, respectively, in the long run.
By contrast, the UK’s Office for Budget Responsibility, which makes economic forecasts for the government, expects Brexit to cut UK output by 4% over 15 years compared with staying in the EU. In the long run, imports and exports are expected to decline by around 15%.
Preliminary data have confirmed this. According to the OBR, in the fourth quarter of 2021, UK goods exports to the EU were 9% below 2019 levels, and imports from the EU were down 18%. Merchandise exports to non-EU countries were 18% lower than in 2019.
The UK “appears to have become a less trade-intensive economy, with trade as a share of GDP falling by 12% since 2019, two and a half times as much as any other G7 country,” the OBR said in a March report.
Jun Du, professor of economics at Aston University in Birmingham, said the fall in exports to non-EU countries could indicate that British businesses were less competitive as they battled higher supply chain costs after Brexit.
“The UK’s ability to trade has been permanently damaged [by Brexit]”Du told CNN. “That doesn’t mean it can’t be recovered, but it’s been regressed for many years. ”
Research by the Center for European Reform, a think tank, estimates that in the 18 months to June 2022, Britain’s trade in goods was 7% lower than it would have been had the UK remained in the EU.
Investment fell by 11%, GDP was 5.5% lower than it should have been, and the economy lost £40bn ($48.4bn) in tax revenue each year. That was enough to pay for three-quarters of the spending cuts and tax increases announced by UK finance minister Jeremy Hunt in November.
Britain is expected to be one of the worst-performing economies in the developed world next year.
The OECD expects the UK economy to shrink by 0.4%, second only to sanctioned Russia. Germany’s GDP is expected to shrink by 0.3%.
The IMF predicts UK GDP will grow by just 0.3% next year, ahead of Germany, Italy and Russia, which are expected to contract.
Both institutions said high inflation and rising interest rates would weigh on spending by British consumers and businesses.
The pace of decline in private sector activity accelerated in December and has now fallen for five consecutive quarters, according to the Confederation of British Industry, a leading business group.
The decline “looks set to deepen” in 2023, CBI chief economist Martin Sartorius said in a statement.
“Businesses continue to face a number of headwinds, with rising costs, labor shortages and weak demand dimming the outlook for next year.”
— Julia Horowitz contributed to this report.