The UK officially left the European Union (EU) on 1 January 2021, around 5 years after the Brexit referendum of 2016. The broad consensus surrounding Brexit is that it will have many short term costs, let’s explore this view and have a look at what some of the recent studies show. Brexit has reduced trade, foreign direct investment (FDI) and immigration in the UK. New border restrictions and greater transportation costs have created barriers to trade.

The graphs below compare UK trade, FDI into the UK and immigration growth both prior to and post Brexit to show the impacts of the UK leaving the EU.

The Uk trade sector has recovered much slower than its European and Pacific counterparts from the pandemic (figure 1). The main European economies swiftly recovered; by Q4 2021, every EU country in the sample had exceeded pre-pandemic peaks in terms of trade as a percentage of GDP. Trade in the Asia Pacific’s most advanced economies has also mostly bounced back. Conversely, UK trade as a percentage of GDP remains below pre-pandemic levels, falling by more than 6% from Q1 in 2017 (figure 2).

Britain was maintaining a steady flow of migrants in the early 2000s. However, after 2018, EU immigration slowed and each year, the number of EU-born residents departing the UK tops new residents (figure 3). There has been no corresponding rise in non-EU immigration, which has resulted in a fall in the size and variety of the UK labour pool. A fall in the size of the labour pool would reduce the supply of labour and give workers the means to negotiate for higher wages potentially increasing the price level and leading to inflation.

The UK is no longer one of the most open economies to immigrants (figure 4). From 2015 to 2020, the UK was the only large EU economy to see a fall in its immigrant population growth compared to the last five years. Its recent growth rates have echoed that of the US. Immigrants are a vital part of the UK’s economy as they increase real GDP, tax revenue and productive potential.

Since the 1970s, the United Kingdom has regularly attracted more foreign investment than similar economies, resulting in better wage growth, greater innovation, technical advancement, and greater knowledge and skill sharing. However, following the Brexit referendum, FDI has decreased, and the UK is no longer a global leader. Between 2017 and 2020, average FDI into the UK as a percentage of GDP fell to its lowest level since the 1980s (figure 5).

Pre-Brexit, the UK was the most open out of its comparable economies to immigration and FDI as it has a similar volume of trade as a percentage of GDP. Following Brexit, the UK is the least open to trade among EU economies, and its FDI and immigration levels rank towards the bottom of the EU economies. Although the UK’s trade performance post-Brexit is better than that of the liberal Pacific economies, it is no longer a leader in FDI and immigration growth (figures 6/7).

The benefits of Brexit in the short run are mostly political. The consequences of this fall in trade, FDI, and immigration could potentially be damaging and have long term repercussions for the UK’s economy. These three components can together reduce real GDP and productive potential whilst also increasing inflation; but of course the extent to which this happens will depend on the UK government’s response. Brexit has had a significant impact on the role of the UK in the global economy and big changes are needed to prevent lasting damage to the UK economy.  

footnotes:

1.https://www.piie.com/research/piie-charts/uk-and-global-economy-after-brexit

2.https://ukandeu.ac.uk/events/constitution-and-governance-in-the-uk-conference/

3.