Douglas McWilliams is Deputy Chairman of the Centre for Economics and Business Research (Cebr).
It looks as though Brexit will be “harder” than we at the Cebr had originally assumed after the Trade and Cooperation Deal was signed. You can read the latest report here.
This is especially so in three areas: small firms, some of whom are finding the procedures now required to trade with the EU too cumbersome to make such trade economic; trade in food and agricultural products where the EU’s own estimated impact of its non-tariff barriers for trade into the EU is equivalent to a tariff of 56.8 per cent; and the City, where the faint hopes that the EU and UK would negotiate equivalence have now died away.
We are assuming that both exports to and imports from the EU will settle at a level that might be as much as 15 per cent lower than would have been the case had Brexit not occurred. Some of the reduced imports will be replaced by imports from other sources.
The City’s activities will be initially hit by the movement of some activities elsewhere with an estimated loss of activity of about 10 per cent. Our modelling suggests that only a third of this will move to other EU financial centres, the rest moving away from Europe or lost altogether as a result of the losses of economies of scale and scope. But this loss could be easily compensated for by achieving the right post-Brexit deals. We estimate that the potential gains could well be at least twice as large as the loss of EU-based business.
Some of our trade in services is linked to trade in goods and will therefore be affected. Tourism will emerge from the pandemic in a very different shape so it will be hard to observe the Brexit impact, though the abolition of the VAT retail export scheme will have a negative impact.
In principle the effect on the UK’s critically important Flat White Economy should mainly be through the impact on its labour force. If the sector can still attract sufficient skills from the EU and elsewhere it may survive Brexit relatively unaffected. Post-Brexit, the government really needs to streamline the currently cumbersome and unnecessarily expensive procedures for people coming to the UK to work and study.
Because a significant proportion of the impact of the loss of EU exports will be compensated for by the production of import substitutes, we estimate that the initial negative effect on GDP will be a reduction of about 0.5 per cent compared with what might have happened otherwise. This does not take account of the impact of faster rollout of vaccines and of new trade and deregulation opportunities that might emerge which could easily more than offset this.
We estimate that the impact of earlier rollout of the vaccination programme than would have been possible had the UK been in the EU programme will give the UK economy a one-off boost of about 2 per cent in 2021.
With Brexit harder than we originally expected, policy needs to be targeted at taking advantage of the deregulatory and trade policy opportunities that have become available.
The government has made a good start in negotiating trade deals with a wide range of countries.
Taxes on anything that is internationally mobile should be reduced to levels as low as possible, consistent with equity (it is important not to discriminate excessively in favour of the internationally mobile, who are often already the most privileged in society). This relates especially to companies, residents, potential skilled workers and tourists.
Climate change policies should be smart, to prevent negative competitive impacts. There is no point in driving away industries to less environmentally regulated regimes where they will create more pollution, just to signal virtue.
The aim should be to build up a knowledge economy based on skills. Education, training and apprenticeships need to be reinvigorated.
Lee Kuan Yew once said in front of me that his aim for Singapore was to build the most highly skilled labour force in the world. That isn’t a bad ambition for Britain post-Brexit.