It was just over five years ago that the citizens of the UK
went to the polls to vote on whether or not to leave the European Union.
A non-binding referendum which most onlookers saw as little more than an opportunity to
silence a vocal minority shocked the world when it came back in favor of the decision to leave.
Four and a half years later after a long and drawn-out period of negotiations, the UK
finally left the EU, ending its 47 years of membership.
At the time there were widespread concerns that this would prevent people from traveling back
and forth with the UK, it had the potential to shut down certain businesses especially
those catering to frequent travelers from the EU, and above all it threatened the living standards
of average brits who had benefited from EU membership whether they realized it or not.
Of course, all of these concerns came true to an extent, but not necessarily because of Brexit,
but rather the global pandemic which hit
the country particularly hard during the lead up to the actual exit day.
This has made it difficult to assess what hardships are being felt as a result of
Brexit and which hardships would have been felt anyway as a result of the pandemic.
By the same logic and in the interest of fairness it makes it difficult to determine
if the promises made by Brexit supporters were founded in reality given that even
the best economic plans would be struggling in the global economic environment of 2021.
So,
How much damage has Brexit done to the United Kingdoms' economy?
Has the UK benefited from the fact that Brexit took place during the pandemic?
And finally
What will this all mean for the UK’s ability to recover from the pandemic?
Once we have done all of that we can put the United Kingdom
on the economics explained national leaderboard.
Now one of the biggest issues facing the UK in the years between the referendum and actually
leaving the EU, was the uncertainty around what a post-Brexit UK would actually look like.
There were a range of conflicting theories suggesting everything from it being some
kind of pommy utopia, finally free from the shackles of the continent,
all the way down to it being armageddon, complete with rioting in the streets and empty shelves.
Of course, the second option doesn’t sound great,
but what might have been worse is not actually knowing which way the country would go.
The biggest and most immediate impact of Brexit would be on trade.
The European Union is first and foremost a union of free trade.
The countries within the union all agree to trade amongst one another without levying
tariffs or imposing import quotas. This is further assisted by the fact that all of the
remaining members have used the same currency, the euro since it was introduced in 1999.
On the opposite side of the same coin,
the EU imposes heavy restrictions on trade with non-member countries
as a way to incentivize EU nations to trade with one another, rather than trading with an outsider.
It does still happen, and exceptions are made for certain goods and materials that are not abundant
within the EU, natural gas from Russia that’s fed to Germany is a perfect example of this.
Now I am not going to get into the benefits and drawbacks of free trade in this video,
because it’s really beside the point. Regardless of if this kind of free trade
region is beneficial to its members, the UK is now an outsider. They have gone from being the
beneficiary of free trade agreements to the victim of harsh trade restrictions.
This wouldn't be good for any country but it’s especially bad for the UK
given just how dependant they are on trade to support their economy.
To understand just how important, we need to look at a figure called trade intensity.
When economists look at trade figures they normally focus on net trade, as in,
exports minus imports. If we want to calculate GDP we look at the sum
total of consumer spending, government spending, investments, and net exports.
Net exports also make up the balance of trade and by extension things like current
account balances so it’s easy to see why it gets a lot of attention, but consider this.
Imagine two countries, one that has no imports, and no exports,
it’s completely isolated. Then imagine a country that imports a trillion dollars worth
of goods in a given year, and exports a trillion dollars of goods as well.
Both of these countries would have the same net export figure,
but the second example would likely be doing much better for itself. A trillion dollars
worth of exports would require the employment of millions of people and a trillion dollars
worth of imports would massively improve the average living standards of those same workers.
The second country would also naturally be much more dependent on free trade agreements,
so that’s why it’s also important for economists to consider trade intensity figures.
Trade intensity is just the sum total of imports and exports divided by GDP. So if
we take our oversimplified example of these two countries here and assume they both have
a GDP of 4 trillion dollars then the first would have a trade intensity of zero percent,
where the second would have a trade intensity of fifty percent. You can clearly see that
trade intensity is often a much more indicative figure of what is really going on in an economy.
So why is this important to the UK?
Well the UK has one of the highest trade intensity levels in the world.
The UK’s trade intensity was 63% in 2019. Compare that to other major
advanced trading nations like Australia at 46%, Japan at 35% and the US at 24%
and you can start to see just how important trade really is to the UK.
Historically this makes sense, the UK itself is a relatively barren rock in the middle of the
Atlantic devoid of much of the natural resources it would need to properly fuel it’s economy.
It’s also historically been a great colonial power so trade is something
that came naturally to it as it became more and more important throughout the last few decades.
This is where that uncertainty about what Brexit would look like becomes really important again.
A worst-case scenario like the much-feared no-deal
Brexit with hard borders, and no free trade at all between the EU
would not have been good, obviously, but it would have been possible to plan for.
Let’s say you ran a tool manufacturing business, you have a small factory, and a warehouse and you
primarily sell high-end machining equipment to other businesses within the UK and across the EU.
Once those referendum results came in you would have been put in a pretty difficult situation.
Without a free trade agreement in place, you would no longer remain competitive in
Europe because you would need to pay import taxes on all of the tools you sell there.
You could get around this by setting up a separate factory in the EU,
but that’s a huge capital investment and if it turns out that the UK is able to negotiate
a favorable trade deal with the EU then it would have been an investment made for nothing.
You could also save up money so that you had the cash on hand to buy a factory quickly if required,
but then you have a pile of cash sitting around not being reinvested into the business,
or being paid to new employees or even getting sent out as dividends to your investors.
Money sitting around waiting for something to happen does not help the economy,
money being used for any of these purposes does.
If businesses owners knew what was happening, even if it wasn’t good news,
they could take measures to deal with it.
The combination of drawn-out decision to actually leave,
followed up by a year-long transition period combined with the existing economic fallout
from the global pandemic made it incredibly hard for individuals,
businesses, and even entire governments to plan much beyond the immediate future.
But of course, now we have the benefit of hindsight we can actually look at a proper
Before and After of Brexit
Trade has dropped significantly, no surprises there, especially considering
the impact of the pandemic on things like travel and general business activity.
Trade intensity fell from 63% in 2019 to 55% in 2020. That might not sound
like a huge drop, and it still puts it well ahead of most other countries,
but this figure was captured during the so-called Brexit Transition Period.
That period is now over and the UK’s trade relationship with the EU is now being defined
by the EU-UK Trade and Cooperation Agreement, or TCA for short. The timeline is that the UK
officially left the EU at the end of 2019, the transition period agreement was then in
place until the end of 2020 and now the TCA has been in place for just over 11 months.
The terms of the TCA are in general much more limiting than the terms of
the transition agreement, and the terms of the transition agreement
were in turn much more limiting than being a full member of the EU.
It is of course less limiting than a no-deal Brexit but perhaps not by much.
Goods exports to the EU are down significantly this year,
meaning trade intensity may very well see another 10% slide in 2021 on the conservative side.
The Centre for European Reform has attempted to isolate the impact of Brexit using a statistically
modeled ‘doppelganger UK’ to assess what would have happened had the UK remained in the EU.
That analysis concluded that, since the transition period ended, leaving the
single market and customs union had reduced UK goods trade by 15.8 percent as of August 2021.
15.8% is huge, this will directly impact hundreds of thousands of workers and not for the better.
Now despite being the first thing that everybody thinks of, lost trade might not
actually be the biggest hit to the British economy. Rather it might be lost manpower.
You might have seen the headlines about empty shelves and gas stations turning
away customers in the UK at the moment. Well this is being caused by a sever labor shortage.
The UK is down about one hundred thousand truck drivers, many of whom used to be
non-british citizens who worked in the UK under the EU shared labor agreement.
You see prior to Brexit any citizen from any EU
country could live and work in whatever other country they wanted within the EU.
This had some advantages, like companies being able to leverage
the best and brightest from a large labor pool,
and it had some disadvantages, like the brain drain pulling promising young workers from
poorer countries to richer countries where they could earn more money, furthering the divide.
I really can see the arguments of both sides here, but regardless of all of that,
truck drivers were one of the most represented groups of workers taking advantage of this policy.
Truck driving, in general, lends itself to being on the move,
when you combine that with free trade agreements across a relatively small
landmass and language barriers not being a huge issue to driving a truck around
it’s no wonder that a lot of European truck drivers basically just went where the demand was.
This meant that overall the EU needed a smaller trucking fleet than what would exist if
all of these countries maintained all of the trucks that they needed year-round.
The downside of this is that as the UK left this shared labor
pool it was shut off from the workers it needed to keep the country running.
The same problem is becoming apparent with other seasonal workers,
especially in agriculture, where workers from across the channel were responsible
for a large portion of harvesting activities which take place only once or twice a year.
This is raising concerns over empty tables at Christmas this year, which is leading to
panic buying which is further accelerating the supply shortages the country is facing.
The government has tried to fix these issues by granting 5,000 3 month emergency visas to
truck drivers and putting military drivers on standby for if things get really dire.
Altogether this drop in trade, employment and consumption has cost the government around 30
billion pounds, just over 41 billion USD, in lost tax revenue. Coincidentally this is roughly the
same amount that was raised by introducing new taxation measures earlier this year.
Heavy taxation during a period of economic turbulence is the exact
opposite of what economists recommend, but the money needs to come from somewhere.
The Uk’s fiscal watchdog, The Office for Budget Responsibility has projected that all of these
factors working together will mean that Brexit will result in a 4% reduction in the UK’s long-run
GDP, this is on top of the 2% reduction in GDP projected to be caused by the pandemic.
Again this might not sound like much but the UK hasn’t really had sustained growth since the GFC,
this 4% hit could genuinely push its economy back over a decade.
Rankings
Alright, now it’s time to put the UK on the economics explained national leaderboard.
Starting as always with GDP, the UK is the fifth-largest economy in the world with an
annual output of over 3.1 trillion USD. It’s still well behind the true superpowers,
China and America, and also comfortably behind Japan and Germany but it still gets a 9/10.
That output is spread between 67 million people to give the country
a GDP per capita figure of Just over $46,000 ($46,344) this is pretty much
in line with it’s old European peers like France and Germany and it gets a 7/10.
Stability and confidence is really difficult to say, of course this is a completely subjective
measure. The country is obviously going through some turbulence but it has historically been seen
as one of the most stable nations in the world, especially for things like banking.
We actually made an entire video on this a long time ago so go and check
that out if you are interested. Look it’s still an advanced nation with robust laws,
a good financial systems, a well regarded currency and a functioning democratic system
so it gets an 8/10. Five years ago, it would have been the easiest 10/10 ever.
Growth has not been great, as we saw earlier in this video it’s GDP
is still below it’s previous peak in 2007. Since then it has been a victim of the GFC,
the eurozone crisis, brexit and the pandemic. It’s certainly resilient and hasn’t fallen much,
but it just hasn’t grown. It gets a 3/10.
Finally, industry, this is surprisingly strong. The UK is still home to a healthy industrial
sector which manufactures everything from high-end sports cars to cutting-edge jet engines. It is
also still home to the second-largest financial center in the world, so the country gets a 9/10.
Altogether that gives the United Kingdom an average score of 7.2 out of 10.
A very healthy score indeed which puts the country into equal third on the leaderboard
alongside France, the Netherlands, and Taiwan.
Thanks for watching mate, bye.