By the time Christmas Eve rolled around last year, Brits were well tired of Brexit. The trade talks were in their 11th hour, the details were mind-numbing and the big picture had been talked to death over four years. The pandemic made the tortuous divorce between the UK and European Union seem frivolous. A deal clinched, Boris Johnson declared victory and heaped praise on his hard-nosed chief negotiator, David Frost.
Now it seems to be Johnson himself whom people are tired of. Brexit is no longer an electoral cash machine for the prime minister, as the shock defeat in Brexit-voting North Shropshire, a seat the Tories held for some 200 years, proved. There has been a tsunami of criticism over the prime minister’s policy judgment and integrity. And in a major blow, Frost has now resigned.
In his resignation letter, Frost urged Johnson to deliver on “the opportunities Brexit gives us” — namely to create a low-tax, lightly regulated economy. And yet, Brexit imposed economic costs and opened new fault lines within the Conservative Party that now threaten the prime minister’s leadership.
Over the past year, Brexit has lurked in the background of disputes over fish, the migrant crisis and a shortage of truck drivers. It moved to the foreground again with rancorous debates about trade rules with Northern Ireland, which had special status under the agreement that Boris Johnson made and now wants changed. Those negotiations, which threatened to blow up the entire trade deal, will continue into next year.
The economic impact of Brexit is difficult to separate from the effects of the pandemic. But where it is possible to draw some conclusions, they tally with what dispassionate observers predicted: The deal wasn’t a car crash for the economy, but it’s easy to hear that hissing sound of air leaving the tires.
Brexit was sold with the promise that, freed from EU rules and regulations, Britain could strike lucrative free trade deals to move its economy away from the stodgy old world on its doorstep and toward the mega-growth of the Asia-Pacific. Though former Trade Secretary Liz Truss (who became Foreign Secretary and is now tasked with Frost’s responsibilities) boasted some 70 trade agreements under her belt, the vast majority have been rolled over from existing EU agreements.
Where new deals were struck, they provided only very modest additional benefits. The new UK-Australia deal hardly plants an ambitious flag for Global Britain: It’s phased in over 15 years and will add 0.02% to the UK economy in the long run. The UK-Japan trade deal will bring an estimated 0.07% of GDP over the next 15 years by the government’s own estimate. The much-vaunted US-UK trade deal is nowhere in sight. (Indeed, the US made an offer to Japan to resolve disputes over steel and aluminum tariffs imposed by Donald Trump, but the UK has had to wait.)
Trade flows have also been impacted by the pandemic and supply-chain disruptions, but it’s also clear that UK-EU trade flows took a Brexit hit. In October, imports to Britain from non-EU countries were higher than EU imports for the 10th straight month. Similarly, exports to EU countries decreased while exports to non-EU countries rose. Britain is overwhelmingly a services economy, but service exports to the EU fell twice as fast as those to the rest of the world.
To try to isolate Brexit effects, John Springford, deputy director of the Center for European Reform, created a nifty algorithm that used pre-pandemic data on GDP, goods trade, population, industrial production and other factors to create a “doppelganger” UK that closely tracked the real UK. His model finds that goods trade was between 11% and 16% lower in October as a result of the UK leaving the single market in January 2021 — a cost of 12.6 billion pounds ($16.7 billion).
In an assessment updated in May, the independent Office for Budget Responsibility estimated that implementing the new Brexit arrangements would reduce GDP by 0.5% in the first quarter. More worryingly, the OBR said they will reduce long-run productivity by 4% relative to remaining in the EU. Brexit will have twice the impact on the UK economy as the pandemic, said OBR Chairman Richard Hughes at the end of October.
In a recent survey by the Institute of Directors, 37% of small and medium sized businesses said they felt less confident in their business’s future after Brexit (35% of large businesses said the same). Big labor shortages in the hospital and social care sectors have grown worse because of both the pandemic (when many foreign health-care staff returned home) and Brexit’s impact on recruitment.
While Brexit-supporters readily accept such costs as the price for taking back sovereignty, they are adding to the political pressure on the prime minister. The promise to “take back control” that united many Conservatives (and others) behind the Brexit project. But there are disagreements over what to do with the freedoms now. A more populist and less traditionally conservative wing of the party, including many of the new MPs from the north of the UK, are focused on public spending programs to keep voters happy. Tax cuts aren’t a priority and they are not averse to the occasional protectionist measures.
Tory traditionalists, on the other hand, are alarmed at the huge increase in expenditure, the rising tax burden and the intrusiveness of pandemic restrictions. They’re not against Johnson’s signature “leveling up agenda” — his promise to deliver growth and opportunity in the more disadvantaged parts of the country — but they argue, in the mold of Margaret Thatcher, that growth will follow if the state gets out the way.
“Look around and you can see all kinds of Brexit opportunities not being taken,” lamented Spectator editor Fraser Nelson (whose job Boris Johnson once held) in a recent column for the Brexit-supporting Daily Telegraph. Thus recent parliamentary rebellion over the pandemic restrictions and the loss in North Shropshire is also about these larger issues: the direction of the party and the nature of the state in the post-Brexit world, as well as Johnson’s own competence to lead.
David Frost was an absolutist whose sovereignty-first stance went down well among Brexiters in the party but did little to advance Britain’s post-Brexit standing. Johnson now has an opportunity to try a more measured approach to defuse some of the tensions built up over the past year and rebuild relations. But it won’t be easy carrying his party.
Nobody who has followed Johnson’s career of write-offs and revivals would count him out. But his dilemma is clear: He can’t please one side without angering the other — at least not without very high real growth levels. Getting Brexit done was an issue around which Conservatives could unite for a while. One year later, we are seeing just how divisive dealing with the aftermath has become.
Bloomberg
