S5 Ep27: The Economics of Brexit

Episode Summary

Executive Summary: The episode reviews early evidence on Brexit’s economic effects, focusing on trade, financial services, and migration. Speakers argue that Brexit has created lasting barriers that are reducing UK-EU trade and reshaping labor flows, with the strongest evidence so far showing fewer trade relationships, lower EU imports, and a more liberal-than-expected immigration regime. The overall picture is a “slow puncture” rather than a crash.

Main Topics: Brexit’s new trade regime (Priority: 5/5): Jonathan Portes explains that the Trade and Cooperation Agreement removed the UK from the single market and customs union, restoring regulatory barriers, border checks, and service-trade frictions even without tariffs or quotas. Early evidence on goods trade (Priority: 5/5): Thomas Sampson describes how researchers separated Brexit effects from COVID by comparing UK trade patterns with the rest of the world and with US-EU trade, finding an initial export drop, then partial recovery, but persistent disruption in trade relationships. Import decline and reorientation of supply chains (Priority: 4/5): The transcript highlights a sharper and more persistent fall in UK imports from the EU than in exports, suggesting buyers shifted demand away from Europe in response to new controls and expected future barriers. Financial services after passporting (Priority: 4/5): Sarah Hall explains that the end of passporting reduced EU market access for UK financial firms, forcing them to rely on limited and revocable equivalence decisions and prompting some job relocation to the EU. Post-Brexit migration system (Priority: 4/5): Portes says free movement ended and was replaced by a points/salary-based system that is more liberal than many expected, with strong declines in EU migration offset by higher non-EU inflows. Distributional effects and sectoral pressures (Priority: 3/5): The discussion notes that the biggest impacts fall on smaller exporters, mid/back-office finance jobs, and labor-short sectors like hospitality and social care, rather than on headline GDP alone. Long-term outlook: persistent but gradual costs (Priority: 5/5): The speakers converge on the view that Brexit’s economic damage is real but gradual, likely unfolding over years through reduced trade integration, higher costs, and slower productivity growth.

Key Arguments: The TCA did not impose tariffs or quotas, but it reintroduced customs and regulatory barriers that make trade more expensive and complex. COVID complicated measurement, but because it was a broad global shock, differences specific to UK-EU trade still plausibly reflect Brexit. UK exports to the EU fell sharply in early 2021, then bounced back; aggregate export values look resilient, but underlying trade relationships shrank substantially. The number of UK-EU trade relationships fell by roughly 30%, indicating that small exporters were disproportionately pushed out by new fixed costs. UK imports from the EU fell by about 25% relative to the rest of the world and the decline appears persistent. Financial services lost passporting and now rely on narrow equivalence arrangements that can be withdrawn quickly, reducing market access. Reported job relocation from UK finance to the EU is lower than worst-case forecasts, around 7,000 jobs, but uncertainty remains. The UK immigration regime is more open than many expected, especially for non-EU workers, which has helped offset some labor shortages. Brexit’s effects are not a crash-like shock but a slower, cumulative loss through lower trade intensity, higher prices, and reduced efficiency.

Data Points: Time since Brexit deal was implemented: About 1.5 years - Used to frame the early-stage assessment of Brexit’s economic effects. EU share of UK financial services exports: 40% - 2019 pre-Brexit benchmark for financial services trade with the EU. EU share of UK financial services imports: 32% - 2019 pre-Brexit benchmark for UK financial services imports from the EU. Job relocations from UK to EU financial centres: Around 7,000 jobs - Estimated number of financial services jobs moved after Brexit, lower than early worst-case estimates. Early job relocation estimate: Around 12,000 jobs - Earlier predictions for finance-sector relocation from the UK to the EU. Decline in number of trade relationships: Around 30% - Estimated drop in UK-EU exporter-importer relationships after the TCA, driven by low-value relationships disappearing. Decline in EU imports: Around 25% - Estimated reduction in UK imports from the EU relative to the rest of the world in 2021. Equivalence decisions for UK financial services: 1 decision - Current level of EU equivalence for the UK, compared with many more for peer jurisdictions. Typical equivalence decisions in comparable jurisdictions: Upwards of 15 - Comparison cited for markets like Singapore and the US. Share of jobs open to global applicants under the UK migration system: Roughly half - Portes describes the new post-Brexit labor migration system as relatively liberal. Visa notice period for equivalence withdrawal: 30 days - EU can withdraw equivalence with short notice.

Pivotal Quotes: "The Trade and Cooperation Agreement essentially takes the UK out of the single market for goods and services." — Jonathan Portes: Explaining the core institutional change Brexit made to UK-EU economic relations. "We find a sharp drop in exports to the EU." — Thomas Sampson: Describing the immediate post-TCA trade disruption in early 2021. "Brexit is more of a slow puncture than a car crash." — Jonathan Portes: Summarizing the overall long-term economic interpretation of Brexit.

Implications: Brexit appears to be steadily reducing UK-EU economic integration, especially for smaller exporters, imports, and some service sectors. Firms and policymakers should expect ongoing adjustment, higher compliance costs, and continued shifts in migration and financial services.