From the Economist this week
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MOST forecasts suggest that Britain will be a poorer country after Brexit, largely because trading with the European Union will become more difficult. Such predictions about the distant future are, by their nature, open to doubt, which is partly why Brexit’s proponents feel free to dismiss them. But the same does not apply to a new paper by Meredith Crowley, Oliver Exton and Lu Han from Cambridge University, which suggests that, months before Brexit has even happened, trade is already suffering, as firms respond to the prospect of higher tariffs.
More than 100,000 British businesses export goods to the EU each year. At present they enjoy tariff-free trade with the country’s biggest export market. But all face uncertainty as Britain negotiates a new trading relationship with Brussels. Some fear disaster if the talks break down. British carmakers could face a 10% tariff to export to the EU market. Dairies might have to pay tariffs of more than 30%. These extra costs could make exporting uneconomic.
The Cambridge paper looks at the exporting decisions of British firms, across 8,000 types of product, in response to the tariffs that Britain would face in the event of reaching no trade deal with the EU. Where necessary, they adjust their calculations to take account of exchange-rate fluctuations.
Since the referendum many companies appear to have reduced their exports to the EU. The research suggests that the bigger the potential tariff facing a product, the more nervous firms are about exporting it. Why risk producing for a market that could soon become unwelcoming? Overall, the number of companies that began exporting new products to the EU in 2016 would have been 5% higher if there had been a Remain vote, the paper finds.
It is hard to know what those firms that decided against producing for the EU did instead. The research finds little evidence, however, that they have lived up to the hopes of Brexiteers and boosted their exports to fast-growing non-EU markets. Some may have tried to sell more within Britain. Businesses may have only temporarily scaled down their production of exports for the EU. Normal service could resume if Britain negotiates a good trade deal.
But some damage is already done. The paper’s results imply that in 2016 Britain lost some £1bn ($1.3bn) of exports to the EU because of the mere threat of higher tariffs. The long-term impact will be greater. Some of the firms dissuaded from exporting would have turned into big beasts. The referendum was only halfway through 2016, and the paper does not analyse data after that year. Meanwhile, Brexit uncertainty continues to rise.
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