What did Brexit teach the UK?

London needs a Brexit deal to save what can be saved

The dispute over Brexit is in a critical phase. The fact that the exit from the EU is damaging the UK's economy is hardly disputed. But without a free trade agreement there is a risk of even greater losses.

While the UK is sinking into the political dispute over combating the second corona wave, another huge problem awaits solution. A free trade agreement with the EU, which will be needed from the turn of the year, is still not in the towel. London is only striving for a relatively simple contract that primarily eliminates tariffs and quantity restrictions in the goods trade. But the differences between London and Brussels remain great. On Thursday, an EU summit will probably find a lack of progress - and Prime Minister Boris Johnson actually wanted to break off the talks if no solution was found by the summit. He has moved away from that for the time being. Too much is at stake.

How big is the minus?

The industrial countries club OECD issued an urgent warning on Wednesday that the talks would fail. Great damage to trade and jobs in Great Britain is threatened. The only question is how great the damage will be. The OECD is pessimistic: Even with a free trade agreement, British imports and exports could develop in the medium term by 6 to 8% and economic output by 3.5% less than if the country remained in the EU internal market, the Paris organization estimates. But without an agreement, there is a risk of a loss of up to 5% compared to EU membership after two years.

A free trade agreement would eliminate customs duties in the trade in goods, but there are certain costs for companies in any case: through the effort for border controls, through the documentation of the origin of the goods (“rules of origin”) and through non-tariff barriers, including the documentation of compliance with certain requirements Norms and standards. All of this makes British goods more expensive and less competitive in the EU if companies want to pass on their extra costs. Conversely, the British also have to pay more for imports from the EU.

Without an agreement, British exports to the EU are subject to the usual EU external tariff for third countries. It averages 3.1%. According to calculations by Oxford Economics, non-tariff barriers result in an additional 1.4%. On the other hand, British imports of EU goods are burdened with a cumulative 3.3%. The costs vary considerably between sectors, depending on the prevailing protectionism: the EU external tariff for British cars and agricultural goods would rise to around 10%, for dairy products it can be up to 36%.

Pessimistic auto industry

Due to the tightly interwoven supply chains with the continent, the manufacturing sector in particular is pessimistic. The OECD fears that exports of the British auto and motor industry could collapse by more than 15% in the medium term. In addition to the loss of competitiveness, there is a short-term confusion at the borders when, for the first time in decades, goods have to be checked in transit across the English Channel. Traffic jams and interruptions in the supply chain are very likely, at least in the first few weeks after the turn of the year.

These distortions at the borders threaten regardless of the outcome of the trade talks, because the controls are necessary in any case. However, analysts from Capital Economics point out that failure could affect the EU's willingness to deal pragmatically with formalities at the borders. On the British side, controls should only be sparse until mid-2021. That is unthinkable in France because the EU has to protect its internal market. But the border guards have quite a lot of leeway to determine how strict a control is.

Of all the variants of cooperation that are conceivable after leaving the EU at the end of January 2020 and after the end of the transition period at the turn of the year, a free trade agreement is the loosest. According to Capital Economics, the decisive factor is therefore less whether there is an agreement than whether a breakdown in the talks ends in bad blood and a rift that paralyzes cooperation in other areas as well.

Divorce without scandal preferred

In the event of a “cooperative no-deal Brexit”, the British gross domestic product in 2021 will probably be only 1% smaller than if a contract were concluded, the analysts expect. But in an "uncooperative no-deal Brexit" the minus grows to up to 2.5%. This is because consumer confidence and companies' willingness to invest suffer if, for example, the Northern Ireland solution provided for in the exit agreement fails.

The analysis company Oxford Economics is somewhat more optimistic. Its experts estimate that by the end of 2022, without a trade agreement, British economic output will generally be only 1% lower than with a contract. However, this does not mean that the overall effect of Brexit is small when compared with the status quo: A no-deal Brexit will weaken gross domestic product by up to 4% in the long term compared to remaining in the domestic market. In the long term, this is about twice as high as the loss due to the corona pandemic.

The corona shock hits Great Britain hard. Economic power collapsed by more than 20% in the spring. The recovery has now stalled, and a return to the initial level may not be possible until 2022. Nevertheless, Brexit will probably be the more severe loss in the long term, according to the think tank UK in a Changing Europe. A calculation made together with the London School of Economics showed that the effect could be two to three times as great. With a free trade agreement, UK growth potential over a 15-year period will be around 5% lower, without a contract by 7.5%.

Corona crisis makes preparation difficult

The long-term estimates vary, and in the short term both problems are even aggravated: the pandemic has diverted companies' attention from Brexit, the OECD warned. The financial reserves of some companies are too small to be able to prepare or replenish their stocks. In some cases, for example in the pharmaceutical sector, the pandemic has actually emptied the warehouses. The benefits of a Brexit agreement are hardly disputed. Now it just has to be successful.

You can follow Benjamin Triebe, business correspondent for the UK and Ireland, on Twitter.