The Influence of Brexit
on the UK’s Trade Relations
and Economic Growth
Xiaoyu Zheng 202007010426
CONTENTS
 Historical Background and Brexit
 Perspectives from Remain and Leave
 EU-UK Trade and Cooperation Agreement
 Influence on UK’s Trade Relations and Economic Growth
 Financial markets
 Consumer and border prices
 Labor market
 Output and investment
 Trade before the TCA and under the TCA
 Conclusion
CHAPTER 1
Historical EU Referendem
The UK was admitted into European Economic Community(EEC) in 1973 and began
incorporating EEC laws into their own.
While the UK's GDP per capita increased faster than the Western Europe average, the
public was not convinced that remaining in the EEC was a good idea, leading to the first
EU referendum in 1975. However, worried about the economic and defense
repercussions of leaving, 67% voted to remain in the EEC.
Historical Background
+
CHAPTER 1
In 1984,former Prime Minister Margaret Thatcher
successfully obtained a rebate from the EEC after
arguing that 70% of the EEC's expenditures went
to farms, of which the UK had few. The UK went
on to opt-out of many provisions set forth by the
EEC, and later the EU, including the Schengen
agreement and the universal European currency,
the Euro.
London grew to become the financial center of
Europe after Thatcher suddenly deregulated the
industry in 1986. Competition in the UK's finance
industry increased, and foreign financial
institutions flocked to the city. Banking and
finance became the largest contributing sectors to
the UK's economy.
CHAPTER 1
Historical Background
This phenomenon led to the UK being hard-hit by the global financial crisis that began
in 2007, to which the government responded by nationalizing banks and implementing
quantitative easing. Following the crisis, the UK's fiscal deficit increased, growing to
10% of GDP by 2010.
The following years saw low growth rates and increases in unemployment and
inequality. While growth later increased and unemployment fell from its 2011 peak,
many believed that the austerity package hindered the potential economic recovery. And,
while inequality increased, immigration into the UK grew. Despite harsher restrictions
on immigrants, 1 in 12 UK residents had non-British nationality by 2015.
Amidst growing Euroscepticism, and increased support for the anti-EU UK
Independence Party (UKIP), Cameron announced that he would hold areferendum on
remaining in the EU if he was re-elected in 2015. Cameron was re-elected, and, after
securing more beneficial treatment from the EU, declared that the EU referendum would
be held on June 23,2016.
Source: the UK Office of National Statistics Public Sector Finance database.
CHAPTER 1
Introduction of Brexit_vote
The vote in the United
Kingdom on June 23, 2016,
was 52 percent leave and 48
percent remain, with 70% of
the population voting.
Britain had voted to exit the
economic union that it had
joined in 1973, more than 40
years earlier.
And it’s an arrangement that
had seemed to serve Britain
fairly well for those decades
become so controversial.
Source: https://www.nytimes.com/interactive/2019/world/europe/what-is-brexit.html
CHAPTER 1
Introduction of Brexit_vote
Differences in the vote were geographic and also demographic.
geographic
Remain voters
London, Scotland,
and Northern Ireland
The rest of England
voted to remain.
(outside London) and
tended to be younger
and more educated.
Wales voted to leave.
geographic
demographic
CHAPTER 1
Introduction of Brexit_EU economic
The key economic featur es of the Eur opean Union (EU) include:
Tarrif
EU
Single
market
Euro
The customs union, which eliminates tariffs on trade
between the EU member countries and imposes a
common set of tariffs on imports from outside countries.
The single market, which promotes free movements of
goods, services, financial capital, and people among EU
member countries.
The euro, a common currency used by 19 EU member
countries, with a common monetary policy set by the
European Central Bank.
CHAPTER 2
Why Remain or Leave?
Remain
Economic benefits to
the UK of continued
EU membership
Leave
Regain the ability to
set its own policies.
Control and reduce
immigration.
CHAPTER 2
Perspectives from Remain
One estimate of the UK’s net benefits of additional trade created with other EU countries put
them at about 10 percent of the UK’s gross domestic product.
Proponents noted that 44 percent of the UK’s exports went to EU countries, and another 16
percent went to countries that have free trade agreements with the EU. Only 20 percent of UK
exports went to the United States.
The proponents also argued that Britain was small by itself
in the world, only about 4 percent of world production, so
Britain gained by being part of the much larger EU.
Excerpt From Pugel, Thomas-International Economics
CHAPTER 2
Perspectives from Leave
In 2015, net immigration increased to 333,000
people, and Britain and other EU countries
faced several shocking terrorist attacks.
To reestablish the sovereignty of the British
government over laws and activities in Britain.
That is, Britain needed to remove itself from
the process of “ever closer union” that was
shifting more power to bureaucrats in
Brussels (the central location for EU
administration).
Excerpt From
International Economics
Pugel, Thomas;
CHAPTER 3
Hard Brexit and Soft Brexit
 A full or nearly full break with the EU,
called “hard Brexit,” would achieve the
54th Former prime minister
Theresa Mary May
Former leader of the British Labor Party
Jeremy Corbyn
goals of reestablishing UK sovereignty and
policy control.
 But it would disrupt many British
 A “soft Brexit” would be less disruptive.
companies and industries, and many
For example, Britain could try to shift to a
workers would lose their jobs. Beyond the
trade agreement with the EU in which
initial disruption, Britain would lose some
Britain was a member of the customs union
of the longer-run net benefits of special
and accepts many rules of the single market,
access to the EU economy.
even though Britain was not formally a
member country of the EU. (Norway has an
arrangement something like this with the
EU.)
Former mayor of London/ 55th prime minister
Boris Johnson
 But then Britain would gain much less
sovereignty.
CHAPTER 2
One Specific Controversial Issue
One specific controversial issue was the status
of the border between Northern Ireland (part
of the United Kingdom) and Ireland. The
disappearance of border checks was key to
achieving peace in Northern Ireland, and the
island of Ireland functions as one economy.
Ireland and the EU insisted that there be no
reestablishment of any border checks, and
Britain agreed.
Source：https://fedtrust.co.uk/constitutional-options-fornorthern-ireland-a-discussion/
CHAPTER 3
EU-UK Trade and Cooperation Agreement(TCA)
23/6/2016 Referendum
2017 EU-UK Negotiation
2018-2019
white paper/agreement...
draft and implement
31/1/2020 Brexit
21/12/2020 TCA
• Negotiations made slow progress.
• Britain formally withdrew from
the EU on January 31, 2020. The
remainder of 2020 was a transition
period in which negotiations
continued almost to the end. On
December 30 the UK Parliament
ratified the EU-UK Trade and
Cooperation Agreement (TCA),
which came into effect on January
1, 2021.
• The Conservative government of
Boris Johnson had pursued a hard
Brexit, and the EU had agreed.
CHAPTER 3
EU-UK Trade and Cooperation Agreement(TCA)
The TCA establishes a free trade area for
goods, with no tariffs and no quantitative
limits. The UK is no longer part of the EU
single market(except Northern Ireland).
For goods trade, this means that each side
applies its own customs procedures and
technical and safety standards, which can be
forms of nontariff hindrances to imports.
source: https://en.wikipedia.org/wiki/File:2021-0422_UK_notification_Trade_and_Cooperation_Agreement.pdf
CHAPTER 3
Influence on UK’s Trade Relations and Economic Growth
Financial
markets
Consumer
and
border prices
Labor
market
Output Trade before the TCA
and
and
under the TCA
investment
CHAPTER 3
Influence on UK’s Economic Growth_Financial markets
The TCA does not cover trade in services, and, as of mid-2022, negotiations
have made limited progress. Financial services are an important export for
Britain, and British banks have lost the passporting rights that are part of
the single market.
Source:
https://www.express.co.uk/news/uk/741596/NoBrexit-banks-remain-under-EU-law-5-years
CHAPTER 3
Influence on UK’s Economic Growth_Financial markets
As Figure shows, the pound started to fall on
the night of the referendum within moments of
the announcement of early results from
Sunderland (an industrial town in the north of
England) that showed an unexpectedly large
win for the Leave campaign.
Sterling depreciation on the night of the Brexit
referendum (June 23, 2016). The vertical line
indicates the announcement of the referendum
result in Sunderland.
The pound depreciated by 8.1% against the
US dollar and 5.8% against the euro.
(Dhingra and Sampson 2022)
Dhingra, S. and T. Sampson (2022). "Expecting Brexit." Annual Review of Economics 14(1): 495-519.
CHAPTER 3
Influence on UK’s Economic Growth_Financial markets
The day after the referendum, the Financial Times Stock Exchange (FTSE) 100 stock market
index saw a significant increase in trading volume, followed by decline and high votality.
A higher Sharpe ratio indicates a better risk-adjusted return, meaning that the investment or
portfolio is generating more return for each unit of risk incurred. Conversely, a lower Sharpe
ratio suggests that the investment is not generating a sufficient return for the level of risk
involved. 1.35 is ok.
Source: Investing.com
CHAPTER 3
Influence on UK’s Economic Growth_Consumer and border prices
A consistent finding is that the sterling depreciation pass-through to the UK
border and consumer prices was very high.
Inflation measured by the UK consumer price index (CPI) rose rapidly after the
referendum, from 0.5% in June 2016 to a peak of 3.1% in November 2017.
Data from the Office for National Statistics (ONS) (at
https://www.ons.gov.uk/). Inflation is the annual CPI
inflation (ONS series D7G7). The real wage growth is the
EARN01 3-month average percentage change year on
year in total pay, seasonally adjusted (ONS series
A3WW).
Depreciation
(Dhingra and Sampson 2022)
Dhingra, S. and T. Sampson (2022). "Expecting Brexit." Annual Review of Economics 14(1): 495-519.
CHAPTER 3
Influence on UK’s Economic Growth_Labor Market
The impact of leaving the EU on jobs was a key battleground in the Brexit campaign
and was closely tied to the debate over the labor market effects of immigration from
the EU. Prominent Leave supporters claimed new trade deals with countries outside
the EU could create 400,000 jobs, while short-term government forecasts put job
losses from a Brexit vote at around half a million.
(Slack 2017), (HM Treas. 2016).
Source:
https://www.crowdfunder.co.uk/p/labouragainst-brexit-campaign-fund-1?
CHAPTER 3
Influence on UK’s Economic Growth_Labor Market
Research published in January 2023 by the Centre for European Reform, a UK think
tank, shows that since the new points-based immigration system came into effect in
2021, there were 460,000 fewer EU employees between 2021 and June 2022, and
while 130,000 non-EU employees partially made up the shortfall, this has led to six
key areas of the UK labor market experiencing a a severe shortage of 330,000 people.
The transport and warehousing sector was the hardest hit, with 128,000 fewer EU
workers, or 8% of total employment in the sector; in wholesale and retail, EU
workers fell by 3%, or 103,000; in the hospitality and food sector, it fell by 4%; and
manufacturing and construction each fell by 2%.
Some specific occupations have been particularly hard hit, with data from the
Institute for Government, showing a dramatic 37 percent drop in EU workers among
heavy truck drivers.
Source: https://www.cer.eu
CHAPTER 3
Influence on UK’s Economic Growth_Output and investment
GDP growth in the UK was not immediately affected by the referendum, but it slowed during 2017
and 2018, as shown in Figure. The UK dropped from having the highest growth rate in the G7 in 2015
to having the lowest 2 years later (De Lyon & Dhingra 2019). Identifying the determinants of
aggregate growth is challenging, but both micro and macro evidence suggest that voting to leave the
EU contributed to the UK’s growth slowdown.
• UK and G7 GDP, quarterly for the period
2013–2019. Quarterly GDP normalized to 100 in
2016-Q2. Rest of G7 values are the simple
average of normalized GDP in Canada, France,
Germany, Italy, Japan, and the United States.
• GDP is the seasonally adjusted real GDP in
national currencies (series LNBQRSA). Data
from OECD (at https://stats.oecd.org/).
(Dhingra and Sampson 2022)
Dhingra, S. and T. Sampson (2022). "Expecting Brexit." Annual Review of Economics 14(1): 495-519.
CHAPTER 3
Influence on UK’s Economic Growth_Output and investment
Leaving the EU’s Single Mar ket and Customs
Union is also expected to make the UK a less
attr active destination for for eign dir ect
investment (FDI), par ticular ly for expor tplatfor m FDI intended to ser ve Eur opean
mar kets (Dhingr a et al. 2016).
To date, ther e has been little r esear ch on how
Br exit has affected FDI, and existing studies
have used data on announcements of new FDI
pr ojects r ather than actual flows.
The Leave vote led to a 9% r eduction in
announced EU investment pr ojects in the UK
by Mar ch 2019 and led to a 17% incr ease in
announced FDI pr ojects by UK fir ms in the EU,
but it did not affect UK investment in OECD
countr ies outside the EU.
Source: https://blogs.sussex.ac.uk/uktpo/publications/notbacking-britain-fdi-inflows-since-the-brexit-referendum/
CHAPTER 3
Influence on UK’s Trade Relations
Trade
In the long run, Brexit is expected to substantially
reduce the EU’s share of UK trade.
Trade barriers were unchanged before
the TCA came into force at the start of 2021.
CHAPTER 3
Influence on UK’s Trade Relations_before TCA
The referendum had a negative
impact on trade for products more
exposed to the risk of Brexitinduced increases in trade barriers.
At the same time, the EU’s share
of total UK trade has remained
stable, and it is hard to find
evidence that growth in UK–EU
trade since the referendum has
been lower for products more
exposed to Brexit risk
EU share of UK trade, 2012–2020. Goods trade excludes
precious metals. Data from the Office for National Statistics
(at https://www.ons.gov.uk/). Goods trade from May 2021
release ofUK trade bulletin. Services trade from July 2021
(Dhingra and Sampson 2022)
release ofUK total trade data set. Dhingra, S. and T. Sampson (2022). "Expecting Brexit." Annual Review of Economics 14(1): 495-519.
CHAPTER 3
Influence on UK’s Trade Relations_after TCA
Covid
Although the Leave vote did not shift aggregate UK trade away from the EU, the eventual introduction of
new trade barriers had a more dramatic impact. Research on UK–EU trade under the TCA is still in its
infancy, but the raw data show that UK–EU goods trade experienced a major shock at the start of 2021.
(Dhingra and Sampson 2022)
Dhingra, S. and T. Sampson (2022). "Expecting Brexit." Annual Review of Economics 14(1): 495-519.
CHAPTER 3
Conclusion
Voting for Brexit had large negative effects on the UK economy between 2016 and
2019, leading to higher import and consumer prices, lower investment, and slower
real wage and GDP growth.
It is not yet possible to draw any conclusions about the long-run effects of Brexit on
UK–EU trade. However, we expect future studies of trade under the TCA to play an
important role in better understanding the consequences of nontariff barriers and in
evaluating the wisdom of the pre-referendum consensus that Brexit would reduce
UK–EU trade and leave the UK worse off economically in the long run.
CHAPTER 3
Conclusion
UK goods exports and imports to and from the EU were lower in 2021 than they were in
2019, even though exports and imports by and from other non-EU countries to the EU
were higher. The new nontariff barriers to trade appear to be reducing UK-EU trade in
goods.
Net migration from the EU to the UK declined during
2016–2019 and fell to about zero during 2020–2021. Britain
has used Brexit to reduce immigration from the EU, and to tilt
its policy toward welcoming more skilled immigrants from
any country.
There have been macroeconomic costs to Brexit.
During 2016–2019, the years after the referendum vote,
real business investment in Britain failed to grow, and it
also did not recover in 2021 from the decrease during
the COVID-19 recession of 2020.
Overall, output and national income appear to be 4–5 percent lower in
Britain that they would be without Brexit.
THANKS
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