David Willetts is President of the Resolution Foundation whose report ‘Leaving Brexit Behind’ is published this week.
The tenth anniversary of Brexit marks another round of appraisals of the effects of Brexit. One effect could be that it just makes governing Britain harder with the imminent arrival of our sixth Prime Minister in the decade since Brexit compared with four in the 20 years before it.
The effects on growth mean that the gap between resources available and what voters expect from Government gets ever wider.
And the electorally important divide between Remain and Brexit does not match traditional party loyalties. Labour has to hold together pro-remain professionals and core working class voters many of whom voted leave. Conservatives need to hold together older voters with the mortgage paid off who are relatively protected from the economic impact of Brexit and its business supporters who face the burdens it imposes.
The vote to leave was of such significance for us that its effects are going to be with us for decades to come. We are not going back in. But that does not mean we stop investigating its effects.
Indeed as one of the biggest issues in politics is how to tackle the poor performance of the British economy we really do need to be understand the reasons for our low growth. That is what the Resolution Foundation tries to do in a new paper out this week which looks at the performance of British industry, particularly since we actually left the EU in January 2021. That is when the Trade and Co-operation Agreement resetting our economic relationship came into effect.
There has been a significant impact on exports of goods.
Since 2019 our goods exports have fallen by £74b compared to what they would have been if Britain had maintained our global market share. We have shifted from being the world’s eleventh largest exporter good to fourteenth. Our modest real growth of goods exports is a fifth of the OECD average.
We were increasingly specialising in some key manufacturing and goods sectors where we had real advantages and where there has been strong growth. But many of these former strengths are now struggling. So for example we had a strong market share in pharmaceuticals. That was in turn linked to our key role in regulating them across Europe – with the headquarters of the European Medicines Agency in London. Since 2019 our medicine exports have been flat in a global market which has grown by 40 per cent.
Automotive is another example. Margaret Thatcher stopped bailing out industrial failures such as British Leyland. But she also understood that she should try to promote new businesses. She focussed on attracting Japanese car makers to set up in the UK. A key part of her pitch to them was that they could use Britain as a base for selling into the European single market. Margaret Thatcher’s strategy worked until Brexit. Now rules of origin and export rules have made things much harder.
These losses of export markets do not just show up in declining EU exports. They are a global decline. Brexit has weakened the supply chains and market access which were the base for wider global success.
As well as the effects over the past few years there are longer term trends which will impact us for years to come. There has also been a big fall in business investment since Brexit. 16,400 smaller firms stopped exporting.to the EU – some of them could have been the growth prospects of the future with the EU the first step in a wider global push.
However there are some high value sectors which have done better. It is notable that our aerospace sector continues to perform well. Rolls Royce matters even more.
Brexit is not the only shock to hit the British economy.
There are other suspects who might be responsible for this poor performance such as high energy prices and China’s surge into higher value manufacturing. The report tries to disentangle Brexit effects from other challenges facing British industry.
We have exceptionally high energy prices. The biggest single thing which an incoming Andy Burnham administration could do to boost growth quickly is probably to cut the cost of electricity to industry. Nevertheless the report shows other countries with high energy costs – Sweden and Switzerland for example – have not experienced the same loss of global market share that we have.
The surge of China into advanced manufacturing is another challenge. But we are actually less exposed to China risk in our manufacturing sectors than many other Western countries but we have lost more ground than others.
Meanwhile there is of course the rise of services in which Britain is a world leader.
We have specialised more in services since Brexit. However that is due to the shrinking of our goods exports so that services are relatively more important. Our services exports have grown at slightly above the average rate for major economies: we have neither lost ground nor gained much. And there has been a change in the composition of our services exports. There are new barriers to regulated services such as consulting engineers or architects. However there are fewer barriers to unregulated services such as PR or advertising which is where more of our growth is coming from.
The economic impact of Brexit is clear. It has accelerated the decline of manufacturing particularly hitting some of our specialist high value sectors. However we have been able to maintain our global market share in services. Indeed UK trade has tilted from goods to services about three-times faster since 2019 than in the 17 years before.
Brexit has delivered a shift from car manufacturing to PR and advertising. That may not be quite what Brexit voting areas had in mind – and they might be wary of promises from the people who brought them that.