ON DECEMBER 24TH 2020 Boris Johnson hailed a trade and co-operation agreement (TCA) with the European Union. Eleven months had passed since Britain formally left the European Union, and just a week remained before it would be ejected from the customs union and single market. The prime minister painted the deal in glowing terms. There would be no tariff or non-tariff trade barriers between Britain and the bloc. Britain could set standards for the benefit of its own businesses, rather than abiding by compromises bashed out between the EU’s members. Exporters might even do more business than previously with their European neighbours, Mr Johnson gushed, adding that European countries should be pleased to have a “contented” Britain on their doorstep.
Was he right? The pandemic has muddied trade and demographic data: lockdowns affected the movement of both goods and people. And in Northern Ireland, which in effect remained in the single market and customs union to avoid a hard border on the island of Ireland, politicians are arguing over whether to rewrite the deal with the EU or tear it up entirely. But it is possible to offer a preliminary judgment on how Brexit is panning out.
In some ways, as badly as critics expected. Promises of more trade and of regulations fine-tuned to suit British companies never seemed realistic, given the friction-free nature of the single market and its regulatory dominance worldwide. And indeed, the evidence suggests both were oversold. The Office for Budget Responsibility, a government watchdog, expects Brexit to sap Britain’s productivity by around 4% in the long run. But dire predictions of goods shortages and a hollowed-out City of London did not come to pass. And in a surprising twist, a new consensus is emerging over one of the most contentious aspects of Brexit: immigration policy. Even though most Britons still characterise themselves as Remainers or Leavers, some of the heat has gone out of the argument.
The economic hit is clearest in trade in goods with the bloc, which is now subject to a host of new conditions. These include sanitary checks, import and export declarations, and rules of origin, which set out when products are eligible for tariff-free entry. According to John Springford of the Centre for European Reform, a think-tank, Britain’s total combined imports and exports have been depressed by 11-16% relative to its peers since the beginning of 2021 (see chart 1). Imports have been hit hardest—surprisingly, because Britain postponed customs checks until January 2022, whereas the EU did not.
One reason may be that EU exporters are more willing to forgo the hassle of sending goods to Britain’s much smaller market (although a survey by the British Federation of Small Businesses, an industry group, found that 17% of exporting businesses had stopped exporting to the EU, at least temporarily). The British government has also spent heavily on helping exporters navigate the difficulties that Brexit created. Since 2018, £84m ($113m) has gone on supporting customs agents who help clients handle paper work—and deal with their EU counterparts. One is Garth Young of Wellmark Customs and Logistics, who reports that the Germans are officious, the Dutch finicky and the French hard to get hold of. Sometimes customers complain that they did not vote for this hassle. He responds: “This is what sovereign borders look like.”
It all means higher costs for businesses. During the first 11 months of 2021, customs payments came to £3.9bn, 25% more in cash terms than during the same period in 2019. Logjams have affected trade with the rest of the world. According to Freightos, an online shipping marketplace, early in 2021 the cost of sending a container from Shanghai to Felixstowe or Southampton overtook that of sending one from Asia to northern Europe.
Freight is also becoming less efficient. The share of heavy-goods vehicles travelling empty from mainland Britain to the EU was around ten percentage points higher in 2021 than in 2018, according to the National Audit Office, an official watchdog. The government was spared the embarrassment of long lorry queues at the beginning of 2021 only because businesses stockpiled, and because of a temporary “pre-check” scheme ensuring that lorry drivers had the right paperwork before they could reach the British border.
Put asunder
Anecdotes abound of British companies shifting operations to the EU rather than continuing to supply the continent from Britain. Tim Doggett of the Chemical Business Association, a trade body, reports that some members have taken their businesses into Europe or set up European entities.
In its half-yearly results JD Sports, a clothing retailer, outlined how it had reduced exposure to the consequences of Brexit by using a new warehouse in Belgium, and said it would expand operations in France and the Netherlands. Marks & Spencer announced a step-up in local sourcing in the Irish Republic and a restructuring of operations in continental Europe to offset new border costs. Surveys suggest that at least 8% of British manufacturing businesses, and 12% in the wholesale and retail trade, had altered their supply chains because of Britain’s new trading arrangements. Of the latter group, around half said their costs had risen.
All that is bad enough, but services, which were almost entirely excluded from the TCA, have probably suffered more. The UK Trade Policy Observatory, a think-tank, estimates that during the first half of 2021 the deal depressed services imports into Britain and exports to the EU by 37% and 11.5% respectively. For the period from January to July, it calculates that goods imports from the EU were depressed by 29%, and exports to the EU by 6%.
A side arrangement allows data to flow freely between Britain and the EU, but the EU could scrap it at any time. British qualifications in fields such as architecture, accountancy and auditing are no longer recognised in the EU. New immigration rules have also caused problems. British businesspeople who used to be able to travel and work in other EU states according to a single, permissive set of rules must now handle 27 less generous regimes.
For financial services Brexit was an almost complete rupture: they were unceremoniously excluded from the TCA. Even “equivalence”, a declaration by the EU that a regulatory regime is sufficiently similar to its own for products to be granted market access, has been largely denied—and would, in any case, have been a poor basis for business planning, since it can be unilaterally withdrawn with 30 days’ notice. The sole exception is clearing, which British firms can carry out for EU clients until June 2022 (this deadline is likely to be extended). A similar exemption for settlement services expired in June 2021.
The immediate turmoil was limited, since financial institutions started to plan for the worst straight after the referendum. One banker describes how his firm assumed from June 2016 that Brexit would be diamond-hard, and started beefing up its continental operations. Its European entities applied for new licences that would allow them to continue offering services across the EU, based on supervision by a non-British regulator.
One result is that the City of London, once a crucial element of Europe’s financial plumbing, is increasingly being bypassed. In mid-2020 over 40% of euro swaps, a commonly used derivative, were traded in London. That has plunged to below 10%. Amsterdam is taking over from the City as the trading capital for European shares. The Office for National Statistics estimates that financial-services exports to the EU in the second quarter of 2021 had fallen by 31%, or £2bn, compared with the same quarter in 2019. Those to the rest of the world had risen by 5%.
Capital and people have shifted too, though neither in the quantity feared after the vote. EY, a consultancy, reckons that since the referendum financial firms have moved assets worth £1.3trn to the continent. This was a one-time-only move: the figure has held steady throughout 2021. New Financial, a think-tank, estimated in April that around £900bn was due to banks moving regulatory capital from British entities to European ones, however. This is dead money, set aside to guard against insolvency in a crisis, not a meaningful loss.
Staying put
It has not taken the relocation of many people to satisfy European regulators. EY puts the number of roles that financial firms have moved from Britain to the EU as a result of Brexit at just 7,400. That is a small fraction of the 190,000 jobs in the City and 1.1m in financial services countrywide. But few in the Square Mile expect European regulators to remain so relaxed indefinitely. They expect a crackdown on practices such as “chaperoning”, which allows a British financier to advise an EU client provided an EU-regulated person is also present. And trades entered into by EU entities will increasingly need to be held on their books, not transferred to London. For the City of London, as for many other sectors, Brexit is a slow puncture with much more air to come out.
What, then, of Brexit’s vaunted opportunities? When it comes to regulatory rewards, the past year has mostly been spent working out what they might be, rather than seizing them. In May the government created a “Brexit Opportunities Unit” in the Cabinet Office and in June a taskforce on “innovation, growth and regulatory reform” recommended relaxing “burdensome” disclosure requirements for some financial products, and replacing the EU’s General Data Protection Regulation with a UK Framework of Citizen Data Rights.
Some clear blue water is already opening up between Britain and the continent. UK in a Changing Europe, a think-tank, has identified 38 examples of disharmony between British and EU regulation. In some, for example a planned state-aid regime, which aims to be more nimble and less bureaucratic, Britain is pulling away. In others, the movement is on the EU side.
But even when Britain offers producers bespoke regulation to match their needs, they do not always want it. The Chemical Industries Association, an industry body, says that the importance of chemicals trade with the EU limits appetite for divergence. Half of British exporters surveyed by the British Chambers of Commerce said they wanted to stick with the EU’s system of safety and quality product marks.
Gradually, and almost imperceptibly, Britain has separated from the rest of Europe over the past year. But a more positive change has taken place in people’s minds. The internal chasm between Leavers and Remainers, which transformed politics and drove many people somewhat barmy, is starting to seem less daunting.
Even before the 2016 referendum, Britons had been sorting into two groups—one university-educated, ethnically varied and liberal, the other older, whiter and culturally conservative. But these groups were not yet self-aware. Will Jennings of Southampton University has studied the writings of ordinary people who recorded their thoughts on the referendum for Mass Observation, a research outfit. Many were ambivalent or confused, “in a complete fog” or “not too bothered” about the result.
That changed when the results came in. The referendum pinned labels on the two groups and set them against each other. Brexit identities became stronger than party-political ones. A few months later the British Election Study found that only 21% of Conservatives used the word “we” for their fellow Conservatives, whereas 56% of Leavers used it for other Leavers. The Tories won the 2019 election largely because they hogged the Leave vote, while Remainers split between Labour, the Greens, Liberal Democrats and Scottish National Party.
Few people have changed their minds about whether Brexit was wise or foolish. “The country was divided down the middle in 2016 and it is still divided,” says Sir John Curtice, a political scientist at the University of Strathclyde. A polling average suggests that 51% would vote to remain in or rejoin the EU today, up only slightly from the 48% Remainers scored in 2016.
But in some ways the country has started coming together again. The most obvious change is that Brexit has become less salient. Every month Ipsos MORI, a pollster, asks people which are the most important issues facing the country. From 2016 to 2019 Brexit was without exception either the most mentioned or second-most mentioned. In 2020 covid-19 forced its way to the top. Then the economy rose, followed in autumn 2021 by the environment.
So Brexit has more competition for people’s concerns. But there is also reason to think that some of the heat has dissipated. Fewer people now call themselves “very strong” Leavers or Remainers (see chart 2). Colin Gordon of Oxford for Europe, a Remainer group in a pro-Remain city, recently returned to campaigning following a covid-induced hiatus. He found locals less fervent: Remainers muttered that it was too late; Leavers looked displeased but did not remonstrate. “There was a lot of avoidance of eye contact,” he says. “People rushed past without engaging.”
Britons are also converging in their views of how Brexit is being handled, largely because Leavers have grown more critical. Perhaps they have been influenced by shortages of fuel and groceries, which are blamed on a shortage of European lorry drivers. The halo effect of the government’s pandemic response may have dimmed, too. Britain took an early lead in vaccinating against covid, and fended off complaints from continental European politicians that it had acquired more than its rightful share of doses—a spat that may have reinforced the view that Britain was better off out. But by August other European countries had caught up.
Come together
Perhaps the most surprising change in public opinion is over immigration—the topic that, more than any other, propelled the Leave campaign to victory in 2016. Britons are angry about asylum-seekers crossing the Channel in inflatable boats. But they are increasingly relaxed about other kinds of immigration.
Leavers have changed more than Remainers. Polling by Ipsos MORI for British Future, a think-tank, found that between October 2016 and July 2021 the share of Leavers who think immigrants have a negative impact on Britain fell from 53% to 42%. Since the share of Remainers who concur is low and steady, at 14-15%, the gap has narrowed.
Perhaps Leave voters feel they have made their point; perhaps people are calmer because covid has suppressed economic migration. Whatever the explanation, a government dominated by Leavers has created an immigration system that Jonathan Portes of King’s College London describes as “pretty liberal”. Jobs paying over £25,600 a year requiring at least A-level skills (around half of full-time jobs) can be filled by people from anywhere; rules governing care workers are being relaxed. Britain has welcomed almost 100,000 Hong Kongers with minimal fuss.
Remainers, who dislike almost everything about the post-Brexit settlement, are likely to come round on this, at least. In 2019 and 2020, when free movement with the EU was still in effect, Sir John and others ran a “deliberative poll”, a cross between an opinion poll and a focus group. Beforehand, Leavers and Remainers were far apart on whether Europeans should have to apply to come to Britain: 85% of Leavers and 41% of Remainers agreed. Afterwards, the share of Leavers who agreed had fallen slightly to 82%, while the share of Remainers who did rose to 57%. “What voters want is immigration control in the country’s interest,” says Sir John.
So Britain enters 2022 still split over Brexit, though a little calmer than it used to be. Fewer Leavers believe Brexit is going swimmingly; many Remainers seem amenable to the idea of controlling immigration from Europe. If Mr Johnson leads his party into the next election—and he is the most likely person to do so, despite his falling political stock—he may choose to fight it much like the last one, by posing as the Leavers’ champion. But that would say more about the limits of his political imagination than about voters’ wishes. ■
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