Brexit was a major headline for the media pre-pandemic. The United Kingdom was the first and only sovereign country to leave the European Union successfully, but how has the UK been faring financially since it left the EU?
Nearly a year after Brexit, the UK faces serious financial difficulties because of revised regulations, customs controls, and added layers of red tape. In turn, UK businesses incur added export costs, suffer from border delays, and haemorrhage money. By the end of 2021, UK companies lost over £250 billion to Brexit.
Although many residents voted to leave the EU to secure political and financial independence, the UK and its businesses are in economic hot water.
Changes Resulting from Brexit
Following Brexit, the EU and UK finalized the Trade and Cooperation Agreement (TCA), providing tariff- and quota-free trade between the UK and EU so long as the goods abide by the rules of origin. For UK businesses to be exempt from tariffs, UK exports must qualify as originating or wholly obtained in the UK or EU.
In other words, the goods must be produced in the UK or EU using materials from these regions. Or if the goods are from international countries, they must be significantly changed. If UK goods don’t meet TCA standards, exporters are subject to tariffs. However, even if they meet TCA requirements, some EU member nations can impose other customs duty charges.
In light of Brexit and the new trade agreement, UK exports to the EU decreased by 45% at the beginning of 2021. And over halfway into 2021, UK exports were still down 15% in August.
As a result of the rules of origin, many businesses are facing mounds of paperwork, resulting in delays and added costs. Increased customs controls and inspections also cause additional delays in the supply chain. After Brexit, the EU introduced full customs controls, requiring safety, security, health, and environmental checks. Moreover, customs declarations are required for all traded goods.
Brexit has also affected the UK workforce, resulting in significant labour shortages. As a result of the end of the freedom of movement between the UK and EU, non-UK citizens will need a work visa. Additionally, UK businesses need to become approved employee sponsors to hire non-citizen employees.
A recent analysis conducted by The Centre for European Reform determined that UK goods trade was 15.7%, or £12.6 billion, lower than the amount it would have been if Brexit did not occur. Some argue that the decrease is attributed to the COVID-19 pandemic; however, strong statistical evidence indicates the negative effect on the UK’s economy is primarily a result of Brexit.
While many other European countries have started to economically recover from the pandemic, the UK has not. And the primary culprit is Brexit. Currently, UK exports are still 5% to 10% lower than in 2019. Moreover, the island nation’s trade is 6% lower than in 2017.
In addition to lower exports of UK goods to the EU, imports from the EU have also diminished. Near the end of 2021, EU imports decreased by 18%, almost double the previous year’s rate. Additionally, service imports from the EU are down 30%.
Individuals are also negatively affected by Brexit’s impact on the economy. For instance, the price of bread and cheese rose from 20% to 30%. Also, because of more costly imports, many other consumer products are significantly increasing in price. In turn, many Brits struggle to find employment and manage their finances.
Brexit and Financial Services
Unfortunately, Brexit’s impact on financial services has been predominantly negative. This is because prior to Brexit, the UK was part of the EU’s single market with commonly established financial regulations amongst the member countries. As a result, a financial institution in one member country could apply to provide services to other member countries without extensive additional requirements. This single market authority was referred to as a financial services passport.
After Brexit and the advent of the TCA, passporting was replaced with an equivalence system. With the equivalence system, UK financial service firms may be granted access to an EU member country’s domestic market in certain areas based on specific provisions. Namely, a UK firm may gain access if the UK’s market regulations are equivalent to the EU country’s regulations. Additionally, the equivalence system allows either country to terminate market access with a 30-day notice.
As a result, based on the survey, 44% of the UK’s largest financial service firms decided to move some of their operations and staff to the EU. Additionally, 24 major financial firms announced that they are transferring over £1.3 trillion in UK assets to the EU.
Despite the difficulties caused by Brexit and the effects on financial services, the UK has outlined reforms it is undertaking. Notably, the UK intends to strengthen its existing financial services regulations and regimes. Secondly, the island nation intends to cultivate relationships with third-party countries aside from the EU.
After Brexit and the adoption of the TCA, the British Chambers of Commerce (BCC) surveyed 981 UK companies regarding Brexit affecting business. When asked about the ease of adapting to changes from the TCA, 46% of businesses responded that it was relatively or very difficult when buying or selling goods.
This difficulty results from added shipping costs of items outside of the UK, particularly to member nations in the EU. Goods cost significantly more for businesses to ship due to the added courier charges to cover additional customs checks, taxes, and paperwork. In turn, this cuts into profit margins.
In addition to the added costs, TCA customs requirements have also affected businesses. For UK businesses to comply with the rules of origin and inspections, they must complete additional time-consuming and lengthy paperwork per shipment. Nevertheless, despite many businesses’ best efforts to adhere to the regulations, EU member countries do not all have the same requirements. As a result, many shipments are held up during customs checks, resulting in delays and lost revenue.
Positive Impacts of Brexit
While Brexit, on the whole, has negatively impacted the UK economy, financial services sector, and businesses, there are some positives to mention.
Particularly, the UK is no longer bound by the EU’s single market. Instead, the island nation can freely trade with non-EU member countries, particularly the U.S. and Australia. Additionally, with the fall of the British pound, UK exports may become more appealing to international markets due to their relative cheapness.
Nearly a year after the UK’s official exit from the EU, the question on everyone’s minds is whether Brexit was good or bad. From an economic perspective, Brexit has primarily negatively impacted the financial services sector and businesses. As a result of changing regulations, heightened border controls, and increased customs reporting, businesses are shelling out more money to export goods. And often, these companies are met with significant delays, further cutting their profits.