09 September 2022

CEPR's Portes: Trade, migration, and Brexit

CEPR eBook reported new academic research on the economic impacts of Brexit, particularly on trade and migration. This column explores ... emerging findings are consistent with economists’ pre-Brexit predictions; and what possible explanations there are for the divergences observed so far.

Leaving the EU Single Market – not, formally, a necessary consequence of Brexit, but in practice one that became inevitable very shortly after the Brexit referendum – meant, by definition, increased barriers to trade in goods and services between the UK and the EU (and the European Economic Area), and the end of free movement of people in both directions.  It also – again, not as a necessary consequence, but as part of the clear political commitments of the Vote Leave campaign and the post-2016 Conservative government – entailed a reduction of such barriers between the UK and the rest of the world (e.g. Baldwin 2016)

In other words, just as joining the EU (and the subsequent deepening of European integration) led both to trade creation – as trade between the UK and other Member States increased – and trade diversion – as UK trade with the rest of the world decreased (particularly, in the years following entry, trade with some Commonwealth countries) – Brexit should lead to the opposite: call it ‘trade destruction’ and ‘trade reversion’.  Similarly with migration, although in this case it was the accession of the countries of Eastern and Central Europe to the EU in 2004 that led to a substantial reorientation of UK inward migration flows away from former Commonwealth countries and towards the EU (Portes 2015).

It follows that in theory, the overall impact on the volume of UK trade and migration from Brexit is ambiguous. However, economists were almost unanimous that it would in practice be negative. For trade, the logic was simple.  The EU is by far the UK’s largest trading partner, accounting for (at the time of the referendum) about half of all UK trade; and the EU Single Market is an area of deep economic integration, much more than just a free trade area.  Empirical estimates of the impact of Brexit on trade therefore suggested that reduced trade barriers to the rest of the world post-Brexit, while beneficial, would do little to outweigh the negative impacts of increased barriers with the EU (e.g. Dhringra et al. 2016). 

Modelling by the UK government (DExEU 2018) estimated that, assuming a free trade agreement (FTA) with the EU that provided for tariff- and quota-free trade with the EU, but little or no regulatory convergence, meaning large increases in non-tariff barriers – which proved to be broadly the eventual outcome under the UK-EU Trade and Cooperation Agreement – UK-EU trade volumes would fall by about 25%. Meanwhile, even under optimistic assumptions about possible FTAs with non-EU countries including the US, China and India, trade volumes with the rest of the world would only increase by about 5%, resulting in a net fall of about 10%.  Consistent with this, the UK Office of Budget Responsibility, based on a comprehensive review of the literature, forecast a fall in UK trade intensity of about 15% (OBR 2018).

The consensus on immigration was remarkably similar: that Brexit would lead directly, through the end of free movement, to a sharp fall in immigration from the EU, only partially offset by discretionary liberalisation to the rest of the world.  Forte and Portes (2019) estimated that EU migration would fall by about 70%, while non-EU migration might increase by about 10%. However, this predated the fall of Theresa May, who had planned to implement a very restrictive new immigration system; the Johnson administration switched tack.  Revised estimates (UK in a Changing Europe 2019) suggested that while EU migration would still decrease very considerably, perhaps by 60%, non-EU migration might increase by about 30%. The official Home Office impact assessment came to a similar conclusion (Home Office 2021)....

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