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Brexit is an early experiment of how well the world can cope with new trade barriers and increased uncertainty.
Leaving the European Union will clearly make commerce with the bloc that accounts for half of U.K. trade more difficult. But it also may give an extreme example of what’s to come elsewhere as President Donald Trump threatens to disrupt arrangements with China and Europe. Bank of England Governor Mark Carney calls it an “acid test” for how consumers and companies respond to the new environment.
“We’ve had 30 years of globalization, and the U.K. is probably the best example right now of actively trying to reverse that by disintegrating from by far its largest and closest trade partner,” said Daniel Vernazza, chief U.K. and senior global economist at UniCredit in London. “Brexit is probably as close as you can get to an exogenous trade shock, and therefore you can more cleanly see the effects of it. We’ll see in the U.K. what disintegrating trade linkages does.”
The similarities give economists and investors, who may have grown weary of Brexit turmoil over the past three years, all the more reason to pay attention as U.K. politicians return to work this week.
According to calculations by BOE policy maker Gertjan Vlieghe, the U.K.’s vote to leave the European Union has cost the U.K. about 800 million pounds ($1 billion) per week since June 2016. Speaking in Parliament on Wednesday, Chancellor of the Exchequer Philip Hammond cited BOE figures that suggest business investment is 20 percent lower than it expected before the vote.
For Arend Kapteyn, global chief economist at UBS Group AG, the dynamics in play in Brexit and a trade war are very similar.
“You model it exactly the same way,” he said. “The only difference with Brexit is three-quarters of the disruption is non-tariff barriers.”
If the U.K. is to prove a guide for the global economy, then there could be trouble ahead. According to calculations by Bloomberg Economics, close to $2 trillion -- some 2.3 percent of global GDP -- is tied to trade flows that are at risk from greater protectionism. The U.K., China and Germany are the major economies that face the biggest risks, the study found. [...]