# 1 / 2022

Switzerland and the United Kingdom: joint efforts for a prosperous future

The United Kingdom in Europe – one year after Brexit

On 31 December 2020, the United Kingdom (UK) completed Brexit and left the EU. After almost 50 years of EU membership, it is once again a European third country. As a result of Brexit, the EU has shrunk by around 67 million inhabitants and one sixth of its economic output. It has also lost its third-largest contributor.

Leaving the EU dampens UK’s economic development

Comparing the development of the gross domestic product (GDP) of the United Kingdom with other European states in the context of the coronavirus pandemic, it becomes clear that Brexit has dampened the economic recovery of the United Kingdom in the short and medium term. Experts from the non-partisan Office for Budget Responsibility of the British administration even estimate that economic development will be twice as badly affected by Brexit (-4 per cent GDP) as by the coronavirus pandemic (-2 per cent GDP).

Specifically, the United Kingdom recorded the sharpest GDP decline of all G7 countries in 2020, which also include Germany, France, Italy, Japan, Canada and the USA (-9.8 per cent compared to the previous year). Germany – with -4.6 percent – and the Eurozone – with -6.3 percent – recorded significantly smaller welfare losses (see chart). Moreover, according to analyses by the Bank of England, declining investment activity in the British private sector had already begun in 2019 as a result of Brexit uncertainties. In 2022, however, this negative trend is expected to reduce significantly. It will thus be interesting to see whether the British economy will be able to continue its strong catch-up movement in the second half of 2021.

Brexit has further increased the UK's economic downturn in the Corona crisis. However, the medium and long-term economic development depends on several factors.

The UK’s manufacturing industry in particular struggled with operational problems in the first months after Brexit. According to the UK’s Society of Motor Manufacturers and Traders (SMMT), for example, more than 60 per cent of its members needed significantly more time and resources to trade with mainland Europe than before Brexit. Specifically, it is not so much exports as primarily imports from the EU that have fallen sharply in the first half of 2021 when compared to the rest of the world (-27 vs. +39.7 per cent). However, the initially predicted collapse of the British automotive industry has so far failed to materialise. The food industry reported a 13.9 per cent year-on-year decline in exports to the EU for the first three quarters of 2021. But the services sector has also been hit: a study of the British financial industry reports that Brexit has led to 440 firms relocating to the EU. This was accompanied by the loss of 7,400 jobs and around 10 per cent of bank assets.

Future economic developments in the UK – and for individual industries – will depend on several factors. On the one hand, the course of the coronavirus pandemic and the development of global supply bottlenecks will be relevant. At the same time, however, it will also be decisive whether the UK succeeds in rapidly and substantially deepening relations with important economic partners after Brexit (e.g. the USA) and stabilising trade dynamics with the EU. Furthermore, economic policy decisions at home are also important in order to strengthen the competitiveness of British companies in the international environment. For example, the current British government is strongly promoting the production of electric vehicles.

Trade and Cooperation Agreement governs future EU-UK relations

With the signing of the EU-UK Trade and Cooperation Agreement (TCA EU-UK) on 30 December 2020 (in force since 1 January 2021), both partners have a contractual basis for future relations. In terms of mutual market access, the agreement corresponds to a comprehensive free trade agreement – with important gaps (e.g. technical standards or financial services). In addition, the EU-UK TCA also regulates the coordination of social security, law enforcement, judicial and technical cooperation and participation in Union programmes.

Despite a treaty agreement, tensions between the United Kingdom and the EU have recently been growing again. Currently, the agreements on fishing rights in the English Channel and the Northern Ireland Protocol are particularly controversial.

Brexit clouds British trade dynamics

Currently, UK trade and investment statistics only allow isolated conclusions about negative dynamics vis-à-vis current EU member states (EU-27) compared to other major trading partners (sources: ONS for goods and investment, WTO for services).

Looking at the development of British trade in goods before the Brexit decision (23 June 2016) until today, several aspects are striking. While the overall trade volume has increased, there are differences in developments with the EU-27 states and other partners. The effects of the uncertainties surrounding the introduction of extensive border controls in EU-UK trade are also clearly visible: a sharp increase in trade volume towards the end of 2020, followed by a massive slump in the first quarter of 2021 and a recovery in the middle of 2021. Various companies stocked up their inventories before Brexit during this period in order to avoid turbulence as a result of new border controls at the beginning of 2021. According to calculations by the Centre for European Reform, the UK’s trade in goods in 2021 was 11 to 16 per cent lower than if the country had remained in the EU’s single market.

With Brexit, British firms face a great number of new hurdles in trade with the EU. This weakens exports, but also accentuates supply shortages on the British Isles.

In the case of services, a different development can also be seen among important trading partners: while trade with the USA grew by 10.1 per cent between 2015 and 2020, trade with the EU-27 countries shrank by 1.5 per cent. Cross-border trade in shares of EU companies, for example, has shifted significantly to the EU. The decline was also evident in transport and tourism – an indication that the coronavirus pandemic was also having a major impact.

Britons feel Brexit directly

On a day-to-day basis, Brexit has had a noticeable impact on the British Isles. Delivery delays as a result of the introduction of extensive customs controls and regulatory checks between the EU and the UK are worth mentioning. These transport problems were and are a major problem for the export of perishable foodstuffs from the UK (e.g. seafood).

In connection with Brexit, however, the staff shortage has also become more acute as a result of the abolition of the facilitated work permit for EU citizens on the island. Jobs without higher qualifications in the transport industry, gastronomy, manufacturing and food processing are particularly affected. The consequences are gaps in supermarket shelves (e.g. meat, milk), rising energy and goods prices and temporary fuel shortages at petrol stations.

It is important to note that not all of the problems mentioned were caused by Brexit alone. The impact of the coronavirus pandemic and the global shortage of various raw materials also play a significant role. And the skills shortage already existed in the UK before Brexit. Yet, leaving the EU has amplified many challenges.

A free trade agreement is not participation in the single market

The legal framework of EU-UK economic relations essentially corresponds to that of a modern free trade agreement (FTA). However, the EU-UK TCA is more comprehensive in certain areas than the FTA that the EU has concluded with Canada, for example (CETA). It also contains detailed provisions on ensuring equal and fair conditions of competition for all participants in a market (‘level playing field’). The EU-UK TCA contains extensive competition and state aid rules. At the same time, minimum rules were also laid down in the areas of environment, tax, labour and social law. The EU-UK TCA also contains a ban on weakening or reducing current protection standards. For the EU, these rules are also mandatory for the future design of its relations with other European third countries – unlike with Canada, for example. This is with reference to the countries’ geographical proximity and the intensity of the economic relations.

Nevertheless, the departure of the United Kingdom from the EU single market is accompanied by the loss of numerous advantages in bilateral economic relations. The following areas are worth mentioning:

  • new border controls on EU-UK trade in goods and advance declarations required
  • exclusion from the network of EU free trade agreements including possibilities of cumulation of origin
  • harmonisation in the certification and marketing authorisation of industrial products
  • loss of passporting rights for financial services
  • additional requirements for the provision of personal services
  • no mutual recognition of professional qualifications
  • more difficult access to skilled workers.

Northern Ireland – the only part of the UK with a physical border with the EU – is a special case. Both sides have agreed to avoid hard internal border controls in view of the Northern Ireland conflict. Therefore, certain EU regulations remain applicable in Northern Ireland and the European Court of Justice also plays a role in case of disputes.