The Brexit Deal

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By MICHAEL ROBERTS*

Brexit is just another burden for British capital to bear; just as it will be for British families

The UK finally left the European Union on December 31st after 48 years as a member. The initial decision to leave, made in the special referendum of June 2016, took four tortuous years to implement. So what does the deal mean for British capital and labor?

For British manufacturing, the EU's internal market tariff-free regime was maintained. But the British government will have to renegotiate new bilateral treaties with governments around the world, whereas it was previously included in EU agreements. People will no longer be able, by right, to work freely in both economies, all goods will require additional paperwork to cross borders, and some will be extensively scrutinized to verify they meet local regulatory standards. Frictionless trade is over; indeed, this is true even of Northern Ireland and Great Britain, with a new customs border set up in the Irish Sea.

And all of this concerns trade in goods alone, where the EU is the destination for around 57% of British industrial goods. Britain's government has fought tooth and nail to protect its fishing industry (and failed), but it contributes just 0,4% of Britain's GDP, while the services sector takes up a 70% share. Of course, most of this is not exported, but even so, the export of services contributes to around 30% of GDP. And 40% of this trade in services takes place directly with the EU.

Indeed, while the UK has a large deficit in trade in goods with the EU, this is partly offset by a surplus in trade in services with the EU. This surplus is, for the most part, composed of financial and professional services, in which the City of London leads. UK financial services exports are worth £60 billion annually, compared to £15 billion in imports. And 43% of exported financial services go to the EU.

The Brexit deal with the EU did nothing for this sector. Professional service providers will lose their ability to automatically work in the EU after the agreement fails to achieve mutual pan-European recognition of professional qualifications. This means that professionals, from doctors to veterinarians, engineers and architects, must have their qualifications recognized by each EU member state where they want to work.

And the deal does not cover access for financial services to EU markets, which is yet to be determined by a side process under which the EU will either enter into a unilateral “matching” agreement with the UK and its regulated companies or let firms seek permits in individual member states. In the course of the following year [2021], side-to-side trade agreements may take place in these areas. But the British services sector is bound to end up worse off, as far as exports are concerned, than the EU.

And this is serious, because the UK is a 'rentier' economy that is heavily dependent on its financial and business services sector. Financial services contribute around 7% of UK GDP, a contribution around 40% higher than in Germany, France and Japan.

Britain is a country of bankers, lawyers, accountants and media people rather than engineers, builders and manufacturers. Britain has a strong banking sector but a small manufacturing sector compared to other G7 economies.

And the impact on workers? Leaving the EU, what little British labor has gained from EU regulations will be at risk in what is already the most unregulated country in the OECD. EU rules included a maximum 48-hour workweek (with many exceptions); health and safety regulations; regional and social subsidies; scientific funding; environmental standards; and, above all, free movement of labor. All this will end or be minimized.

Around 3,7% of the European workforce – 3 million people – currently work in a member state other than their own. Since 1987, more than 3.3 million students and 470.000 teachers have participated in the Erasmus program. That program will exclude the British from now on. Immigration to the UK from EU countries was significant; but the same is true in the opposite direction; with many Britons working and living in continental Europe. With Britain outside the EU, Britons will be subject to work visas and other costs that will be greater than the total money per person saved from EU contributions.

In general, European immigrants (all immigrants, in fact) contributed more to the British economy through taxes (income and consumption) and by taking low-paying jobs (hospitals, hotels, transport) than they took from it (with the extra cost for education, utilities, etc.). This is because most of them are young (often single) and contribute to the pension payments of retired British taxpayers. The Brexit referendum has already led to a sharp drop in total immigration from mainland Europe to the UK, around 50 to 100.000 and still falling. This just adds to the loss in national income and tax revenue to come.

Most sober estimates of the impact of leaving the EU suggest that the UK economy will grow more slowly, in real terms, than it would have done had it remained a member. Mainstream economic institutes, including the Bank of England, believe there will be a cumulative loss in Britain's real GDP over the next 15 years of around 4% to 10% due to the EU's exit; or about 0,4% points of annual GDP growth. This means a cumulative loss of 3% in per capita GDP, equivalent to around £1000 per person per year.

O Office for Budget Responsibility of Great Britain estimates that a third of this relative loss has already happened as a result of the reduction in the pace of business investment since the referendum, as domestic businesses have reduced their investment, due to uncertainty over the Brexit deal accompanied by a sharp drop in inflow of foreign investment.

And then the COVID pandemic decimated business activity. In 2020, Britain will suffer the biggest drop in GDP of any major economy except Spain, and will recover more slowly than others in 2021.

British capitalism was already skating considerably before the arrival of the pandemic. Its trade deficit with the rest of the world had grown to 6% of GDP, and real GDP growth had slipped from over 2% to less than 1,5%, with industrial production dragging by 1%. The British economy already had low investment growth and productivity andm compared to the 1990s and other OECD countries

Investment in technology and R&D has been poor, more than a third less than the OECD average.

And the reason for this is clear. The average profitability of British capital has been falling. Even before the pandemic, this profitability (according to official statistics) was about 30% below the level of the late 1990s and, excluding the Great Recession, reached an all-time low.

Since the 2016 referendum, Britain's profitability has fallen by around 9%, compared with small increases in the Eurozone and the US. And, according to the forecast of Europe's annual macroeconomic database, the country will be around 18% below 2015 levels in 2022!

As a result, British capital investment is set to collapse and forecasts call for a staggering 60% drop by 2022 compared to the 2016 referendum.

However, the UK may be able to circumvent such gloomy predictions, as the government claims, because its industry and the City of London now they can expand across the world 'free from the shackles' of EU regulations. And it is increasingly clear how he thinks he can do it – by turning the country into a tax-free and regulatory-free home base for foreign multinationals. The government is planning ports and 'free' zones; areas with little or no taxation to encourage economic activity. Although geographically located within a country, they essentially exist outside its borders for tax reasons. Companies operating inside free ports can benefit from deferring duty payments until their products have been moved elsewhere, or they can avoid them altogether if they bring goods in to store or produce locally before exporting them again.

Unfortunately for the government, studies demonstrate that free ports can simply postpone the time when taxes are paid, as imports still need to reach end consumers across the country. And incentives can also promote the relocation, from one part of Britain to another, of activities that would already happen anyway. Furthermore, tax exemptions can mean a loss of revenue for the Treasury. And free ports run the risk of facilitating money laundering and tax evasion, as goods are often not subject to inspections that are routine elsewhere. A deregulated Britain will not restore economic growth, nor will good, well-paying jobs for an educated and skilled workforce. It will only increase the profits of multinationals by using cheap and unskilled labor.

In short, the Brexit deal is another obstacle to sustainable economic growth in Britain. But the recession brought on by the COVID pandemic and the underlying weakness of British capital is far more damaging to its economic future than Brexit. Brexit is just another burden for British capital to bear; just as it will be for British families.

*Michael Roberts  is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Daniel Pavan.

Originally posted on the blog The Next Recession.

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