Article 50 one year on: regional and sectoral impacts of Brexit

Both before and after the referendum, a powerful narrative took hold that the major beneficiaries of Britain’s EU membership were the ‘metropolitan elites’ of London and the south east, while the majority of the population had been ‘left behind’.

There are still genuine debates regarding the likely regional outcomes, with some research pointing to greater impacts on London and its hinterland, while various other papers point in the opposite direction.

In particular, our own recent analyses suggest that the ‘metropolitan elite’ argument is empirically incorrect. London is the part of the UK economy least economically dependent on the EU for its prosperity, and it is therefore the least exposed region to Brexit. In marked contrast, Leavevoting regions are between 10% and 50% more dependent on EU markets than London.

Moreover, we can expand this argument to examine how each UK region is exposed to all of the potential trade-related risks of Brexit. We do this by considering all of the UK-EU global value-chains, in which goods and services cross borders numerous times, as well as those trade linkages connected via third countries. For example, British firms sell services and components to German automobile firms who then sell cars to China and India.

For many UK firms, not only EU but also broader markets are at risk from Brexit. Again, we see that regions which voted Leave typically tend to be more exposed to Brexit trade-related risks than the regions which voted Remain.

Indeed, the scale of the exposure to Brexit for Leave-voting regions is typically some 25–50% higher than their direct dependence on EU markets for their prosperity.

Using similar techniques, we also analyse the Brexit-related risks for 54 UK sectors. Again, we find that the likely adverse impacts of Brexit are not consistent with those that are most prominent in the public debate.

Sectors such as professional, technical, or scientific occupations, legal services, computer programming, and architecture are far more exposed to Brexit in both relative and absolute terms than financial services.

These analyses raise three key issues. First, a key characteristic of many of the UK’s economically weaker regions is that they display a much more limited ability to adjust to economic shocks. Our evidence suggests that it is precisely these regions which will be most adversely affected by Brexit.

Many of these Leave-voting regions display much lower levels of diversity, skills and connectivity than more prosperous regions, and for much of the last 30 years of globalization their weaker ability to respond to shocks has been evident.

In contrast, many of the Remain-voting regions have been able to more successfully adjust and adapt their economies. This implies that Brexit will aggravate, not reduce, interregional imbalances. Local government officials in London and the south east are less pessimistic about Brexit than those in other regions, and our research suggests that this is justified.

Second, the fact that many of the Leave-voting regions are also likely to face the most severe post-Brexit challenges also means that in the long run there is likely to be a profound mismatch between public expectations and economic outcomes.

Exactly why this is the case is something of a conundrum, and the reasons why people in more vulnerable places voted for Brexit are complex. It is in part related to the attractiveness of the narrative or perceived plausibility of the message, and the ‘metropolitan elites’ argument appears to have been persuasive.

It is also likely to be related to the fact that the types of complex trading relationships inherent in the UK’s global value-chain relationships with the EU are little understood by either the general public or even by much of the mainstream media. (This lack of understanding is reflected in the widespread repetition of mercantilist arguments regarding the potential effects of EU-UK trade surpluses and deficits on the likely final negotiated UK-EU trade deal.)

Similarly, the idea that we are nowadays operating in a post-geography trading environment goes against almost everything we know from international economics. The fact that these narratives have resurfaced in the Brexit debates implies a profound lack of understanding of the complexities of the nature of modern trade even at the highest levels, as well as more generally within society.

Third, local government now has to find ways to respond to the post-Brexit landscape. Much of the thinking underpinning city-regional policy-making follows ideas emerging internationally about place-based decision – and policy-making.

Yet, it is still early days. Many of the recently constituted city-regions are still searching for their role and mission, while most Local Enterprise Partnerships have no real capacity to design or effect post-Brexit strategies.

Moreover, the movements towards new devolved institutions and powers, especially around the ‘Northern Powerhouse’ and ‘Midlands Engine’ agendas, appear to have largely stalled during the last year, in large part because Brexit has overwhelmed the ability of central government to act.

The result is that there are a range of different and somewhat disparate responses on the part of different parts of the country. Some regions have set up local task-forces, commissions and inquiries to try to examine the local impacts of Brexit and to consider potential local policy responses to limit the possible adverse impacts.

But the ability of many localities to seriously consider or respond to these issues is limited. While some of the major city-regions may have the capacity to undertake these initiatives, most do not.

Sub-state government in the UK is struggling to respond to Brexit and make its voice heard at the national level. It is only at the level of the three devolved administrations that any discussions about sub-national governance have any traction in national government discussion about Brexit. Except for London (and in particular the City), the rest of the UK’s cities and regions are largely operating almost entirely outside of the key Brexit decision-making sphere.

Ironically, the fact that those regions and sectors which are most exposed to Brexit have little or no representation in the national government Brexit debates, while the regions and sectors which are least exposed have the most, means that UK sub-national governance is currently little more than an observer, dependent on decisions taken elsewhere.

By Chloe Billing, Philip McCann and Raquel Ortega-Argilés part of The UK in a Changing Europe Brexit research team.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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