Beyond Brexit
- Giulio Draghetti
- 2 days ago
- 17 min read
Navigating the New Frontier Between the EU and the UK
From Skepticism to Separation
Brexit, the withdrawal of the United Kingdom from the European Union, was the product of a multifaceted combination of historical, political, and legal processes spanning several decades. It has its foundations in the initial period of UK-EU relations and goes back to Britain's early hesitation to become a member of the European Economic Community (EEC) during the 1950s and 1960s. In 1973, Britain's "Brentry", the country's formal entry into the EEC, was a highly contentious one. For decades, there was a simmering angst about the European project underlying the surface of British politics, not infrequently reflecting wider suspicion of supranational institutions. This simmer boiled over into a fever pitch in 2016 when the UK held a referendum to resolve the question of EU membership. There was a combination of reasons to leave, ranging from sovereignty, immigration, and economic independence, matters that had been informing politics for many years. The result of the referendum, in which 51.9% voted to leave, sealed a significant political shift, and this began to unravel the decades-long membership in the European Union.
The regulatory and legal landscape that ensued after the Brexit referendum was characterized by frenzied negotiating and restructuring. One of the landmarks, of course, was the EU- UK Trade and Cooperation Agreement in December 2020, which established the UK's and the EU's new relationship. The TCA established a framework for UK-EU cooperation on trade and security, as well as on issues of mutual interest, to mitigate some of the disruption that Brexit was likely to create. The accord allowed free trade in commodities tariffs and quota-free access but added new regulatory barriers, including customs inspections and documentation, that would inevitably involve costs and delays for business. It also established a framework for collaboration on issues like law enforcement, energy, and transport, with the condition that the UK and EU need to have some degree of regulatory standards in place to allow trade and security exchanges to remain free from interference.
From a political point of view, Brexit also reflected a realignment of the UK's domestic policy terrain: Brexit was not just about exiting the EU, but it was symptomatic of deeper changes in British polity. The referendum had exposed a nation intensely divided, with rural and working-class communities heavily voting to leave, while urban hubs and more prosperous regions voted to remain. After the referendum, the UK government struggled to control the exit, especially as various groups in the governing Conservative Party, ranging from hard Brexiteers to moderates, fought for control. The government of Prime Minister Theresa May struggled to find a satisfactory compromise for both the EU and the UK’s divided political factions, which ultimately led to her resignation. Under her successor, Boris Johnson, the government pursued a more aggressive approach to leaving the EU, which resulted in the final departure in January 2020. Since Brexit, political shifts have been marked by a renewed emphasis on nationalism and greater sovereignty and a pivot towards new trade deals with countries outside the EU. These political dynamics, combined with the legal framework set by the TCA, have reshaped the UK's role on the global stage, signaling a new chapter in its history.
New Costs, Delays, and Supply Chain Disruptions
As the UK's new relationship with the EU started to take form, soon evident were the implications for trade and supply chains. Since Brexit, companies in a range of sectors have been managing increased costs of trade due to the imposition of new tariffs, regulatory barriers, and intricate administrative demands. These increased trade expenses have not only put a lot of pressure on businesses but have also had wider budgetary impacts. Delays and extra documentation prerequisites, alongside compliance expenses, have imposed an additional financial weight on businesses, especially those depending on just-in-time manufacturing techniques. The heightened financial pressure has expressed itself in the form of elevated prices for consumers and has lowered competitiveness for UK businesses in the international market, causing an overall decrease in trading efficiency. This has been especially devastating for those industries that previously thrived on the frictionless integration of the UK and EU economies, resulting in the remolding of the UK's economic environment in fundamental ways.
Following Brexit, UK-EU trade has witnessed goods becoming subject to novel customs procedures and regulations, triggering serious delays along borders. It has hit most critically in areas like food and agriculture, whose time-sensitive items are now undergoing stricter checks, resulting in shortages, delays, and price rises. The food sector, for example, has struggled to maintain the speed and volume of cross-border deliveries, with some ensuing stock shortages and increased costs to consumers. Businesses have also needed to rearrange supply chains to deal with such novel bottlenecks, either by changing suppliers or modifying logistics approaches to compensate for the additional Brexit complexity. These delays have forced UK companies to reassess their operations, creating both short-term volatility and long-term strategic shifts in how goods are shipped and traded across the English Channel.
The introduction of tariffs and border checks has also made trade volumes between the UK and the EU decrease, especially in sectors that depend on the free movement of goods and just-in-time production flows. For sectors such as auto manufacturing, the effect has been even worse. Automobile firms that had depended on EU-based suppliers have endured delays since tariffs and customs have slowed down the transfer of essential components. This has prompted numerous firms to rethink supply chain strategies, finding new providers outside the EU or near-shoring production to steer clear of the intricacies of cross-border trade. The heightened administrative load has also compelled business firms to devote investment to novel infrastructure and assets to deal with the increased difficulties, involving extra expenditure. Some businesses have resorted to stockpiling methods, building up inventories of key constituents in a bid to reduce the effects of future probable disruptions. Others have adopted more adaptable logistics provisions, like utilizing various transportation channels or altering suppliers, to limit the risk of bottlenecks at primary entry points. Such changes reflect the extent of redesign engaged in by companies to find their way through the post-Brexit trading landscape, which is characterized by increased uncertainty and increased costs. The requirement for adaptability, resilience, and flexibility has never been more apparent as UK and EU companies acclimatize to a new reality of trade with its opportunities and threats.
Post-Brexit Economic Recovery Strategies
After Brexit, the UK undertook a multifaceted strategy of economic revival based on innovation and diversification of the economy. The government of Britain prioritized areas of growth not thoroughly explored in the EU environment, such as green technologies and digital systems. The government's decarbonization pledge has seen unprecedented investment in renewable schemes, such as solar and wind power, and green technologies subsidizing. Transitioning to electric cars, in particular, has been one of the key pillars of the new UK industrial development. Sales of new diesel and petrol vehicles are to cease by 2030, placing the country amongst the world's top producers of electric vehicles. The establishment of a national grid of electric charging points and the new production facilities for battery technologies are among a broad range of measures intended to spur a greener economy, providing new opportunities for industrial expansion and employment.
Speeding up digitalization is another significant part of the UK's economic resurgence plan. Post-Brexit, the UK government has made efforts to obtain a position as a global leader in technology, with an emphasis on innovation in sectors such as artificial intelligence, cybersecurity, and data analysis. New plans to boost digital infrastructure, including 5G coverage and national broadband deployment, drive this agenda. The UK has also created a more flexible regulatory environment for tech companies.
London's Shift
The financial services sector has been one of the most directly impacted sectors of the UK economy as a result of Brexit, and the City of London, once Europe's financial hub, has been at the centre of the crisis. Arguably, the prime impact for the UK financial sector has been to strip passporting rights, under which UK domicile financial firms could operate across the EU without the imposition of other regulatory hurdles. These rights were one of the columns upon which London's dominance in European finance stood, and their removal has disconcerted the ability of UK businesses to sell services across the EU, leading several of them to question their model. The chance for regulatory differences between the EU and the UK only added fuel to these predicaments. As EU financial rules no longer bind the UK, there is a risk of developing separate regulatory standards, which would result in additional compliance costs for firms that wish to operate in both territories. This fragmentation has rendered the City less attractive for EU customers, as firms seek simpler access to the European single market.
In response to these events, the UK and the EU have been in a competitive battle to attract financial services. The European Union has moved to make cities like Frankfurt, Paris, and Amsterdam viable alternatives to London so that businesses can avoid the same restrictions currently prevailing in the UK. In seeking this objective, EU cities have made efforts to attract financial institutions, such as tax incentives, regulatory frameworks, and talent pools. The UK has, in return, doubled down on pushes to maintain London's position as a global financial hub, with a focus on administrative flexibility, deregulation in targeted areas, and new trade relationships beyond Europe. However, the exodus of meaningful financial institutions and talent away from London to EU financial centers can easily be perceived as several banks, asset managers, and trading houses have shifted business or set up new bases in Frankfurt and Paris.
The City of London itself is being dramatically repositioned in the post-Brexit world as well. London remains a major global financial centre, but its role within Europe has been diminished. Withdrawal from access to the single market has prompted many firms to reconsider their plans for operations that hitherto relied on London's EU market proximity. Relocation trends have accelerated, with most financial players shifting key parts of their operations to EU cities in a bid to continue having free access to European markets and consumers. London still has a competitive advantage due to its high financial acumen, comprehensive infrastructure, and international networking. Financial Regulatory reforms have also been a strong indicator of the City’s repositioning. With the UK seeking greater administrative freedom, it is rolling out new reforms to make its financial system more attractive, such as relaxing some of the EU's stringent requirements.
The Impact on Workforce Supply, Sectors, and Immigration Policies
Brexit has fundamentally changed the model of labor mobility in the UK, with the end of free movement between the UK and the EU introducing far-reaching changes in the internal labor market. Britain’s withdrawal from the EU abolished the automatic right of EU nationals to live and work inside the country, a move that has had a lingering impact on the labor supply and employment in many industries. The end of free movement has led to a significant decline in the number of EU workers taking up employment in the UK. Before Brexit, EU nationals were extensively present in agriculture, hospitality, construction, and healthcare, where they would take up mostly low and medium-skilled posts that were harder to fill in the UK workforce. The shrinking of the workforce has also had numerous spillover consequences, such as higher wages, as businesses have been forced to raise wages to lure domestic workers into accepting jobs from a diminished pool.
The reduction in labor supply has also been accompanied by a shift in the overall migration policy, once more reshaping the labor market. The UK government introduced a points-based immigration system that currently benefits high-skilled migrants and puts a cap on low-skilled migrants, which has led to the number of low-skilled EU migrants arriving in the UK decreasing abruptly. The healthcare sector has especially been impacted by this change in migration trends, as numerous EU nationals were formerly employed as carers, nurses, and doctors. Under the new immigration rules, fewer EU citizens have been willing or able to make the journey to the UK, and this has led to acute staffing shortages in hospitals, care homes, and other healthcare institutions. In the same vein, the farming industry, which had traditionally relied on seasonal migrant workers from Eastern Europe, has also been very much shaken. The declining supply of labor has resulted in shortages of agricultural workers, and many farms have been forced to cut back production or leave crops unused in the field, resulting in food supply chain disruptions and higher food costs. The migration restrictions, along with the continued uncertainty around residency status for EU nationals already settled in the UK, have exacerbated labor shortages, with major sectors finding it difficult to fill critical positions and deal with higher operating costs.
Brexit and Northern Ireland: The Economic Effects of the Protocol
One of the most politicized and contentious aspects of Brexit has been its effect on Northern Ireland, perhaps most notably via the Northern Ireland Protocol. This agreement, intended to avoid a “hard” border between Northern Ireland and the Republic of Ireland, has held important political and economic functions. The Protocol, which binds Northern Ireland to some EU protocols to avoid a physical frontier between Éire and the UK, has produced a new reality whereby Northern Ireland remains within the single market for goods of the EU while the rest of the UK has withdrawn from it. This divergence has produced a chain of issues, not least within trade flows among the UK, Ireland, and Northern Ireland. The Protocol has created a de facto Irish Sea customs border, impeding smooth trade between Great Britain and Northern Ireland. Convergence of regulations and customs controls, together with added paperwork for Northern Ireland's trade with the remainder of the UK, have split up historical supply chains, producing delays, costs, and market inefficiencies. In addition, they have heightened political tensions, and unionist circles in Northern Ireland have perceived the Protocol as posing a threat to their economic and political ties with the UK.
Going deeper into the economic effects of the Protocol on Northern Ireland’s trade and businesses, it's clear that it has resulted in mixed outcomes for local enterprises. For some companies, especially those with close ties to the Republic of Ireland, the Protocol has guaranteed ongoing access to the EU market, enabling them to have unbroken trade relationships with the Union. However, for most others, particularly those reliant on imports and exports with Great Britain, the Protocol has brought on great difficulties. Discrepancies in rules and increased customs controls have raised expenses for businesses, particularly in manufacturing, retailing, and agriculture. These extra costs not only impacted the cost of merchandise but also made supply chain operations cumbersome, forcing companies to navigate through a complicated web of legislation in an attempt to avoid non-compliance. The Protocol has also had ongoing political implications for the UK, as the government has been obliged to act in response to the economic disturbance created by it while trying to meet the requirements of Northern Ireland's political parties and the EU's need to maintain the integrity of its single market.
Labour Victory in the 2024 Election and Its Effect on Brexit Consequences
The Labour Party's landslide win in the 2024 general election has added new dynamics to the post-Brexit terrain. Led by Keir Starmer, Labour has been outspoken about its plans to buffer the economic and social dislocations wrought by Brexit. The party has demanded reopening a series of elements of the Brexit agreement, such as pursuing a closer relationship with the EU on trade and regulation. One of the fundamental elements of Labour policy was getting reconnected to the Union, possibly renegotiating elements of the EU- UK Trade and Cooperation Agreement (TCA) to minimize the trade barriers that have disproportionately affected most sectors, particularly agriculture, manufacturing, and financial services. The most dramatic policy change under a Labour government may very well be the implementation of a more relaxed immigration policy, one designed to plug the labor shortages in the health, agricultural, and construction sectors. Labour's win, then, would include a partial roll-back on some of the more restrictive post-Brexit immigration regulations, the same that have helped to fuel labour shortages, with long-term dividends for the economy and social cohesion in the UK.
Labour's Brexit policy also includes more cooperation with the EU on climate change, defense, and research. Starmer's party has been focusing on keeping strong ties with Brussels in a bid to tackle global issues and to foster more cooperation on research and the development of new technologies. Specifically, Labour has shown interest in rejoining EU research programs, which the UK had withdrawn from after Brexit, such as Horizon Europe. This would enable UK scientists to receive EU funds again and work with European researchers, leading to innovation in sectors such as health and environmental sustainability. Politically, a Labour victory may also see the UK's global role combined with a more proactive approach to working with Europe, maintaining Britain's role as a key partner. Yet Labour's ability to do all of this will hinge on its balancing act of preserving the UK's sovereignty while toeing the line of EU policies that it would have otherwise opposed.
Global Britain: Redefining Trade Relations Post-Brexit
Following Brexit, the UK has embarked on a strategic bid to redefine its global trade relationships, focusing on forging new trade deals and emerging as a world-leading player in markets. The UK's post-Brexit trade strategy, aiming for a "Global Britain," is meant to deepen the UK's economic integration with partners outside of the EU through a more outward-looking approach towards international trade. By pursuing alternative trade agreements with global nations around the world, Britain seeks to diversify its economic dependency on the EU and its share of global economic power. The UK has already signed a number of free trade agreements (FTAs) with nations like Japan, Australia, and Canada, and it has been actively seeking membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These efforts are reflective of the UK's aspirations to diversify trading partners and access high-growth markets in the Asia-Pacific region. Yet, despite these new deals being tantalising opportunities, there are some challenges, as the UK is competing against other great world powers in a bid to win the most advantageous terms of trade. Whether the "Global Britain" fantasy pays off will depend on how successful the UK proves to be at juggling the subtle global politics of trade alongside its established relationship with the EU.
Domestically, the UK government is grappling with fiscal challenges exacerbated by global trade tensions. Chancellor Rachel Reeves is considering abolishing the £800 million-a-year digital services tax on American tech giants to facilitate deals with the US and avoid potential tariffs. Additionally, the UK is negotiating with the EU to revitalize its goods exports, with business groups urging a more ambitious stance to improve trade relations.
Challenges in Trade, Labor and Growth
The economic outlook for both the UK and the EU in the aftermath of Brexit presents a complex picture, shaped by shifts in trade, labor markets, and investment trends. The UK, now positioned outside the EU's single market, has restricted access to one of the biggest economic areas of the world. Thus, UK-EU trade will still be below pre-Brexit levels, with obstacles like customs controls, regulatory divergence, and tariffs continuing to influence trade flows. The difference will be experienced especially in the sectors that were most integrated into the EU's supply chains, like manufacturing and agriculture. In the home labor market, the UK can expect to see ongoing skills shortages, particularly in low- and medium-skilled occupations that had been previously taken up by EU migrants. The shortage of workers, along with lower investment because of higher trade friction and uncertainty, will likely drag down the UK's long-run growth prospects. On the EU side, though the immediate economic fallout from Brexit has been fairly limited, the longer-term consequences will hinge on how the EU evolves in the absence of a constrained Britain. The Union may have problems holding onto its regulatory cohesion as well as in the economic integration of the remaining member states, yet it ought to be comparatively more stable than the UK as the single market is a solid base for economic growth.
The UK economy has been in this limbo since the referendum, and its GDP growth has not matched pre-Brexit expectations. The short-term effects have been a decline in the trade flows between the EU and the UK, especially in the financial services, car manufacturing, and agriculture sectors that relied heavily on frictionless integration with EU markets. This decline in trade has been exacerbated by high non-tariff barriers such as customs inspection, certification procedures, and border congestion that have increased costs and challenges for businesses. Brexit has also sped up a realignment in the UK's sectoral make-up, with some sectors like finance and technology contracting whilst others like logistics and distribution have grown as supply chain patterns have altered.
At the macro level, these tendencies have resulted in more subdued collective growth and rising economic instability as the UK integrates new external trading relations beyond the EU. The UK's medium to longer-term economic path will be characterised by slower growth, greater inflationary pressure, and greater regional imbalances, as various sectors adapt at different paces.
In response to the new economic reality following Brexit, the Bank of England has updated its monetary policy to address the new economic reality. The Bank has been focused on managing inflationary pressures, which have gone up as a result of disruptions in the supply chain, rising barriers to trade, and higher production costs. The exchange rate volatility triggered by Brexit uncertainty has also played a part in inflationary pressures, with the British pound witnessing periods of volatility against major currencies. In addition to reacting to the broader economic slowdown, the Bank of England has employed interest rate changes and other monetary levers in managing inflation and enticing investment. The subdued growth forecasts for the UK economy have been tricky for the Bank to manage as it must balance the country's need to spur economic activity and the need to rein in inflation. Specifically, the Bank has the task of making sure that inflation is kept in check without worsening unemployment or stagnation in important sectors. The long-term success of the Bank of England's monetary policy will hinge on whether the UK can steer its post-Brexit economic reality by bolstering economic stability amid changing global trade patterns and restructuring its domestic economy.
The Future of the UK-EU Political Relationship
Although Brexit marked a clear political separation, the future of the UK-EU relationship is one of guarded collaboration. As the UK proceeds on its post-Brexit path, both parties see the advantage of keeping close relations, especially in the fields of security, defense, and technological cooperation. On defense and security issues, the UK continues to be an indispensable ally to EU member states, notably in the face of common threats posed by terrorism, cyber threats, and geopolitical uncertainty. Although the UK is no longer a member of the EU's official political institutions, the two actors still work very closely together on intelligence and law enforcement issues, thanks to instruments like the European Security and Defense Policy (ESDP) and the European Arrest Warrant (EAW). Still, the changes determined by Brexit have made it necessary for both sides to devise new mechanisms to deal with these shared problems as they finalize their post-Brexit security agendas.
On the economic side, the UK has the challenge of ensuring that its exit from the EU does not result in an irreparable breach in trade ties. Although the UK-EU Trade and Cooperation Agreement (TCA) has set an agenda for trade in goods and services, there are areas where regulatory alignment and access to markets must be negotiated and constructed. The UK government has tried to make Britain a global trading hub, developing new relations with non-EU nations, but the hard reality of the EU's regulatory space is that it cannot entirely ignore the rules of the bloc. In particular, Agriculture and financial services continue to be constrained by fresh trade barriers, and so there are demands for more flexibility within the TCA. As the UK establishes new economic and regulatory benchmarks, the question is whether it will be able to maintain the alignment of a portion of its policies with the EU without undermining its sovereignty. Their economic relationship will likely continue to develop, influenced by continuing negotiations, changing market needs, and different political agendas on both sides.
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