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State of the Region 2020 Full Report

Impact of Risks from Brexit

Since the UK officially left the European Union on 31 January 2020 much has changed. Brexit has gone out of the political focus as both the UK and European governments have been preoccupied with responding to the Covid-19 pandemic. The negotiations have slowed, or even stalled in some regards, as governments and also civil service functions have been rapidly diverted to addressing the overwhelming health and safety imperatives. These lockdown responses have led to enormous disruptions in global value chains, dramatic capital shocks, and severe cutbacks in the flows of people and, consequently, knowledge and ideas. Jonathan Portes, one of the authors of The Brexit Negotiations: a Stocktake, said: "Covid-19 pandemic and Brexit are major shocks for the UK economy. The interaction of the two is complex and unpredictable, with the potential to amplify some impacts while moderating others.“ "On balance, the pandemic probably does make the economic risks of exiting transition on January 2021 without a trade deal larger, but considerable uncertainties remain," Portes said. As such, the UK and EU negotiators must decide whether or not to extend the period of negotiation due to the interruptions caused by the pandemic, and if so, how this might be achieved, given that the transition period runs out at the end of 2020.

Over the last few months the UK-EU negotiations have been taking place via electronic media (Ebner, 2020), and in particular via a Webex videoconference system produced by Cisco. Apart from technical issues, the major difficulty here is that electronic video-conferencing and webinar systems cannot act as perfect substitutes for face-to-face contact, especially in highly complex and sensitive negotiations. This suggests that the ability of both sides to come to a mutually acceptable resolution is diminished by the lack of personal interactions over recent months (The Independent). This has probably meant significant lost time. Moreover, during the immediate recovery period, the EU governments are all preoccupied with negotiating the €750 billion recovery package, so the immediacy and importance of Brexit has probably been significantly reduced in most EU capitals. At the same time, as the CBI Daily Covid-19 Webinar “Update on UK-EU negotiations” held on the 10 June concluded, in the case of the UK, that the dominance and disconnection of politics from business and economics suggests that the post-covid recovery priorities of job creation are unlikely to play any real part in extending the transition period, or altering the UK’s negotiating position (IANS). The Cabinet Office minister said it is “prudent and wise” to prepare for trade negotiations to fail and for the UK to default to World Trade Organisation (WTO) terms for business with the EU from January (HuffPost UK). The result is that the prospect that Britain departs the bloc with a ‘no-deal’ Brexit is more likely than ever, or something very close to this.

Our research at WMREDI suggests that these types of outcomes will almost certainly lead to greater interregional and intra-regional inequalities within the UK and will fundamentally work against the 'levelling up’ agenda (Billing et al., 2019). The effects of a “no-deal” Brexit will be very damaging for the UK regions and the West Midlands economy in particular as our research has already illustrated Our results show that 2.64% of EU GDP is at risk because of Brexit negative trade-related consequences. In the UK, the Brexit trade-related consequences account for 12.2% of its GDP. Our results suggest that adverse effects are likely to be more severe in the regions which have the least ability to respond to adverse shocks. Our results show that 12.2% of West Midlands GDP is at risk because of Brexit negative trade-related consequences. If we consider the wider West Midlands region we see that the exposure of Shropshire and Staffordshire is 13.9% of local GDP and the exposure of Herefordshire, Worcestershire and Warwickshire is 14.3% of local GDP. In other words, the West Midlands as a whole is more exposed than the UK average (Ortega-Argiles et al., 2018, 2018, 2018c). What is already clear is that any type of Brexit will exacerbate the negative economic effects caused already by Covid-19 in UK firms, regions and sectors.