THE COSTS of Brexit are adding up. Exports of goods to the European Union (EU) fell by 40% between January and December, while imports dropped by almost 30%. Although much of that fall represents the unwinding of prior stockpiling and pandemic-related effects, there are clues in the data that suggest a substantial proportion reflects the new post-Brexit reality. First, trade with the EU is being hit harder than other trade. Compared with a year ago, EU-bound goods exports were down by just over 10% in January while exports to non-EU countries rose by almost 5%. Second, the differential falls in exports and imports point to border-rules enforcement being a factor. While the EU states are applying the new tougher checks, Britain is still mostly waiving them. The net result is trade disruption felt more keenly by British exporters than importers and exports to Europe falling faster than imports. Overall, the Office for Budget Responsibility, a fiscal watchdog, estimates the hit from border frictions will be around 0.5% of GDP in the first quarter of 2021.

Although Britain avoided the imposition of tariffs by signing a trade deal with the EU, there is new friction at the border. Sanitary and phytosanitary checks have not just imposed new costs but also created delays—a particular problem for perishable goods such as shellfish. Re-exporters of goods manufactured outside Britain have fallen foul of rules-of-origin regulations. Trading in billions of euros of continental shares has migrated across the Channel because the EU has, so far, declined to decree Britain’s financial regulation equivalent to its own.

The government argues that even if Brexit has caused headaches for some industries, the speedier roll-out of vaccines will allow Britain’s economy to recover faster than the EU’s, more than making up lost ground. A faster cyclical recovery, though, will not undo the structural damage of Brexit. Exporters will face more barriers and domestically focused firms will face less competition from abroad. More trade friction will mean less trade, which will hit productivity in the long run. Britain’s new trading relationship with the EU will lead to the economy being around 4% smaller than it otherwise would have been, according to the OBR, a view widely shared by other forecasters. According to the OBR’s most recent forecasts, the hit from covid-19 will be only 3%.

Brexit will also bring some economic upsides, although they are smaller. Britain can, for example, now strike a trade deal with America, if the domestic political hurdles can be overcome, but that would probably add less than 0.2% to GDP in the long term. The government is hopeful that its new freedom to diverge from EU regulations will pay dividends, but a paper in 2018 put the likely impact at 0.1% of GDP. Open Europe, a think-tank, managed to find measures worth some 1.3% of GDP, but only by assuming the public would tolerate an extremely liberal regulatory system. Filling the long-term Brexit-shaped hole in growth will be hard.

Editor's note (March 12th 2021): This article has been updated since publication to include data on British exports to the EU in January.

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