New Brexit deal is still bad for business and the UK economy

British Prime Minister Boris Johnson says he has secured a “great new deal” on Brexit. But the agreement he’s struck with the European Union would erect significant trade barriers for companies operating in the United Kingdom, reduce growth and leave the country poorer.

The deal must still be approved by the UK parliament, which will convene Saturday for a special session. To secure its passage, Johnson must win over lawmakers who voted three times against a previous Brexit accord negotiated by his predecessor, Theresa May.

Johnson will struggle to make the case that his deal is better than May’s when it comes to the economy. Her agreement would have kept the United Kingdom in close alignment the European Union, despite it leaving the bloc’s unified market and customs union. Johnson has abandoned that goal, and instead wants Britain to have more control over its regulations and global trade policy at the expense of easy access to the EU market of about 450 million people.

“Flexibility comes at a cost,” said Jonathan Portes, a professor at King’s College, London, and senior fellow at UK in a Changing Europe, a think tank. “The fact is, economically, there is no doubt that the gains from being in the EU customs union outweigh any potential free trade deals with another country.”

While Johnson’s deal would be better for the economy than crashing out of the European Union without arrangements to protect trade, Britain faces a future where many of the benefits of decades of integration with the European Union are unwound. EU membership helped Britain attract scores of foreign companies, including the biggest American banks and Japanese carmakers, who used the country as their base in Europe. About 46% of UK exports are shipped to EU markets.

The way the British economy works would change significantly if Johnson’s deal is approved.

In practical terms, his agreement would result in new barriers including onerous customs checks at the border with the EU. And if the United Kingdom chooses to diverge from EU regulations — perhaps so it can strike trade deals with the United States and other countries — manufacturers in Britain might have to make two versions of every product or lose European customers. The UK services sector, which accounts for 80% of the UK economy, would also face new barriers. Banks have already moved some activities from London to EU cities.

“Frictionless EU trade and regulatory alignment is vital for UK prosperity and jobs,” the Confederation of British Industry said in a statement, adding that the deal is “inadequate” on services and that big questions remain on whether a free trade deal of sufficient depth can be negotiated with the EU before transitional arrangements expire.

Johnson’s Brexit deal would mean significant economic pain. An analysis of his approach published recently by UK in a Changing Europe, found that new trade barriers would reduce national income per person by 2.5% after 10 years, compared to remaining in the European Union. That translates to lost production of £800 ($1,030) for every UK citizen, more than twice the estimated hit under May’s plan.

Factor in a 10% reduction in trade and productivity losses caused by new barriers, and the outlook is even more dire. The hit to national income increases to 6.4% under Johnson’s deal, or £2,000 ($2,575) per person, compared to 4.9% under May’s agreement, according to the analysis.

Business groups reacted to Johnson’s deal with caution on Thursday. Adam Marshall, director general of the British Chambers of Commerce, said in a statement that “businesses need a chance to analyze precisely what the terms of this agreement would mean for all aspects of their operations.”

“Let’s not forget, we’ve been here before. There is still a long way to go before businesses can confidently plan for the future,” he added.

More than three years of uncertainty over future trade policy has caused many UK companies to put investment on hold, and resolving the Brexit question would produce some immediate economic relief. According to Capital Economics, a surge in investment as deferred projects are revived would help boost growth next year by 0.5 percentage points to 1.5%.

But the structural changes to the UK economy caused by Johnson’s deal would diminish the country’s economic prospects over the longer run. The UK government modeled a range of Brexit scenarios in late 2018, each of which showed the UK economy would be worse off outside the European Union.

On Friday, the UK Parliament’s Treasury Select Committee repeated a request to the government that it provide an updated forecast of the economic consequences of Brexit before lawmakers vote on Johnson’s deal. Catherine McKinnell, the interim chair of the committee, said in a letter to UK Treasury chief Sajid Javid that a request made three months ago has not been answered.

“This [deal] is even worse for the economy than Theresa May’s deal,” Hilary Benn, a member of the opposition Labour Party, told the BBC on Thursday. “It’s not in the interest of the economy, jobs, investment and the future of our communities.”