Provisional view
The Cross-Whitehall Briefing included a provisional view of the likely impact on the UK regions under three potential models for the UK-EU relationship (see Figure 8.7). The analysis considered each region’s dependency on exports and its risk from new trade barriers.
The provisional results showed that all regions of the UK would be economically worse off as a result of Brexit. The worst affected regions would be:
- North East
- West Midlands
- Northern Ireland
- North West
Those least affected would be London, the South West and Yorkshire/Humber.
Other studies found that several regions had a high proportion of EU exports in the most vulnerable goods sectors. The most exposed regions with vulnerable goods sectors included:
- Northern Ireland and Cornwall (food, live animals and material manufactures)
- Northumberland, the Tees Valley and Durham (chemicals, machinery and transport equipment)
- East Wales (material manufactures, machinery and transport equipment)
Limits of trade flow analysis
A simple measure of export dependency (such as the one above) can give a misleading picture of vulnerability to Brexit. A better view comes from considering trade linkages in more detail by looking at the flow of goods and services in each region and the linkage to regional labour income.
Simple measures like exports and imports hide the back and forth trade in raw materials, parts and components and business services typical of international value chains. The World Input Output database has been extended to show this flow data for 245 regions within the EU.
Trade flows and labour income
A study by the City-REDI Institute at the University of Birmingham linked trade flows not just to regional GDP but also to regional labour income. This provided a more tangible and specific local measure of the risk of Brexit to the local economy than GDP or GVA which are more general and can seem remote.
The extent to which the trade risks would actually materialise, for example via tariffs and non-tariff barriers, would depend on the final agreements reached.
The study looked at one principal feature of Brexit – trade flows of goods, intermediate goods and services – but ignored others such as the relocation of UK subsidiaries of multinational firms or the redistribution of subsidies to regions. Similarly it ignored the risks associated with reduced migration and foreign direct investment.
The study found (see Figure 8.8):
- High levels of exposure in Cumbria (17%), Lancashire, Leicestershire, Warwickshire, and East Riding/North Lincolnshire, which are located in the old British industrial heartland (14 – 15%).
- High levels of exposure in the west and south, including: Hampshire, Herefordshire, Gloucestershire, and Wiltshire.
- Low levels of labour income exposure to Brexit in the Highlands and Islands (Northern Scotland), Northeastern Scotland, Merseyside and both Inner and Outer London (8% to 9%).
Comparing the UK and the EU27, the study demonstrated:
- Overall, the UK is far more exposed to Brexit risks than the rest of the EU.
- The UK is far more dependent on a relatively seamless and comprehensive free trade deal than the EU27.
- Almost all UK regions are systematically more vulnerable to Brexit than regions in any EU27 country.
- Irish regions have levels of exposure similar to the UK regions with the lowest levels of exposure, such as London and northern Scotland
The argument that the UK’s trade deficit with the EU27 implies that other EU member states will be eager to agree a free trade deal with the UK, was mistaken. The study found the UK’s overall exposure to Brexit was about 4.6 times greater than the exposure to Brexit of the whole EU27.