It’s important to realise that, while Brexit will have an effect on the whole of the UK, it will not be spread evenly around the country. In an attempt to look at the relative winners and losers, the think-tank Centre for Cities and the LSE’s Centre for Economic Performance teamed up to produce Brexit, Trade and the Economic Impacts on UK Cities. This report, by Naomi Clayton and Professor Henry Overmann, attempts to model the impact on a much finer level. Clayton generously agreed to speak to us about the report and its implications.
To produce the figures, Clayton and Overmann looked at two scenarios. The first “soft Brexit” scenario involves a comprehensive trade deal that eliminates tariffs and most (but not all) non-tariff barriers – similar to the situation of Norway or Switzerland. The second “hard Brexit” scenario fails to achieve this degree of access and is closer to the default terms enjoyed under membership of the World Trade Organisation, with some tariff barriers and far greater non-tariff barriers.
While both would be negative for the UK as a whole, “scenario two would be much more painful”. Under a soft Brexit, “gross value added” (GVA – a measure of goods and services produced; closely related to GDP) would suffer a permanent hit of 1.3%; this would increase to up to 2.6% under a hard Brexit. Clayton stresses that such an analysis is likely to be conservatives since it doesn’t take into account foreign direct investment (FDI), innovation and the negative effect of reduced migration, so the long-term impact is likely to be greater – possibly as high as 9.5% in the hard Brexit scenario.
Clayton then looked at the exact range of goods and services that each city currently produces, as well as their trade links with the EU, to analyse the effect on each specific area. She found that “while all areas will be losers” there are likely to be “large regional disparities” in how badly they will be affected. She found that “cities with high levels of employment in knowledge-intensive industries will be hit most hard” (due to substantially increased non-tariff barriers). The losers will be “predominantly in the south of England”, and include the “M4 corridor”.
However, it’s not just a problem for the Southeast, London and the commuter belt, since the effects will also be felt by those living north of the border, as Scotland will also be hit hard, “especially Edinburgh and Aberdeen”. Indeed, Aberdeen is likely to do the worst out of the whole UK, a potential hit of up to 3.7% of its GVA, thanks to the importance of the oil and gas industry. Even under a soft Brexit outcome, it would still see its GVA decline by 2.1%. For its part, Edinburgh will be the sixth most negatively affected (London will be seventh).
In contrast, the cities in the North and Midlands will be the least affected, with Telford, Mansfield, Wakefield, Hull, Burnley and Barnsley all in the bottom ten (though even they will all be net losers, even under a soft Brexit). Interestingly, the study finds that there is a correlation – albeit a weak one – between the Remain vote and the potential economic impact, with some of the mostly badly affected areas Remain strongholds. This contradicts other models, which predict that Leave areas will be worst affected. It also implies that, contrary to conventional wisdom, economics did play a role in the referendum.
“There needs to be an appreciation of how cities will be affected”, says Clayton. Government and localities in the firing line need to start preparing schemes to cushion the blow, including those focused on diversifying away from industries and sectors that will be particularly affected. Some of this may involve “investment in skills, transport and infrastructure”. Cities can also help “by providing information about tariffs and barriers”.
In terms of immigration, it may be worth considering different policies across the regions, as many firms in the Southeast will be facing skills shortages. Of course, these will vary from town to town. While Cambridge and Peterborough are only about 40 miles apart, Cambridge has a lot of highly skilled EU professionals employed, while Peterborough has a lot of relatively low paid labourers from Eastern Europe.