Forecasting Eye
Although much of the current focus on Britain’s EU withdrawal has been on the terms of exit, less attention has been paid to its likely impacts on the long term economic landscape. This note covers two important sets of impacts arising from the changes in Britain’s terms of trade with both the EU and the rest of the world that Brexit will bring about. These reflect:
- The UK’s ability to continue running sustained current account deficits.
- Trading patterns tilting away from the EU and towards more distant locations in the rest of the world, which will have far reaching implications for the UK’s economic geography.
There has been a deficit in Britain’s current account of 5-7% of GDP for much of the past decade. This has been covered by inward investment. While it is possible that inward investment on this scale might continue post Brexit, we think it unlikely and – to the extent that it requires selling off many of the country’s prized possessions – undesirable.
If the UK had to replace inward investment funding the current account, currently around 4% of GDP, with exports or import substitutes, this would require a trade boost of approximately £80bn.
In addition, it seems likely that over time EU withdrawal will reduce UK exports to the EU. If we make a strong assumption that around a third of UK exports of goods to the EU (currently running at £164 billion annually) will eventually have to be replaced this will expand the ‘hole’ that needs to be filled to £135 billion (£80bn + £55bn).This deficit may be even bigger if service exports to the EU also end up being curtailed.
Meanwhile there is a second dramatic change taking place that affects the UK’s industrial ecology. Traditionally factories have needed to be close to towns to access labour. With modern production methods, factories now require relatively few employees. But they are crucially dependent on easy access to raw materials and good logistics for distribution to customers. And, with an increasing proportion of trade to non EU countries, trade will increasingly have to be focussed on a relatively small number of large capacity ports that can take the huge container ships that transport goods long haul.
To help generate this increase in exports and import substitutes we propose that the government sets up industrial development zones in nine existing port locations, together with upgraded transport infrastructure.
The port locations we propose are in the Severn estuary, lower Thames, Solent, the Haven ports, the Humber, Teesside, Merseyside, Forth, and Belfast Harbour. Additional inland development locations linked to these ports could also be considered.
The operation of these free trade zones would be supported by blockchain technology and they would be linked by sustainable coastal shipping. They would have their own energy supply, possibly generated by tidal lagoons and local renewable supplies such as offshore wind farms.
Obviously the government cannot and should not compel industrial development to move into these zones. But the provision of port facilities, cheap energy and good infrastructure and the simplification of customs procedures at them will make the gradual movement of industry to these Superports a no brainer for many industrialists.
The government will be needed to kickstart the process by starting a competition for Freeport status. Road, rail and energy policy will need to be adjusted to take these ports into account. In this way the country can gear up to a successful post Brexit future.
This future will reduce energy usage sharply with cutting edge logistics and use of coastal shipping for transport between the zones. It will relieve congested road and rail networks and give British industry a competitive advantage both in selling abroad and replacing imports.
Contact: Cristian Niculescu-Marcu cniculescu-marcu@cebr.com and Ian Birch ibirch@cebr.com
0207 324 2850