In figuring out why the United States tariff shock hasn’t sent the economy or financial world into a tailspin, Britain’s exit from the European Union trade bloc provides something of a playbook — and without a particularly happy ending.
Aside from vast differences in economic scale and global reach, the two episodes bear some comparison in how they upended years of deeply integrated free trade and possibly in how business, the economy at large and financial markets reacted.
The 2016 Brexit referendum and Trump‘s tariffs this year were each widely billed as economic shocks that would send the financial world into paroxysms. They didn’t, at least not at the outset.
To be sure, both were followed by dramatic downward lurches in the two countries’ currencies. But, to some extent, the steep drop in sterling after the referendum vote and the dollar’s plunge on President Donald Trump‘s tariff plan this year helped offset some of the wider impact, at least on stock markets that are loaded with global firms with outsized foreign revenue.
More broadly, however, the difficulty in isolating their immediate net impact means no “big bang” economic crisis unfolds to prove critics right, even if their enduring legacy turns out to be a slow burn of economic potential and lost output, often obscured by multiple other crosswinds.
In Britain’s case, the seismic effects of the Covid-19 pandemic distorted any attempt to easily assess Brexit when it actually happened. Tortuous negotiations with the EU meant the UK’s departure eventually occurred on the eve of the health crisis in 2020 and the new trade rules did not come into force until a year later.
But in the four years between the referendum surprise and the pandemic, the UK economy never entered a recession nor recorded a negative quarterly GDP print — confounding pro-EU supporters at the time and bolstering the Brexit lobby.
Emerging from the twin hits, however, the economy has almost flatlined since. What’s more, it’s taken more than eight years for the pound’s effective exchange rate to recover its pre-referendum levels.
Few mainstream economists now doubt that Brexit has taken a serious toll on the UK economy. One academic study by a number of Bank of England economists earlier this year concluded that uncertainty following the referendum resulted in little change in goods exports and imports before the exit was finalised.
But after the new rules hit, UK imports fell three per cent and overall exports fell 6.4 per cent, largely because of the 13 per cent hit in exports to the EU.
While this slump seems relatively modest compared with the official forecasts of the longer-term hit, the pain has been borne disproportionately by small businesses. And the cumulative damage to London and the service sector over the next 10 years continues to worry the City.
The US tariff story is of a completely different order, of course, as it will reverberate across the world economy. But there are some parallels, not least in certain aspects of the market reactions and the initial resilience.
Economists estimate that the tariffs could lop anywhere from 0.5 per cent to one per cent off US gross domestic product over time. That’s a US$150 billion to US$300 billion hit, which, though painful, would not be an instant crisis for an economy that’s growing at a roughly two per cent annualised rate, where imported goods represent just 11 per cent of GDP and where tech and AI trends are generating considerable tailwinds.
But as former White House economic adviser Jason Furman said in a New York Times essay last week, the tariff damage is likely not a one-off hit. The loss of 0.5 per cent of GDP, he argued, is “the equivalent of every household in America taking around US$1,000 and lighting it on fire, then doing it again every year. Forever.”
In the end, the main point of the British comparison is to show how extreme partisan arguments on the pros or cons of such giant economic policy changes don’t necessarily get resolved cleanly in adaptive, hardy and hyper-complex economies.
The latest YouGov opinion poll shows 56 per cent of Britons now think it was wrong to leave the EU, some nine years after their narrow vote to leave.
The jury on Trump‘s tariffs is still out.
The writer is from Reuters
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