Most mainstream studies predict that Brexit will have a negative impact on the UK economy. For example, work by researchers at the CEP predicts that reductions in trade resulting from Brexit will lead to a fall of 1.3 to 2.6 per cent in national income depending on the type of deal negotiated (‘soft’ or ‘hard’ Brexit).2
The economic impact of changes to the UK’s trading relationships will vary across the country. Different cities specialise in different products and services, and trade with different countries.3 Yet, to the best of our knowledge, the impacts of Brexit have not been analysed at a local level. This report fills that gap by summarising the local area findings from recent modelling undertaken by researchers at the CEP.4 It focuses on the potential impacts of Brexit at city level under two scenarios – ‘soft Brexit’ and ‘hard Brexit’ – and considers whether Brexit is likely to alleviate or exacerbate existing inequalities.5, 6
For national government, it aims to build understanding of how different areas might be affected by Brexit and the terms negotiated. For city leaders, it provides insight on the potential sector-specific impacts of Brexit as a complement to local knowledge. Understanding how different areas might be affected by Brexit is crucial to developing appropriate policy responses at the local and national levels.
This analysis will be used by the Centre for Cities and What Works Centre for Local Economic Growth to inform their joint programme on the local implications of Brexit and how local economic development strategies can best respond.7
Box 1: Approach
The trade model developed by CEP uses the most comprehensive data on trade flows and trade barriers available, including industry-level data on exports and imports covering all sectors of the economy in every country in the world. It is used to predict the sectoral impact of Brexit under two scenarios:
- ‘Soft Brexit’ – a scenario where the UK joins a free trade area with the EU, such as the European Free Trade Association (EFTA). While tariffs would remain at zero, non-tariff barriers (including customs checks, border controls, differences in product market regulations and legal barriers) would increase the costs of trade.
- ‘Hard Brexit’ – a scenario where the UK and the EU do not immediately form a free trade area and the default situation is to trade under World Trade Organisation (WTO) rules. This would result in an increase in tariffs and non-tariff barriers that would be substantially larger than under soft Brexit.
The sectoral impacts predicted under these two scenarios are then weighted using local employment shares to predict changes to GVA at the city level. This gives estimates of the ‘medium-run’ impact on GVA as it is assumed that it would take 10 years for the non-tariff barriers within the EU to converge to a new level post-Brexit.
It is important to note that the model predicts the static effects of Brexit-related increases in trade costs on city economies. This is likely to underestimate the impact of Brexit as the model does not take account of the other effects of Brexit, for example on innovation, foreign investment and migration. Factoring in these additional effects at the national level increases the costs of Brexit to a loss of 6.3 per cent to 9.5 per cent of national income. The predictions also do not account for how cities might adjust to these shocks. Just as with the financial crisis, there are good reasons to think that these adjustments will have significant implications for understanding the long run differences in impact across the country (see p.10).