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5 July 2018

These are the areas that will suffer the most economically after Brexit

The North and the Midlands have the closest trade links with the EU.

By Marley Morris

The whole process of leaving the EU can at times look like an obscure debate played out in the corridors of Westminster. But the potential consequences of Brexit are expected to ripple across the whole country. IPPR’s new analysis out this week explores how each part of the UK will feel the implications of new trading arrangements with the EU in different ways.

Some might assume that the trade impacts of Brexit will be most heavily felt in London and the South East, where sectors most likely to be affected by trade barriers with the EU – such as finance and other business services – are strongly concentrated. And indeed that’s what some of the academic analysis suggests, at least in the short to medium term.

But these estimates tend to not take into account differing regional trade patterns across each sector of the economy. In fact, our analysis reveals that some parts of the UK send a far greater share of their goods exports to the EU than others, with parts of Wales and the North exporting the vast majority of their goods to the EU, while parts of London and the South send most of theirs to the rest of the world.

There are also clear patterns for particular goods. For instance, Northern Ireland sends 90 per cent of its food and live animal exports to the EU – much of it to the Republic of Ireland. Meanwhile, east Wales sends 84 per cent of its machinery and transport equipment exports to the EU – most likely because a number of key European manufacturing hubs, from Toyota’s Deeside plant to Airbus’s Broughton site, are based in the region.

Bringing this trade data together, the evidence shows that it is in fact the North of England and the Midlands that have the closest trade links with the EU. This means that a post-Brexit settlement that ends up cutting off such trade ties could leave businesses in these regions particularly exposed.

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Moreover, even if London and the South East are hit hardest in the short to medium term, it is likely that they will be more resilient in the longer term. Just as London felt the initial brunt of the financial crisis in 2008 but rebounded quickly while other areas struggled, it could be parts of the UK outside of London that feel the economic effects of Brexit the longest.

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Finally, our research also explores how trade-related price increases after Brexit might have an impact on different nations and regions. Prices are expected to go up after Brexit because of new trade barriers between the UK and the EU, but these increases will be felt differently by different households, depending on how they spend their money.

In London, the average household tends to spend a greater share of their expenditure on housing (in particular, rent) and a smaller share on transport (in particular, purchasing cars). As housing costs are not expected to be much affected by post-Brexit price increases and transport costs are expected to be significantly affected, this means that on average households in London won’t feel these prices rises as strongly as the rest of the country. On the other hand, average households in Scotland and Northern Ireland are expected to experience the largest impacts from price rises.

Of course, the consequences of Brexit for different parts of the country will, in the end, depend on the final trade deal with the EU. But there are some clear risks for certain regions. Areas like east Wales that are especially reliant on the exporting of certain manufactured goods to the EU could suffer if customs or regulatory barriers are introduced. Parts of the UK – such as Northern Ireland – where households spend a greater share of their expenditure on food and drink or transport could be more exposed to post-Brexit price rises. And London and the South East could be especially hit by disruption to arrangements for financial services, though the longer term impacts are likely to be more widely spread across the UK.

As the government enters the next stage of the Brexit negotiations, it therefore needs to carefully calibrate how a new trade agreement will balance the interests of each of the UK’s nations and regions. A deal that works for one part of the UK at the expense of another runs the risk of further exacerbating the UK’s regional divide.

Marley Morris is a senior research fellow at the IPPR thinktank.