Brexit: Intermezzo


The 31st of January the Brexit finally occurred, more than three years after the notorious Brexit-referendum the United Kingdom (UK) finally left the European Union (EU). The UK moved into the so-called transition period, scheduled to the end of this year, in which she still follows EU regulation and trade on free terms with the continent. Within this brief period of time, Johnson will try to forge a favourable deal with the EU, something that was clearly not accomplishable within the past three years. The content of the deal that Johnson is currently negotiating is closely related to the one proposed by May. The only significant difference is the reallocation of the custom border between Ireland (EU member state) and Northern-Ireland (part of the UK) to between Great Britain and Ireland. This administrative custom border within the United Kingdom would prevent the necessity for a harsh physical border between Norther-Ireland and Ireland. The UK wants to prevent such situation as it might spark the tensions left behind by “The Troubles”, the conflict between Irish nationalists and unionists.

Not surprisingly do economists anticipate that the Brexit will have a negative impact on the European economy and the Dutch economy in particular (the UK is relatively a large trade partner to us). The argument is simple: raising tariffs will be partly incorporated in prices faced by consumers. This raises prices for imported goods in both the EU and the UK. Consequently foreign demand for domestic produced goods decrease for both countries. This means that production (output) for both countries will fall due to the rigidities in exchange. This slink of output will be accompanied by loss in surplus, reducing social welfare.

Also non-tariff barriers will increase, such as delay of transport at the custom border or other time-consuming and expensive procedures due to mismatch of regulation. These increasing transaction costs will depress trade furthermore. These barriers will also make their mark on labour mobility, resulting in a less efficient allocation of labour (and production).

Nevertheless there are also clearly advantages for the Dutch economy in the short run. There are around 140 so-called “Brexit firms” who exchanged the United Kingdom for the Netherlands. These firms made a total of 380 million of investments and will create 4216 often high-quality jobs, estimated by the Dutch Foreign Investment Agency. A big catch for the Netherlands is the relocation of the European Medicine Agency (EMA) to Amsterdam, which is expected to provide (both directly and directly) 1500 jobs. These “Brexit Firms” gave Brexit-related reasons for the relocation of their headquarters. The most frequently mentioned reason was the uncertainty of a no-deal Brexit which would disrupt all communication and supply lines with Europe. But also expected delays at the border and time-consuming procedures when serving the European market (non-tariff barriers) play a major role. While this happening might be a stimulus for the Dutch economy in the short run, in the long run these gains will not outweigh the lost trade volume.

By: Joris Hoefnagel