Bank of England governor Andrew Bailey said recently that the long-term economic impact of Brexit could be greater than that of Covid-19. This seems odd: Covid-19 has caused the worst recession since 1709 while disruption to supply chains or food prices caused by Brexit should be short-lived. Nevertheless, Mr Bailey has a point.
Most economists agree that the main problem with Brexit isn’t the short-term transition: if this is disorderly, it will be because of bad government rather Brexit itself. Instead, the problem is its gradual long-term impact. The thinking here dates from the first words of what is regarded as the first book on modern economics, Adam Smith’s Wealth of Nations. “The greatest improvement in the productive powers of labour,” he wrote, “seem to have been the effects of the division of labour.” But, he added, this division is “limited by the extent of the market”. Trade frictions – not so much tariffs as red tape – tighten these limits and so reduce productivity relative to what it would otherwise be.
There are several mechanisms here. In a freer market, more efficient exporters can expand more. More intense competition from overseas forces UK companies to up their game. And companies that buy or sell a lot from the EU visit their customers and suppliers and so can learn best practice from them.