Brexit hit to UK trade not as bad as first thought

The negative impact Brexit had on UK trade may have been softened by big firms adapting to EU barriers, fresh research from a top London university has shown.

A report from the Centre for Economic Performance, linked to the London School of Economics, found that “in the short run, aggregate trade proved moderately resilient” to the disentanglement with the European Union (EU), in 2021, through the Trade and Cooperation Agreement (TCA).

The study found that with the UK’s exit from the single market and customs union in early 2021, there was an “immediate, sharp drop” in trade with the union.

It said many UK exporters and importers “stopped trading with the EU entirely”, with 14 per cent of firms, equating to around 16,400, pulling the plug.

“Heterogeneous firm-level responses to the implementation of trade barriers mitigated Brexit’s impact on aggregate trade”, the study said.

While the decline in exports was significant it was “concentrated among smaller firms” and was merely “significant for the largest firms”.

It estimated that leaving the EU, in the short-term, reduced UK worldwide exports by 6.4 per cent, or £27bn, and imports by 3.1 per cent, based on data from 100,000 firms.

The study split firms in to five categories, by number of employees, finding that all but the top fifth experienced a negative outcome.

Companies which continued to trade with the EU were hit hard by Brexit, the study showed. The value of EU exports fell by 30 per cent for the smallest firms, and 15 per cent for the middle fifth.

Exports for the top fifth of businesses were not affected by the TCA however, which “dampened the decline in aggregate trade”.

The study found that the TCA “reduced the survival rate for exporters to the EU and importers from the EU, especially for smaller firms”, because it “increased fixed trade costs.”

“These estimates imply that, although disintegration under the TCA undoubtedly decreased trade, the decline was not large and, at least in the short run, was smaller than forecasters expected.

“For exports, the relatively small aggregate impact reflects our finding that the negative effects of the TCA were concentrated on smaller firms, while the largest firms successfully maintained export levels.”

The report added that “firm-level adaptations to the customs and regulatory barriers introduced by the TCA increased the resilience of overall trade to Brexit”.

Experts who compiled the report also suggested that the trade barriers put up in 2021 were the cause of the decline, not the uncertainty linked to the changes.

‘A disaster for small exporters’

Co-author and professor of economics at UCL, Kalina Manova, said: “The TCA has disrupted firms’ relationships with firms they export to and import from.

“Firms’ performance in the medium to long run will hinge on their ability to maintain supply networks and diversify export demand in the face of higher and uncertain non-tariff barriers to EU trade.”

Fellow co-author and associate professor of economics at LSE, Thomas Sampson, added: “The TCA has been a disaster for small exporters, many of which have simply stopped exporting to the EU.”

“At the same time, larger firms have adapted well to the new trade barriers. Consequently, total exports have, at least so far, declined less than expected.” 

Thomas Prayer, co-author and associate of CEP’s trade programme, added that “after the referendum, there was essentially no change in firms’ trade with the EU until the TCA came into effect.”

“It was the introduction of new trade barriers under the TCA, rather than the uncertainty of the withdrawal process, that reduced firms’ trade with the EU.” 

The Office for Budget Responsibility (OBR) declined to comment on the findings, but pointed to its recent research about the longer-term impact of Brexit.

Following Brexit, the body predicted a 15 per cent long-term decline in trade over a 15 year period.

In May of this year, it issued a forecast which said that post-Brexit ties would reduce productivity by four per cent, due to an increase in non-tariff barriers, which damages competitive advantage.

The OBR added that exports and imports will be 15 per cent lower in the long run, and new trade deals with non-EU countries will not have a material impact, on overall trade.

A warning on the horizon

Marco Forgione, director general of the Chartered Institute of Export and International Trade, said:  “This report reinforces the key points we have been raising with government since the TCA came into force.”

“There has been a significant drop in SME’s trading with the EU, these businesses find the new requirements too complex, they’ve reacted to the many stories of problems with customs processes and they don’t have the expertise or staff to cope with the extra rules and regulations now in place.”

“Although larger firms tend to have departments dedicated to customs to ensure the smooth transit of goods between the UK to the EU, there has been less negative impact from them, but even they are not immune to problems.

“We are working with a major exporter of chicken products, and just last week had four shipments rejected because of one missing digit on a customs form. That cost them over £80,000.”

Forgione added that “from our conversations with EU based businesses there is a very real danger many EU based producers will stop trading with the UK”, ahead of the new UK Border Target Operating Model requirements, from the end of January.

“We have already seen delays, rejected shipments and spoiled goods at the UK border because animal and plant product checks have been introduced this year.”

“We need to focus on giving SMEs in the UK and EU the expertise and knowledge they need to trade competitively and compliantly with each other, as the EU and UK markets are vital to consumers and businesses on both sides.”