The new trading arrangements between the UK and the EU that came into effect at the start of 2021 have had contrasting effects on UK exports and imports, according to new research by Michael Gasiorek and Nicolo Tamberi. Their study finds that after a sharp drop of around 40% in January 2021, aggregate UK exports of goods to the EU quickly recovered in the following months. But UK imports of goods from the EU were negatively affected throughout 2021, with a cumulative loss of up to 27%.

The results on imports may be surprising given that the UK waived most border checks on imports from the EU, while EU members immediately began enforcing checks on UK goods. The researchers’ analysis suggests that part of the explanation lies in relative market size where the EU is a far larger market for UK exports than the UK is for EU exports.

They note that before the completion of Brexit (over the period 2017-19), the UK exported nearly half of its goods exports to the EU-27; while only 5.9% of total EU-27 goods exports went to the UK. Hence, for UK firms dismantling trade relations with the EU may be very costly, while ceasing to serve the UK market is likely to be less important for EU exporters.

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Following the Brexit referendum of June 2016, and after protracted, tortuous and often fractious negotiations, the UK left the European Union on 31 January 2020, signed the Trade and Cooperation Agreement (TCA) on 30 December 2020, and the new trading arrangements between the UK and the EU commenced the following day, 1 January 2021. This study considers the impact on UK trade in goods.

The TCA is a long and complex document covering a wide range of economic relations between the UK and the EU. In comparison with being an EU member state, the new trading arrangements introduced a range of barriers to trade. With regard to goods trade, these are tariffs, administrative barriers and regulatory barriers.

Hence, while the agreement allows for tariff-free trade in all goods, this is only where it is possible to establish that the goods being traded originate from within the partner countries. Data for 2021 show that, on average, the share of tariff-free trade out of all the trade that was eligible to be duty-free was only a bit over 70%.

In addition, all goods traded between the UK and the EU now face customs formalities and potentially customs checks where previously this had not been the case. For some goods the customs documentation and procedure may be relatively light, but for others and notably those subject to sanitary and phytosanitary requirements there are a range of procedures.

Finally, departure of Great Britain from the EU’s single market introduces further regulatory barriers to bilateral trade as UK firms have not only to continue to produce to EU standards, but also to prove that they are doing so.

Hence, the study investigates the effect of both the 2016 Brexit referendum and the Trade and Cooperation Agreement signed by the UK and the EU in December 2020 on UK trade with the EU. While the 2016 referendum may have introduced some uncertainty as to future barriers between the UK and the EU, in reality, new barriers were not introduced until January 2021.

Using a range of econometric techniques, the researchers find no evidence that the 2016 referendum had any impact on aggregate UK-EU goods exports or imports. On the other hand, the TCA did affect UK trade with the EU.

Perhaps surprisingly, the impact on exports appears to be quite different to the impact on imports. This is surprising if nothing else because many of the ex ante studies undertaken before the UK left the EU predicted much more symmetric impacts on both exports and imports.

After a sharp drop of around 40% in January 2021, aggregate UK exports to the EU quickly recovered in the following months. While this is the case in aggregate, some sectors experienced a more persistent decline over the course of the whole year.

The products where exports appear to have been most negatively affected over the period January-December 2021 are Vegetables (-35%), Fats and oils (-57%), Food, beverages and tobacco (-15%), Textile (-59%), Footwear (-72%) and Miscellaneous manufacturing (-20%).

Contrast this to the pattern of UK imports from the EU. These were negatively affected in all months of 2021, with a cumulative loss over the first year of implementation of between 24% and 27%.

The results on imports are perhaps, prima facie, surprising given that the UK waived most of the border checks on imports from the EU, while EU members immediately began enforcing checks on UK goods. One explanation may be due to relative market size where the EU is a larger market for UK exports than the UK is for EU exports.

More concretely, over the period 2017-19, the UK exported 47.4% of its goods exports to the EU-27. On the other hand, only 5.9% of total EU-27 goods exports went to the UK over the same period. Hence, for UK firms dismantling trade relations with the EU may be very costly, while ceasing to serve the UK market is likely to be relatively less important for EU exporters.

The study therefore considers whether the asymmetry of impacts can be explained by the relative importance of the EU market for UK firms, in comparison to the importance of the UK market for EU firms. The researchers test this formally using a two-step approach and the results confirm that relative market size does provide an explanation for the asymmetry in impacts.

Clearly when considering trade in goods there is much more still to be disentangled regarding the ‘trade effects of Brexit’ – be this the determinants of the use of preferences, the role of the administrative and regulatory barriers, and the differential impact across different types of firms, which are beyond the scope of this study.

From a policy perspective, the asymmetric results across export and imports are instructive. The results suggest that the impact of trade barriers are likely to depend on relative market size and hence are likely to be asymmetric across markets. This also raises the question as to whether there is a similar asymmetry when considering reductions in trade barriers – an issue for further research.

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‘The effects of leaving the EU on UK trade’

Authors:

Michael Gasiorek (University of Sussex)

Nicolo Tamberi (University of Sussex)