Three Years of Brexit: Impact on UK Trade –

Credit: Original article can be found here

February 1, 2023, marks the third anniversary of the day that Britain formally left the European Union. Brexit always came with the promise of massive legal realignments as Britain was, after all, cutting ties with the world’s most deeply integrated economic region after 45 years of membership.

Since so many of the legal provisions that came with EU membership concerned international trade, commentators have focused on how Brexit would impact the UK’s ties to the international economy.  Before Brexit, Britain enjoyed the benefits of being part of the European Single Market. No import duties or quotas applied to trade with any of the 27 other market members. The EU had also provided clear tariff rules under which Britain traded with the rest of the world.

With Brexit, however, Britain was excluded from the single market and a hard legal border grew up between the UK and the continent. Further, it was no longer party to the tariff’s negotiated between the EU and the globe.

Three years on, how have these changes affected international trade in British goods and services?

Drop in Value of UK Exports to the EU

The most immediate effect of Brexit on trading was that UK exports to the EU declined. Researchers at Aston University found UK exports to the EU fell by an average of 22.9 per cent in the first 15 months after its departure from the bloc, between January 2021 and March 2022.1

EU data paints a similar picture of UK exports declining by nearly 14 per cent in 2021 compared with 2020 before it left. The study took into account the impact of the pandemic.2

However, an even more pronounced change was the dip in the value of UK exports to the EU.3 Experts think that this is due to the increased fixed costs of exporting to the EU, knocking out many small companies.4

The Trade and Cooperation Agreement

What makes post-Brexit rules so onerous to smaller exporters? It all goes back to the new trade agreement between the EU and the UK. The first change in Britain’s post-Brexit international trading relationships came with the Trade and Cooperation Agreement—the law that governs future ties between the UK and the UK.

The Trade and Cooperation Agreement came into force from January 1, 2021. Although the law upholds some EU-era free trade benefits for the UK, such as ensuring that UK-EU trade is tariff and quota free, it placed new customs and regulatory borders on the border between the regions.

Thanks to the new customs check imposed on goods leaving the UK for the EU, English manufacturers were now saddled with new bureaucratic procedures. This is heavily ironic given how the leave campaign consistently played up EU red tape as a reason to exit the union, arguing that laws emanating from Brussels make it harder for UK businesses to operate.

In 2021, a group of researchers from the universities of Glasgow and Birmingham interviewed senior executives in the English midlands manufacturing sector on the impacts of the new trade agreement between the EU and the UK.

One respondent said that providing full export documentation on goods leaving for the EU was the biggest rupture that came with Brexit: “Overnight we have from frictionless trade to full export documentation. This is a fundamental change in the system.”

What makes this extra documentation so cumbersome for businesses is the constant possibility of human error, they said “There is going to be other people [..] up and down the supply chain making errors, adding compound things to the issue of capacity at the borders.” Order delays due to errors mean a loss of business, translating into a loss of competitive advantage.5

UK Buys Fewer Goods from the EU

Another big post-Brexit shift has been the drop in UK imports from the EU. EU exports to the UK declined by around 25 per cent relative to rest-of-the-world imports to the UK.6 The dip shows up clearly in UK figures on where it is sourcing its imports. In 2021, the share of total UK imports originating in the EU fell 58 per cent to 45 per cent.7

These figures are likely due to the UK choosing instead to trade more with the non-European world.

Nonetheless, the EU remains the UK’s largest trading partner in absolute terms. Around 42 per cent of all UK exports went to the EU in 2021 – a testament to its proximity and the long-term trading ties that the two regions have enjoyed.

Trading Outside the EU: Rollover Deals and WTO Rules

If the UK is trading more these days with the rest of the world, how have the non-European trading relationships changed?

When the UK was part of the EU, the UK was able to operate under EU’s blanket MFN tariff schedule. Under this schedule, the EU had done all the legwork for the UK in terms of defining the country’s trading relationship to the rest of the world.

Now that the UK is no longer party to this blanket tariff schedule, the country has embarked on the laborious process of negotiating individual deals with every other economic entity that it trades with.

Much to the relief of businesses, the UK was able to simply roll over its EU free trade arrangements with 69 non-EU countries post-Brexit.8 Of course, the UK is now party to these new standalone agreements as a sovereign entity.

However, there remains all the other countries that the UK has not rolled over its EU trading relationships with. Further, the rolled over EU agreements are only temporary measures – more permanent and favourable deals are in the UK government’s pipeline.

The UK has a long list of countries which with it wants to hammer out post-Brexit trading agreements. The government’s priorities are now in progressing negotiations with India, Canada, Mexico, Israel, and the Gulf Cooperation Council.

Canada is one of the countries that Britain managed to rollover its EU trading agreements with, but this is only a temporary fix. Canada and the UK want a customised and “more ambitious”9 agreement worked out in the near future.

The UK is also vying to reach a deal with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is a regional economic bloc much like the EU.

Because the UK so far has worked out only a limited number of customised, individual trading agreements with other nations,10 it is currently trading with much of the world under WTO rules. WTO trading rules are the default state that economic exchanges between nations revert to if they have not made specific trading arrangements among themselves.

New Deals: Australia and New Zealand

There are two countries that the UK has already managed to sign custom bilateral trading agreements with: New Zealand and Australia. These are the only nations that the UK has struck agreements with that are totally independent of EU-era rules.

Australia’s deal came first. Signed on December 17, 2021, the 32-chapter agreement covered everything from digital trade to intellectual property and agriculture.

The most politically controversial part of the Australia free trade agreement (FTA) has been its new rules for agricultural trade. Although the UK government says these will happen slowly, most British farmers remain unconvinced that the new arrangements work in their favour.

The National Farmers’ Union (NFU), the UK’s largest agricultural industry association, released a statement in April 2022 arguing the FTA “opens up UK agricultural markets for Australian produce, whether or not produced to the same standards that are legally required of UK farmers.”11

The NFU fears cheaper goods made under more lax Australian regulatory standards will flood the market, depressing prices for UK agricultural products which must meet more stringent legal criteria.

The NFU was similarly critical of the UK’s new FTA with New Zealand, signed February 28, 2022, which eliminated tariffs for New Zealand’s products. It said the FTA will disadvantage UK farmers.

The NFU stated that “UK farm businesses face significantly higher cost of production than farmers in New Zealand”, meaning they will not be able to compete on the open market with the nation’s goods.

The New Zealand and Australia trade agreements are not yet in force (as of writing this article): They must be inspected first by the UK Parliament before kicking in.

The Position of Northern Ireland

Northern Ireland occupies a unique position in the post-Brexit landscape. Because of profound historic tensions between Northern Ireland and the Republic of Ireland, negotiations after Brexit have focused on avoiding a hard border appearing between the latter (still part of the EU) and the former (governed by the UK Parliament and therefore no longer an EU member).

EU-UK negotiations sought to avoid a hard border between Northern Ireland and the Republic of Ireland by agreeing there would be no new checks on goods crossing the border between these regions. In effect, Northern Ireland is still subject to many EU laws.

Textiles and Apparel

The same story is playing out in the textiles and apparels industry, with the sector facing new administration burdens and their associated costs if they want to continue reaching the European market.12

The EU is by far the largest export market for UK fashion and textile imports, absorbing 74 per cent of the sector’s goods sold abroad in 2016. Equally, the UK was (and remains) the biggest export market for EU textiles and clothing.13

It is unsurprising then that UK clothing and footwear was one of the sectors hardest hit by the break from Europe.14 Between 2015 and 2019, there was a 6.45 per cent drop in total imports of textile and clothing. Although the UK had not formally exited the EU in this period, the massive uncertainties already in place over what new trading regulations businesses would face are thought to have dented international exchange in clothing commodities.15

This is mainly to do with the fact that the new trading agreement between the EU and the UK only waives tariffs if the products are of UK origin. In the garment trade, where supply chains are globally extended, very few products marketed from the UK fulfils this criteria.

Another trend was in force with regards to the UK textiles trade. While there were less textiles imports from EU countries, there were more form non-EU countries.16

The EU sector also suffered from Brexit. Between January and September 2021, the EU lost more than €3.4 billion, according to trade data.17

Statistics for the year 2022 are set to paint an even gloomier picture, because it was only on January 1, 2022 that the full set of new customs controls were implemented. Now, products must already have a valid declaration secured and have received customs clearances.18

Brexit’s Impacts Yet to Play Out

An important point in all this is that the full impacts of Brexit on trade are yet to play out. This is particularly because Brexit, the pandemic slowdown, and post-pandemic inflation all happened in quick succession, making their impacts on trading patterns very difficult to disentangle.

The full impacts of Brexit will also be contingent on the terms that Britain manages to negotiate in its own trading deals with much of the world’s countries.

What does seem clear is that Brexit is not working for smaller businesses. While large multinationals working at vast economies of scale can absorb the added costs of new border rules, not all companies can do so.

A December 2022 survey by the British Chambers of Commerce, whose respondents were 92 per cent from small and medium enterprises, made this clear. Over half say they were facing difficulties adapting to new rules for trading goods.

In a large survey on the fashion value chain in the UK conducted between June 2019 and January 2020 sponsored by the UK Fashion and Textile Association, over 60 per cent of firms reported that the uncertainty around Brexit was affecting them.19 Only 4 per cent, on the other hand, reported a boost from an increase in UK orders from retailers switching to local products to sidestep the new regulatory regime at the EU border.

The UK fashion industry is bracing itself for more headwinds over the coming years with raw material inputs refusing to return to pre-pandemic and pre-Ukraine war levels.