21 January 2020

UK in a Changing Europe: Trade diversion and Brexit uncertainties

Since the Brexit referendum, small and medium sized UK firms have begun to divert their exports away from Britain's close and enormous neighbour – the EU – to places further afield.

 [...]There is immediate evidence of reaction to the referendum announcement itself: total quarterly exports to the EU decreased, while those destined elsewhere kept growing.

The triggering of Article 50 at the end of first quarter 2017 created an even stronger trade diversion. Both overall number of products and of new products exported show a clear redirection away from the EU.

However, this impact was not uniform across firms and products.

Micro and small firms diverted their exports to a significantly greater extent than larger firms. Understanding this outcome is the key to the required policy interventions.

World tariff levels vary markedly by type of product. Under a no-deal scenario, the UK and the EU would revert to trading under rules governed by World Trade Organisation (WTO) agreements.

This means that some sectors would be exposed to high tariff levels under post-Brexit arrangements.

Agriculture, textile and footwear sectors are in the front line, and also around 30% of products in the transport equipment manufacturing industry.

However, typical size of firm differs across sectors, and, as it happens, the sectors most likely to face steeply higher tariff barriers contain a disproportionate number of micro and small firms.

Moving from the zero-tariff regime of the EU to a WTO trade regime would be expected to exert a strong push to micro and small exporters to divert towards alternative markets.

And that is what appears to have happened: about 45% of total export values for micro and 19% for small firms have experienced a diversion.

Medium-sized exporting firms have made similar changes but to a lesser extent.

The micro and small exporters have mainly redirected their exports towards Commonwealth and BRICS countries (Brazil, Russia, India and China). [...]

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