25 January 2022

Federal Trust: Post-Brexit Trade Flows with the EU: What Leavers overlooked

Above all else, Leavers were looking for a marked short run improvement in Britain’s economic fortunes, such as higher trade and output volumes, and a reduction in trade with the EU. This has not happened.

The formal enactment of Brexit came into force on January 31^st 2020, complete with a transitional agreement to add bells and whistles to the Withdrawal Agreement. What may have started out as a “simple”, “oven ready” agreement, has morphed into a document 2,500 pages long. It includes many chapters, and also specifies, in detail, rules affecting trade between the UK and the EU. Judging by subsequent reactions in Britain, one might guess that virtually no one in the UK government has actually read the entire treaty from start to finish. If they had, then they would have been less surprised by subsequent events.

This paper examines how international trade has developed between Britain and the EU since the end of 2019 to mid 2021. Expectations varied hugely. Leavers saw the near future as being one of “regaining control”, throwing off the ill effects of Brussels bureaucracy, and rapidly signing new free trade agreements with other countries signalling a return to a “global Britain”, as Drake like buccaneers would bully nations across the world with the benefits of increased trade with the UK. Above all else, Leavers were looking for a marked short run improvement in Britain’s economic fortunes, such as higher trade and output volumes, and a reduction in trade with the EU.  This has not happened.

Remainers were convinced that “doom and gloom” was imminent. Cut off from the country’s main trading partner, the EU, substitutes would be hard to find. Trade volumes would drop. Trade surpluses (where they existed) would shrivel up, as UK exports struggled to absorb the additional costs of doing business with the EU. Profit margins would slump, and Britain’s engagement in international trade would become more inwardly focused and more distant from global supply chains. What was left unsaid was whether the UK, in time, would also become more protectionist.  Being outside the EU entailed a rise in trade friction, thus engendering additional costs leading to higher import prices. And this in turn, in the short run, would increase inflationary pressures. The country would become permanently poorer.

The rest of the paper analyses developments in the trade of goods and services since 2016, concentrating attention on the post 2019 period. It is a complex area, and the period coincides with a global Covid pandemic that clearly also affected demand and supply in both the UK and the EU. Despite this, evidence suggests that it is Brexit rather than Covid that is driving fundamental changes in post Brexit trade patterns. The recent resignation of Lord Frost also suggests that the desire of Leavers to impose their will on the EU has failed (for the time being). Some Leavers, and many businesses, are realizing a more realistic approach for living constructively with our largest trading partner across the Channel is needed. As is shown below the outcome differs from what both Leavers and Remainers expected.

Post-Brexit Trade Implications

Trade patterns during and after the Brexit process have not corresponded to the Leaver’s dreams and aspirations. On the goods side exports have declined globally, while they declined by slightly less to the EU. The share of exports going to the EU has remained almost constant. The general picture for total exports is that of falling volumes and increased sales to the EU. This is not to overlook the four product groups that have achieved both higher export volumes as well as reduced exposure to the EU, corresponding to the Leavers dream.

The complications arise on the import side. Here there was a 5% drop in imports to the UK, but a 9.2% drop in imports from the EU. While the government may seek to lay the blame for the reduced supply and empty shelves on Covid, it appears highly likely that additional bureaucracy and shortages of key personnel greatly exacerbated the situation. As a spokesman for the UK Road Haulage industry explained, there had been a structural weakness in the British road freight industry for decades, leading to an undue dependence on EU truck drivers to deliver material to this country. None of the Brexiteers appear to have been aware of this, even though the supply interruptions have caused great damage across the UK economy. Moreover, it has led to an increase in costs, particularly on account of higher fuel prices, which is, in turn, contributing to higher retail price inflation. There was a more significant shift away from the EU as a supplier, and the share of EU imports in total UK imports dropped by over 4%.

The overall characteristic of goods imports though shows lower volumes, and lower dependence on the EU. Four of the 10 product groups analysed have this pattern. Another four product groups have conformed to the Leaver’s dream, showing higher volumes and lower exposure to the EU. But it should be recalled that the product groups showing higher exposure to EU imports include Food/Livestock and Machinery and Transport, both important sectors for the economy. The post-Brexit trade experience, influenced by Covid, is significantly worse than expected by Leavers. Thus far, the scepticism of Remainers that foreign trade performance would deteriorate is justified. Moreover, the variation in trade performance by product group provides a fertile starting point on which to construct a more targeted approach to trade policy, and to learn more from countries such as Switzerland and Norway about how best to deal with unequal trading relations with the EU. UK government slogans about “bouncing back better” reveal the chasm that lies between the aspiration and the development of new trade policies.

 

The Goods Trade

Before examining the details of post-Brexit changes in trade flows, it is useful to put the short term volatility into a medium term context. This helps to give a scale for the recent perturbations.

Chart 1

Chart 1 shows how total trade volumes in UK trade has changed by region and over two time periods. The longer time period (2011 to 2021) is shown with the orange bars, and the shorter term changes (2019 to 2021) by the blue bars. The red bar shows the short term reduction in total trade with the EU. The first thing to note is that the longer term changes are much more subdued, and are mostly negative. Trade volumes by regions have been gradually declining, with the exception of trade with North America and the EU, which rose very slightly over the decade.

The short term shock of Brexit (plus other factors) has been much more severe. This is shown with the blue bars. The short term impact of Brexit (plus other factors) has been strongly negative. There have been falls in trade volumes of over 20% with Europe (ex EU), the Middle East and North Africa (MENA), South America, the Confederation of Independent States (CIS-former Soviet Union). Africa and South Asia are the two regions where trade volumes have increase since 2019.  The performance of trade with the EU has also declined, but by rather less than in many other regions. This is important since the EU is Britain’s largest trading partner. Nevertheless, total trade volumes with the EU declined by around 14% since 2019.

Table 1

Table 1 provides an overall summary of the changes in total exports and total imports, as well changes in exports and imports to/from the EU.  The table shows that there was an 11.6% drop in export volumes to all markets. Exports to the EU dropped by a more modest 10.8%, very much in line with the global picture.  The share of exports going to the EU fell by under 1%. This suggests that export relationships with the EU remain stronger than those with other markets. British exporters prefer maintaining links with their partners in the EU, who have persisted in ordering goods from the UK.

Imports have behaved differently. The overall import level dropped by 5% from all sources. Imports from the EU dropped by a larger 9.2%. Moreover, the share of imports from the EU dropped by over 4%. This is curious in that for the period under consideration, there were no tariffs, quotas and other limits placed on imports coming in from the EU. Other non tariff barriers start to bite in 2022.

One of the contributory factors for the decline in the EU share of imports is likely to have been the change in cabotage rules affecting EU inbound trucks[1]. The earlier EU rule limited drivers/trucks from other EU member states to 3 cabotage trips while in the UK. This was reduced to two trips post-Brexit. UK drivers taking freight to the EU are limited to just one cabotage trip, plus 2 cross border journeys. The combination of these moves, it is argued, far from “taking back control” contributed materially to extensive supply shortages, contributing to the decline in imports from the UK. Recent efforts by the UK government to relax the cabotage limits on EU trucks are not welcomed by the domestic British haulage industry. Changes in company business models affecting the flow of intermediate goods into the UK have also contributed to the drop in import volumes.

Federal Trust

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