11 February 2022

UK TPO: The UK-EU Trade and Cooperation Agreement (TCA) one year on: trade in goods

In the first year of the TCA, imports from the EU fell by -32%... Exports experienced a moderate fall of -3% for the whole of 2021, relative to what exports would have been without the agreement.

With trade data for the full year 2021 just released, we update our earlier estimates of the UK-EU Trade and Cooperation Agreement’s impact on bilateral trade between the UK and the EU for the first year of the agreement.

Although the TCA, signed between the UK and EU in a last-minute deal on Christmas Eve 2020, came into being amidst much fanfare, the picture of bilateral trade between both economies continues to be rather gloomy. Using the latest release of HMRC data we estimate the impact of the TCA on UK exports to, and imports from, the EU excluding gold trade.

Data speak clearly. On the one hand, whilst UK exports to the EU saw a jaw-dropping fall in January 2021 (-41%), exports quickly recovered in subsequent months, resulting in a moderate fall of -3% for the whole of 2021, relative to what exports would have been without the agreement.

On the other hand, the effect of the TCA on UK imports from the EU is strong and, more importantly, turns out to be much more persistent. In the first year of the TCA, imports from the EU fell by -32%. And what’s more, it almost looks as if EU imports would be on a falling trajectory after the immediate hit in January 2021. The results for estimated impacts on exports and imports are summarised in Figure 1.

Figure 1: the effect of the TCA on UK trade with the EU

Although the results on total trade show that the TCA did not affect aggregate UK exports beyond January 2021, running the same counterfactual analysis at a more disaggregated level reveals that EU exports of certain broad product groups have been badly hit. In particular, we find that the negative impact on UK exports of Leather and Textile & Clothing (HS 41-43, 50-67) has been persistent across all months of 2021. For these two sectors, the TCA reduced combined UK exports to the EU by -59% or £5.7bn. The next most affected export sector is Food and agriculture (HS 01-24). For this sector, the recovery has been slower than for total exports, and over 2021 the TCA reduced exports by 19% or £2.8bn.

For imports, differences across sectors are less pronounced. The most affected sector is Chemicals and plastics, whose combined imports fell by 39% (£19bn), followed by Machineries and transport equipment (-28% or £29bn) and Metals (-28% or £4bn).

In summary, the TCA has had a strong and persistent effect on UK imports from the EU, while the effect on total UK exports to the EU appears to have been rather ephemeral in January 2021 only. That said, looking beyond aggregate exports at product level data shows that UK exports in particular sectors have also been severely hit.

One may ask what is driving these negative impacts.  After all, in the TCA, the provisions agreed on market access for goods ensure that, at least in principle, trade between the two Parties remained tariff-free and quota-free to minimise disruption for producers exporting and importing goods to and from the EU. Practically, however, we have seen that the disruption has been significant....

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