The damage to our trading relationship with the EU from Brexit cost the UK £27bn in the first two years, according to the most comprehensive review of the issue since the UK left the EU in its entirety. The overall impact was more limited than forecasters initially estimated. The beginning of 2021.
Researchers based at the London School of Economics found that trade barriers were a “disaster” for small and medium-sized businesses, forcing thousands to suspend trade with EU countries.
Academics at the Center for Economic Performance examined evidence from more than 100,000 companies and found that by the end of 2022, two years after the UK signed the Trade and Co-operation Agreement (TCA) with Brussels, the UK's total exports of goods will increase. It was found that there was a decrease. 6.4%, and imports 3.1%.
The Office for Budget Responsibility (OBR) estimates that the UK is expected to suffer a 15% trade recession in the long term, leading to a 4% decline in national income.
CEP researchers say that while there is still a chance that the UK will experience a decline of the size envisaged by the government's independent economic forecasting agency, the OBR, exports and imports with the UK's largest trading partner will need to worsen further. He said there is.
“We find that the TCA has reduced trade in goods by more than half the amount predicted by the OBR by the end of 2022,” said Thomas Sampson, one of the report's authors. That said, the OBR numbers are long-term projections, and we only look at the first two years of the TCA.
“Whether the decline in trade will be even larger over time remains to be seen. However, to match the OBR's predictions, any additional decline would have to be larger than what has been seen to date.”
Rachel Reeves is likely to welcome the findings, which show the economy's resilience in the face of large trade shocks. But it will also put pressure on the prime minister to support efforts to lower trade barriers in the coming years to prevent further damage.
A review of previous forecasts by the OBR could result in a higher growth forecast if it incorporates a relatively brighter outlook for UK trade.
The UK plans to start negotiations on the next stage of the TCA next year. Ministers are expected to resist demands that Britain open up its agricultural markets to competition from EU farmers and trawlers in exchange for greater access for British goods into the region.
The authors said that looking at the first two years of the TCA, it is clear that large companies have largely continued to trade at the same level as EU member states.
However, small exporters with fewer than 100 employees were hit hard. More than 14,000 of the 100,000 companies surveyed had completely withdrawn from doing business with the EU. Almost all were small businesses.
Imports outpaced exports as large companies found ways to source parts and raw materials from outside the EU.
Mr Sampson, associate professor of economics at LSE, said: “The TCA has been a disaster for small exporters, many of whom have simply stopped exporting to the EU.” At the same time, large companies have adapted well to new trade barriers. As a result, total exports have fallen less than expected, at least so far. ”
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This study is the first to use customs records collected by HMRC to study the impact of Brexit on trade. The researchers said that customs data allows them to understand individual trade relationships and “highlights how large companies are adapting to new trade relationships better than smaller companies.”
The TCA did not include tariffs. However, this has resulted in issues such as customs inspections and paperwork, rules of origin requirements, excise taxes, sanitary and phytosanitary inspections on the movement of animals and plants, and the need for exporters to demonstrate that their products comply with national regulations. , creating barriers to trade. destination market.
However, many of these tests have been repeatedly delayed, and further measures are expected to come into force next year.
The study only looked at trade in goods, not imports and exports of services, which are mostly outside the jurisdiction of the single market or customs union.
Co-author Karina Manova, professor of economics at UCL, said: “Over the medium to long term, firm performance will depend on maintaining supply networks and diversifying export demand in the face of higher and more uncertain non-tariff barriers. It depends on whether we can do it or not.” To EU trade. ”
The report found that the UK's exit from the EU's single market and customs union in early 2021 led to an immediate decline in imports and exports from the EU. But it added: “It also shows that businesses responded to the shock in a way that limited the decline in overall trade.” While large companies did not experience a decline in exports, importers partially compensated for the decline in imports from the EU by increasing their sourcing from outside the EU.
“The results show that aggregate trade is reasonably resilient to collapse, at least in the short term.”
