Economics

The economic impact of Brexit: What do we know about the hit since January?

How damaging in practice is Britain’s new trading arrangement with the EU?

June 15, 2021
Colin McPherson / Alamy Stock Photo
Colin McPherson / Alamy Stock Photo

Britain has been trading with the European Union since the start of January under the terms of the agreement reached late last year. It should now be possible to assess what impact, if any, the hard version of Brexit that Boris Johnson chose is having on trade.

The figures so far appear damning for goods, where the EU accounted for half of total trade—exports plus imports—in 2019, before the pandemic. Excluding precious metals (which move erratically), the value of both exports and imports with the bloc plunged by around a fifth in the first quarter of 2021 compared with the final quarter of 2020. By contrast, total trade with non-EU countries was broadly unchanged. As a result, imports from non-EU countries exceeded those from the European bloc for the first time on records dating back to 1997. That remained the case in April, according to figures released on Friday by the Office for National Statistics.

Case made? It’s not that straightforward. One complication is that the trade negotiations went right up to the wire. Firms stockpiled in both the UK and the EU for fear of a worst-case outcome, in which Britain left the single market and customs union with no deal at all. That added to trade with the EU in late 2020 and subtracted from it in early 2021.

A further difficulty in interpreting the figures is the disruptive effect of the pandemic and lockdowns on trade patterns. China has overtaken Germany in the past year to become Britain’s top supplier of imports. That occurred as the Chinese economy recovered swiftly from Covid, enabling it to meet extra demand for electronic goods and PPE. As Britain emerges from the pandemic, spending is likely to revert to the kinds of products, such as cars, that are imported predominantly from European neighbours, especially Germany.

Given the confounding factors in the trade data, it makes sense to pay attention to what firms have been saying themselves about the impact of Brexit. One source is the Business Insights and Conditions Survey conducted by the Office for National Statistics. Among businesses experiencing exporting or importing challenges, coronavirus rather than the end of the EU transition period was blamed as the main problem in December. But this year the new trading relationship with Europe has come to the fore, with between 50 and 60 per cent highlighting this as their main challenge.

Again, however, this bears more than one interpretation. On the one hand, firms may have been experiencing teething troubles and will come to terms with the new trading arrangements with the EU in time. On the other hand, the reported difficulties may be genuine and enduring, reflecting the hard version of Brexit that Johnson chose. Although the trade deal does avoid tariffs for goods provided that they comply with (complex) rules of origin, firms exporting products to the EU now have to cope with non-tariff barriers such as border checks and red tape.

Another way of working out the impact of the new trading relationship is to model what would have happened if Britain had stayed in the single market and customs union this year. John Springford of the Centre for European Reform has created such an alternative British economy from a group of other countries with similar economic characteristics. He uses an algorithm to select the ones whose trade data, when combined, closely mirrors what happened in recent years to actual British trade (specifically, between 2016 and 2019, thus excluding the impact of coronavirus last year). The trading performance of the body-double economy (while Britain was still in the EU) can then be calculated for this year, providing a comparison for what has happened in practice.

Springford finds that total goods trade (with non-EU countries as well as the EU) was 11 per cent lower in April than his estimate for the alternative British economy still inside the EU trading system. That comes on top of a 10 per cent decline already incurred as a result of the referendum outcome five years ago, calculated using a similar approach.

Current assessments of the impact of the trade deal are based on trade in goods because geographical breakdowns of trade in services this year are not yet available. But there is little reason to expect anything but bad news when the services figures do emerge. The deal struck in December did more for goods (where the EU has an advantage) than for services (where Britain is stronger). It was particularly inadequate for the financial sector, while providers of business and professional services in which Britain also excels are hit hard, too. A briefing paper from the UK Trade Policy Observatory in January said that overall, the agreement “represents a major setback for services sectors.” All this matters, because in 2019 services made up nearly half of Britain’s total exports and almost 40 per cent of those services exports went to the EU.

At this stage, the evidence suggests that Johnson’s hard Brexit is indeed punishing trade. However, the scale of the harm will remain uncertain for some time to come. For the moment the prime minister will no doubt be able to shrug off such damage, since GDP is rebounding through a consumer-led boom as Covid restrictions are lifted. But the long-term consequences of his deal will still be less trade and output than would have been the case if he had pursued a pragmatic compromise rather than an ideological divorce.