Trade flows between the UK and the EU fell sharply in the first month the UK spent outside the single market. Thomas Pope sets out what this does – and does not – tell us about Brexit
At 11pm on 31 December 2020, the UK left the EU single market and customs union, marking the biggest change in the UK’s terms of trade in a generation. The new Trade and Cooperation Agreement (TCA) was only agreed on 24 December, giving most businesses barely a week to make sense of new rules and to finalise their preparations.
Numerous news stories of problems facing businesses and falling trade volumes between Britain and the EU have followed, based on anecdotes or survey data which cover only a small part of the trade flows between Britain and the EU.
But now the first official statistics on UK trade in January have been published, and they show a dramatic fall in trade between the UK and the bloc. However, this is due to both Brexit and non-Brexit related factors – including the pandemic. So while the new data tells us a lot about short-term trade fluctuations, and the government should not dismiss this data point as it works with businesses to ease disruption, we still do not know what the longer-term impacts of Brexit on trade flows – and the wider economy – will be.
The headline from today’s release is that UK exports to the EU fell by 40% between December 2020 and January 2021. In contrast, as the figure shows, exports to the rest of the world were more or less unchanged.
Some of the fall in exports to the EU is attributable to disruption as a result of the end of the transition period – including firms that chose not to trade while they made sense of new rules or to avoid getting caught up in possible border delays. But this is not the full picture. Even without any disruption, a fall in trade with the EU was always likely in January because many businesses made preparations towards the end of 2020 – for example, by sending goods out ahead of time. Exports to the EU grew strongly in November and December for this reason.
Covid also continues to hit world trade and may have had a particularly large effect in January, and it is difficult to disentangle the effects of Brexit and covid on UK-EU trade – indeed businesses themselves struggle to distinguish the two when they report difficulties in exporting. Coronavirus has affected demand for certain goods, although this effect is likely to have been in play last year too and would affect exports to all parts of the world, not just to the EU. A new factor affecting exports to the EU in January is that, since late December, hauliers have had to provide a negative covid test to enter France. Of the 3-8% of lorries turned away from Dover and Folkestone in the first few weeks of January, around half were denied entry for a failure to provide a negative test. [1]
The data show that EU imports have not been affected as badly as exports to the EU. Imports from the EU fell but only by 29% between December 2020 and January 2021 – and there was also a fall in imports from the rest of the world. Part of this fall in imports will have reflected the unwinding of the stockpiling that businesses did in late 2020 in anticipation of expected disruption to trade flows, which appears to have been bigger in the UK than the EU. The fall in imports from the rest of the world may also reflect the impact of the UK’s lockdown (which began on 26 December) and suggests there has also been some unwinding of broader stockpiling by businesses.
The smaller impact of Brexit on imports is likely a result of the UK’s lighter-touch approach to border checks. While the EU has, more or less, applied checks in full from day one, the UK is phasing in new paperwork and inspections – to allow more time for businesses and government to prepare. Yesterday, the government announced that the introduction of full checks would be further delayed – in most cases by six months – ostensibly because ongoing Covid disruption has prevented firms from preparing for new rules. [2]
While those lighter-touch checks are in place, imports will continue to be affected less than exports. More time to prepare should mean there is less disruption when full import checks are finally introduced, but there is still a risk that moving the deadline simply delays the point when imports are disrupted so the government must ensure it uses the additional time well.
Trade has been more badly affected in some sectors than others. The two charts below show a picture that is consistent with the concerns businesses have been voicing since the end of the transition period. The agri-food and chemicals [3] sectors have seen especially big hits to their EU trade. In both of those sectors, exports to the EU in January were less than half their monthly average in 2020. Imports from the EU also fell, though only by around 20%.
The agri-food sector has faced some of the most onerous new checks and is disproportionately made up of small businesses, which were generally less well prepared for the end of the transition. Chemicals businesses are now subject to duplicate regulatory regimes – with firms subject to EU rules in full since January – hitting those exporting to the EU hard.
Many of the factors affecting trade in January were temporary rather than permanent. The impacts of stockpiling and coronavirus on trade should recede over the coming months. Some businesses who were not ready for the end of transition – and so faced ‘teething problems’ such as confusion over new paperwork – will adjust to the new requirements.
However, a change to trading arrangements as fundamental as Brexit will have permanent effects – with many firms only now beginning to address the long term impact of new trade frictions – which may require structural changes such as adjustments to supply chains and business models. How these adjustments play out and the size of their effects remains uncertain. Over one-third of business are not sure whether their export sales will increase or decrease over the next year – this is a marked rise in uncertainty since November 2020.
The longer-term impacts on trade are even more uncertain, but it is these changes to patterns of trade which will ultimately determine the economic impact of Brexit. Dominic Raab, the foreign secretary, has said that businesses should take a “10 year view” before judging the impact of Brexit. [4] This does not mean the government should ignore the short-term information this data provides, and we will be able to judge many of the substantive impacts before a decade has passed. But we need more than one month of data to draw widespread conclusions.
