What’s the real story on UK-EU trade?

Many diehard Remainers are still claiming that UK exports to the EU have been permanently crippled by Brexit, and that UK imports will fall further. But the evidence is stacking up against them.

Admittedly, the widely expected decision to delay the full introduction of UK border checks might suggest that there is worse to come. The Government has announced a “pragmatic new timetable for introducing full import controls for goods being imported from the EU to the UK”. This will push back the imposition of some new requirements from October to January 2022, and some others which were due to come into force in January until July.

If the Government was hoping for a universal sigh of relief, it will have been disappointed. You might think that businesses would welcome the additional time to prepare, especially given the ongoing labour shortages and disruption to global supply chains. But the lateness of the changes has understandably frustrated many companies, notably in the food and drink industry, who have invested heavily to be ready in time on the basis of a timetable that officials had promised to keep.

Indeed, this illustrates a broader point: uncertainty about the nature and timing of additional barriers to trade can sometimes be as big a problem as the barriers themselves.

Others will also argue that the delay to the introduction of full border checks means that the negative impact of Brexit on UK-EU trade is only likely to grow. But this is too pessimistic.

It may help to step back a little and review what has happened so far to the trade in goods, where we now have data up to and including July. (Data on international trade in services are only available with a long delay.)

The usual Remain narrative is that UK-EU trade has collapsed since the end of the Brexit transition period at the start of the year, and that it remains subdued. The reality is more nuanced.

Some commentators like to lump exports and imports together to get a measure of overall trade. This is not completely daft, because the economic benefits from trade come at least as much from what a country imports as from what it sells overseas.

But in this case, it makes more sense to separate out exports and imports, because the stories are quite different. It is also more useful to look at the monthly profile, rather than just at the totals for the first half of the year. (See my chart below.)

On the export side, UK sales to the EU did indeed slump in January, but they have since recovered to pre-Brexit levels. Admittedly, exports are probably still lower than they would otherwise have been, but the inevitable hit from increased trade frictions has been smaller than many feared.

In contrast, UK imports from the EU have fallen sharply – and remained lower. This is a bit of a mystery. It may partly reflect problems in the way that imports are recorded following Brexit. Previously, some third country goods came to the UK via the EU and showed up in the data as EU imports. Now they are more likely to come direct, or at least to be recorded as such.

Another possible distortion is that the precautionary stockbuilding ahead of Brexit will probably have affected UK imports more than UK exports. This helps to explain the bigger fall in imports than exports between the final quarter of 2020 and the first of this year, though this effect should have unwound by now.

More positively, the relative weakness of UK imports from EU may also reflect substitution by domestic production, or by imports from rest of world. This is hard to prove. In particular, total imports (adding together both EU and non-EU trade) are also down. But looking just at UK imports from the EU in isolation risks ignoring these important factors completely.

Another key factor may be the asymmetric impact of Covid on UK imports and exports. In other words, this is not just about Brexit, as some assume. For example, the UK normally imports more cars from the EU, but the auto sector has been hit by global supply problems.

The upshot is that we cannot be sure exactly what is driving the continued weakness in UK imports from the EU, but attributing it solely to the departure from the EU would clearly be a mistake.

So, what impact might the new UK border checks have, when they are eventually introduced? There are four reasons to be relatively optimistic.

First, imports from the EU have already fallen sharply, suggesting that a lot of the adjustment to supply chains has already taken place, at least as much because of Covid as Brexit.

Second, there is an awful lot else going on, apart from Brexit, and any increase in trade frictions due to new UK border checks could be more than offset by an easing of these problems. A good example is the likely reduction in the shortage of HGV drivers as tests for newly qualified drivers are streamlined and more are attracted to work in the industry by higher pay.

Third, the delay to the introduction of UK border checks, while frustrating for many, will at least allow more time both for businesses and officials to prepare, technology to be improved, and so on, reducing the cost of the new checks.

The final point is the one made earlier about uncertainty. Once businesses know exactly what they have to deal with, they can adapt and adjust. This helps to explain why UK exports to the EU have recovered relatively quickly. It should help UK imports from the EU to recover too.

This article was first published by the Daily Telegraph on 15th September 2021

2 thoughts on “What’s the real story on UK-EU trade?

  1. Mr Jessop’s blog pointedly omits some really key facts: 1) Some UK businesses are unhappy with the delays to the new customs procedures, as they have already invested a lot of £ into them, only to find they are not needed till next year (at the earliest). 2) Indeed the Food & Drink industry is so embattled that it forecasts shortages for the foreseeable future. Supply chains have been permanently disrupted, due to both Brexit AND Covid (as well as the global recovery). 3) Surely fallen UK imports from the EU is no ‘mystery’? There have been lots of reports that British companies have given up on importing, finding the time and costs too onerous. 4) Mr Jessop completely ignores the huge increase in trade volume between N Ireland and Ireland.
    There is no way other than a die-hard Leaver could call the last 8 months anything other than catastrophic in terms of trade.

    Liked by 1 person

    1. Let me take each of these points in turn.

      1. I made this point myself. See the third paragraph, where it says ‘but the lateness of the changes has understandably frustrated many companies, notably in the food and drink industry, who have invested heavily to be ready in time on the basis of a timetable that officials had promised to keep.’

      2. I discussed the supply chain problems on a panel hosted by the Institute for Government, which included Ian Wright from the Food and Drink Federation, who also made the point that Brexit has only played a small part. You can watch it here: https://www.instituteforgovernment.org.uk/events/border-supply-chain

      3. The mystery is why UK imports have fallen further than exports, and remained low, not why they have fallen at all. I have never denied that an increase in trade barriers will reduce trade – that is just Economics 101. The question is how big the impact will be – and its duration. If you are interested, here’s a longer piece on the benefits of imports: https://iea.org.uk/publications/the-importance-of-imports/

      4. You’re right that trade between N Ireland and Ireland has increased substantially, but this is an article about UK-EU trade, of which NI-I trade is only a small part.

      Finally, in my view the data (see my chart) simply do not support your claim that the impact has been ‘catastrophic’. But let’s agree to disagree – politely – on that.

      Liked by 1 person

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