The authoritative source for independent research on UK-EU relations

24 Jan 2023

Economy

Public Opinion

Relationship with the EU

UK in a Changing Europe has published a major new report on the relationship between the UK and the EU. In this piece, Stephen Hunsaker reflects on the nature of UK-EU trade relations post-Brexit. You can read the report in full here.

While the immediate effects of the referendum in 2016 were not as severe as some had predicted, the implementation of the Withdrawal Agreement and Trade and Cooperation Agreement in January 2021 marked a significant shift in trade relations between the UK and EU. 

Though most UK-EU trade remains tariff- and quota-free under the TCA, it is not free of new non-tariff barriers. This includes regulatory checks for agri-food products and the need for paperwork and reviews of products that must meet EU standards. As a result, trade costs for businesses and consumers have increased.  

While the TCA marked a dramatic shift in the UK’s trade relationship with the EU, it also opened the possibility for new partnerships with non-EU trade partners. The UK’s freedom to negotiate new trade deals was a key promise of the Brexit campaign, and the government had hoped to negotiate new trade deals that would benefit the country, particularly with the US, China, and India.

However, the reality is that the vast majority of the 71 deals agreed since Brexit are rollover agreements with countries that already had trade agreements with the EU. Even though the existing UK-Japan agreement was slightly modified, the UK Trade Policy Observatory cautioned that it will provide no net gain compared to the EU-Japan deal.   

The UK has also signed new deals with Australia and New Zealand. While these deals are expected to increase trade, this will only be to a small extent. The Australia and New Zealand deals have also been met with controversy due to their potential impact on UK farmers being crowded out of the market by cheaper Australian products. This has concerned some in the government over the precedent they are setting for future deals, including possible deals with South American beef producers. 

Economists anticipated that exiting the Single Market and customs union would significantly reduce UK trade and that new trade deals would only have a limited impact on economic growth in the short to medium term. This prediction has been supported by data so far, with the adverse effects of the TCA on trade offset by only a slight increase in exports to countries outside the EU. For example, the OBR estimated that the impact of the former would be to reduce UK trade by about 15% but that new trade deals, even with the US and India, were unlikely to have ‘a material impact’ on economic growth. In addition, the UK’s trade deficit has increased since Brexit. 

So far, the data appears to support these OBR predictions.  In the run-up to Brexit, uncertainty over the terms of withdrawal, coupled with a succession of looming deadlines for a no-deal exit, led to volatility in the trade data. However, in that period, the UK was still trading with the EU on the same terms as a member state, so those fluctuations were in anticipation of change rather than as a result of it. 

When compared to other advanced economies, the likely impact of Brexit on the UK becomes clearer. The UK’s trade openness, measured by the total value of imports and exports relative to its gross domestic product (GDP), has significantly declined relative to other G7 countries and other advanced economies. This decline is particularly notable when compared with the post-COVID recovery experienced by many other countries. It is difficult to attribute this underperformance to any factor other than Brexit’s direct and indirect impacts. Overall, the data suggests that Brexit has had a negative effect on the UK’s trade with all countries, not just the EU. 

Analysing the annual growth rate of trade tells a similar story. The UK has not been able to recover from the pandemic at the same pace as the rest of the world. In 2021, the UK experienced only a 2.5% annual growth in trade, the lowest of all G20 countries. While this underperformance has been noticeable since 2016, it has been particularly acute in recent years, coinciding with the implementation of the TCA. However, it is still somewhat unclear just how much can directly be attributed to Brexit.   

Brexit is also likely to be a major factor driving the persistently weak level of business investment in the UK. While this issue predated Brexit and also reflects the ongoing impact of austerity and broader economic policy failures, recent trends have been particularly worrying, and while some argued that this was driven primarily by Brexit uncertainty – and so would improve once the Brexit deal was actually implemented – there is little evidence of this to date. 

Since the Brexit referendum in 2016, public perception in the UK has grown pessimistic about the outcome. A majority of voters believe that the economy will be worse off as a result of Brexit, a belief that has persisted even among Leave voters. In late 2021, only 13% of Remain voters said that Brexit had a positive effect on the UK economy, while a quarter of Leave voters agreed. Even among those who would still choose to leave the EU, over half believe the impact on the economy has been negative. The current state of the economy suggests that this negative perception is unlikely to change in the near future. 

The TCA has resulted in increased trade costs for businesses and consumers. So far, the predicted negative impact on UK trade and limited potential for offsetting growth through new deals has been borne out in the data. It remains to be seen how the UK’s trade relations with the EU and other countries will continue to evolve in the coming years. 

By Stephen Hunsaker, Researcher, UK in a Changing Europe.

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