Brexit has already been a disaster for British trade

Opinion piece (Encompass)
23 March 2021

No one has much interest in talking about Brexit in the UK at the moment. The pandemic means that voters have more important things on their mind. The Conservatives are enjoying a bounce in the polls, thanks to the fast vaccination roll-out, and do not want to highlight the dreadful trade data that’s starting to come through. Labour wants to move on from Brexit, believing that ignoring the issue will help them win back pro-Brexit voters in Wales and the Midlands and North of England. But the scale of the hit to UK trade may make the topic hard to avoid as the pandemic recedes.

My new analysis shows that leaving the EU’s single market and customs union led total UK goods trade to fall by 22 per cent, compared to a modelled Britain that remained within the single market and customs union in January 2021. Exports to the EU fell by 40 per cent, but the relevant statistic in terms of economic performance is total trade, because it tells us whether the British economy as a whole is becoming more closed. January’s trade losses are on top of my other estimate, which shows that Brexit had already led to a 10 per cent reduction in total UK goods trade between the referendum in 2016 and the end of the transition period, which finished on 31st December 2020.

Simply put, the method works as follows. An algorithm chooses – from a ‘donor pool’ of 22 advanced economies – a selection of countries with economic characteristics that most closely matched those of the UK over the last decade, and puts them together to create a doppelgänger UK. By comparing the UK’s goods trade performance from January 2021 to that of the doppelgänger, we can assess how damaging leaving the single market has been to Britain’s trade, while also correcting for the effects of the pandemic. And by comparing the UK’s trade performance with another doppelgänger UK that did not vote to the leave the EU in 2016, we can determine how much the decision to leave the EU had already cut UK trade before the transition period ended.

UK-EU trade should improve in future data releases. There were teething troubles as hauliers stayed away from Britain’s ports in order to avoid congestion, and some of those who did make the journey carried incorrect forms with them or failed to follow other procedures. Stockpiling before Christmas will also have reduced trade in January. Britain’s Office of National Statistics has (unhelpfully) changed the way it measures goods trade, which may artificially reduce trade in January and inflate it in February (this effect will be one-off, the ONS says). Trade flows have been improving since, according to the British government, and future updates of our model will determine the extent to which trade is permanently lower as a result of leaving the single market.

But the pandemic is not disrupting goods trade at present. Unlike GDP or services trade, in the UK and other OECD countries goods trade had returned to its pre-pandemic level by the end of 2020, despite the new waves of the virus that began in the autumn of 2020. Few countries closed down manufacturing plants when restrictions were tightened in the autumn, because they were found to play a minor role in transmission. We can therefore be confident that Britain’s lockdown in January is not significantly skewing the estimate.

We can start to infer how accurate the forecasts for the impact of Brexit were by comparing them to our results. Our 2014 gravity model for goods trade suggested that leaving the single market and customs union would reduce total goods trade by 18 per cent. Thomas Sampson of the London School of Economics and colleagues at UK in a Changing Europe forecast in 2019 that Boris Johnson’s deal would reduce UK trade by 13 per cent, and that would result in a fall in national income per capita of 2.5 per cent (only including the efficiency losses from lost trade: when the impact on productivity was also taken into account, the cost grew to 6.4 per cent). They forecast these declines to take place over a decade, but their – and my – numbers are smaller than the reduction in trade so far.

Time – and our models – will tell us whether UK trade will improve as stockpiles are run down and the new arrangements bed in. But so far, it’s not looking good: a hit to trade of this size entails big structural changes to the British economy, with capital and workers being shifted between sectors of the economy, businesses going bust, and higher prices for imports eroding living standards. The recovery from the pandemic will mask the effect of Brexit on headline GDP and unemployment numbers, but the longer-term prospects for UK growth do not look rosy.

John Springford is deputy diretor of the Centre for European Reform.