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16 February 2024

Michael Gasiorek is Director of the UK Trade Policy Observatory and Co-Director of the Centre for Inclusive Trade Policy. He is Professor of Economics at the University of Sussex Business School. Nicolo Tamberi is Research Fellow in Economics at the University of Sussex and Fellow of UKTPO.

HMRC has just published statistics for trade in goods for December 2023, giving us three years of data after the implementation of the Trade and Cooperation Agreement (TCA) with the EU in 2021. This blog reviews trends in UK trade with the world and the effects of the TCA on UK-EU trade.

There is good and bad news for UK trade in goods. Starting with the bitter pill, the UK’s trade in goods with the world has underperformed compared to other comparable countries over the last few years. Figure 1 shows the exports (panel a) and imports (panel b) of the UK, marked in red, and other OECD countries in blue, together with the series for the OECD total in dark blue. While during the period 2013-16, the UK was in line with the OECD total, the UK’s imports and exports started to slow down since the Brexit referendum in June 2016. For exports, the gap with the OECD total increased substantially with the Covid-19 pandemic. Imputing causation in this setting is not easy; most likely, the Brexit referendum, a slow recovery from the pandemic and the UK’s exit from the EU all contributed to the underperformance of UK trade.

Figure 1: Trade in goods with the world, Jan 2013 – Sep 2023

A) Exports                                                                                       B) Imports

Source: author’s calculations based on OECD data. Trade is measured on a Balance of Payment method.

Our second bit of analysis looks at the geography of the UK’s trade by comparing UK trade with the EU to trade with other non-EU countries (ROW). With the caveats of having preliminary data for 2023, here comes the sweet news: three years after the TCA, the UK’s trade with the EU relative to non-EU is back to normal.

As shown in Figure 2, exports were affected only in January 2021, the month of entry into force of the TCA. But this is old news. Imports on the other hand were down by about 20-30% over the period 2021-22, but by the end of 2023, they have also recovered to pre-TCA levels relative to non-EU imports.

Figure 2: UK trade with EU-ROW ex. gold (HS 7108) and minerals (HS 27), Jan 2013 – Dec 2023

A) Exports                                                                                       B) Imports

Source: author’s calculations based on HMRC data. The figure reports the difference-in-difference coefficients of a PPML regression with partner-by-calendar month and time-fixed effects. The sample includes UK trade with the EU members and a control group composed by OECD+BRICS countries excluding Canada and Japan as FTAs between the EU and these countries entered into force in the period considered. We removed gold (HS 7108) and minerals (HS 27) from total trade due to the volatility of these products. Results are subject to some caveats, which we tried to address, as detailed below, to ensure that the results are robust.

  • A rise in EU import demand: if EU imports from any exporting country grew faster than imports from other countries post-TCA, we might find no effect of the TCA when comparing UK-EU to UK-non-EU trade. Solution: we include trade EU trade data with itself and other non-EU countries. By comparing the difference between EU/non-EU for the UK with the same EU/non-EU difference for the EU, we control explicitly for factors such as an increased EU import demand.
  • Staged customs control: the UK waived controls on imports from the EU in 2021 and firms could declare with a delay of up to June 2022. According to the ONS “It is likely that there has been some double counting as a result of staged customs control, with imports in the second half of 2021 recorded via the Intrastat Survey, then some appearing again on customs declarations in the first half of 2022.” Indeed, we see a jump in imports in the first half of 2022. Solution: we re-run the same analysis using the data from the ONS, which were adjusted for staged customs controls.
  • Russia-Ukraine war: the war might affect results as Russia is in the control group; also the rise in oil and gas might be a concern. Solution: we dropped Russia from the control group. We excluded minerals (HS27) from our main analysis.

After running these robustness checks, the results of Figure 2 remain solid. There can be many reasons beyond these results. One narrative is that big firms, which drive the bulk of trade, generally operate in many countries around the world and already know how to deal with customs formalities. Costs increase a bit, but things proceed as normal.

Our previous analysis (see the Economic Policy paper) showed strong sectoral differences in the effects of the TCA, especially for exports. We estimated the effects of the TCA on UK-EU trade for seven sectors up to October 2023.

For exports, two sectors were affected by the TCA and show no sign of recovery: Agrifood, down by 18%, and Textile and clothing, which is down by 55-60% over 2021-23. The TCA effect on imports on the other hand was quite similar across sectors in 2021, and so was the recovery. Only one sector remained substantially affected by the end of 2023: Textile and clothing (-19% in 2023). These sectoral results for Agrifood and Textiles and clothing are strongly in line with these sectors being where most trade restrictions are in place. Apparently, those restrictions are here to stay.

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or the UK Trade Policy Observatory.

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