The lid is open: why is the EU-UK Trade and Cooperation Agreement costly and what does the UK need to do?
By Professor Jun Du
Director of the Centre for Business Prosperity
Professor of Economics, Finance and Entrepreneurship, Aston Business School
Lecturer in Politics and International Relations
School of Social Science and Humanities
Dr Oleksandr Shepotylo
Senior Lecturer, Economics, Finance and Entrepreneurship, Aston Business School
As far as trade is concerned, the EU exit has been rather costly to the UK. At the Centre for Business Prosperity, we have been tracking the performance of UK trade in recent years. The UK’s trade dropped sharply during COVID. Like other nations, this was due to the global recession and supply chain disruptions. However, the UK failed to recover and enjoy the boom, despite the tariff-free terms of trade in goods set out in the EU-UK Trade and Cooperation Agreement (TCA). The UK now trades less with the EU, its largest trading partner, than in 2019. During the same period, Germany and the Netherlands grew trade with the EU by nearly a quarter, and US trade with the EU has also grown considerably. Reports suggest, including those from the British Chambers of Commerce, that exporting to the EU has become much more costly and in some cases, unviable. It appears that the “certainty” provided by the TCA has not reversed the declining trend of the UK-EU trade so far. Our new paper for the Enterprise Research Centre (ERC) has found that UK exports experienced a large, negative, statistically significant decline in 2021 at the end of the transition after the EU-UK Trade and Cooperation Agreement (TCA) was put into force. We estimate that this amounts to a 22% reduction in exports to the EU and a 26% reduction in imports from the EU over the first half of 2021, relative to the counterfactual scenario of the UK remaining in the EU.
It was equivalent to a reduction of £12.4 billion in UK exports over the first six months period of 2021.
How did this happen? After all, the TCA ensures that goods moving between the UK and the EU have no tariffs or quotas, so long as the rules of origin are complied with. Rules of origin help you work out where your goods originate from and which goods are covered in trade agreements. Our research found that non-tariff measures (NTMs) were responsible for the adverse TCA effect on UK trade with the EU and that the magnitude of loss was significant. It was equivalent to a reduction of £12.4 billion in UK exports over the first six months period of 2021. This equals 16% of UK total exports in the first half of 2019 and 70% of the documented total reduction in the EU exports in the same period.
A number of factors can be attributed to the decline of UK exports to the EU. In particular, the increased trade frictions that occurred mainly due to sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) as a result of entering the TCA. Sanitary and Phytosanitary (SPS) measures refer to the EU controls to protect animal, plant or public health. And technical barriers to trade (TBT) refers to mandatory technical regulations and voluntary standards that define specific characteristics that a product should have, such as its size, shape, design, labelling/marking/packaging, functionality or performance. On average, for the first six months of 2021, a 1% increase in SPS resulted in a 13–15% reduction in exports to the EU, most notably in the food and drink, wood and chemicals sectors. Furthermore, a 1% increase in TBT led to a 2–3% reduction in exports, especially in metals, equipment, machines and miscellaneous industrial products. What next? Since the post-Brexit dysfunctions are now diagnosed, in theory we could move on. The UK can directly tackle the trade challenges, so long as other things, such as politics, do not stand in the way. Fundamentally, what needs to happen is the removal or relief of the root causes coded by the TCA – the trade barriers newly erected. This is a key task; it is challenging but not impossible. Trade frictions due to the SPS measures are an acute problem of Brexit. Reducing some of the non-tariff measures between the EU-UK would help by exploring other mechanisms such as equivalent SPS measures or other ways to reduce businesses burden to a minimum.
Future EU-UK co-operation is critical and mutually beneficial but requires political will and strong leadership.
The technical barriers to trade are more complicated and challenging and they could potentially cause significant damage to the UK economy. Despite its limitation, maintaining and broadening the established arrangements of the current TCA provision, through some form of mutual recognition of specific practices or international regulations for selected sectors, should be the ambition of UK government to help ease the TBT trade barriers.Future EU-UK co-operation is critical and mutually beneficial but requires political will and strong leadership. In the short and medium term, supporting firms should be the priority, especially small- and medium-sized firms that are productive enough to have exported to the EU in the past, but now face hurdles to continue exporting. These firms tend to be limited on resource but have the infrastructure and ambition to internationalise. Targeted support for specific challenges could be also fruitful. The UK Department for International Trade Export Support Service, the British Chambers of Commerce and local growth hubs have the expertise and experience to help firms export. Therefore, resources should be made available to allow for customised and responsive support with exports, as well as taking advantage of technologies that can identify and reach businesses who require support. Provision should also be made to collect feedback on the quality of the support provided, to enable further improvement. Helping businesses continue to access EU markets, while enabling the economy to take advantage of welfare-enhancing benefits from trade, remains imperative. Given the economic benefits of the roll-out, the new free trade agreements are expected to be limited and effective only in the long term. UK domestic policies should be the focus to improve the competitiveness of exporters and their ecosystem.