Brexit or COVID-19? How the drop in UK trade affects the US

This year, Brexit is expected to have a negative impact on U.S. trade with the United Kingdom, but we struggle with the question, what’s to blame, COVID-19 and its variants or Brexit? The drastic fall in trade between the U.K. and the European Union in the first months of 2021 sheds light on the answer. 

According to the U.K. Office for National Statistics, U.K. export of goods to the EU fell by 42 percent in January 2021 compared to January 2020. This was the first month following a Trade & Cooperation Agreement  (TCA) with the EU, and it offers a mere glimpse of future trade relations. February figures showed a 46.6 percent jump in exports to the EU, but overall exports were still below last year’s levels. Of greater concern was U.K. economic growth of only 0.4 percent. It remains 7.8 percent smaller than the same time in 2020.  Prime Minister Johnson assures us that growth will bounce back better, but will it? 

In the same month U.K. imports from the EU fell by 16 percent compared to January 2020 before recovering slightly in February. The decreases in exports and imports are significant and require U.K. government action not only to explain, but to remedy in the months ahead.  The remedy depends upon the cause and we ask whether both decreases are due to the TCA or to COVID19 and its variants? Prime Minister Boris Johnson’s administration explained the fall by referring both to the virus and stockpiling in December 2020 to get ahead of the new rules under TCA, but analysis of the data for January and February suggests that Brexit may explain more accurately the new trading position. 

First, a major divergence exists in goods trade between the EU and non-EU countries, including the USA. While U.K. export of goods to the EU fell by 38 percent, goods to non-EU countries fell by only 8 percent compared to the previous year. Likewise, imports which fell by 16 percent with the EU contrasted with a fall of only 9 percent with non-EU countries. Should COVID-19 explain the fall in goods trade, we would expect to see a similar decrease in both EU and non-EU exports and imports.

How easy is it to unpick Brexit from COVID-19 and its variants? In the first 5 months of 2020, U.K. citizens faced strict lockdowns with the manufacturing sector closing down to stop the spread of the virus. At that time U.K. trade in goods fell, but bounced back in the second half of the year. Also, in those first months the decrease in goods exports and imports affected both EU and non-EU countries. We may conclude that the early 2020 COVID lockdown caused both the overall fall in demand for goods and in the export of goods worldwide. By contrast, the U.K. Christmas lockdown of December 2020 resulted in a much higher decrease in trade with the EU than in non EU trade. Maybe this was due to anticipation of a hard Brexit, or something approaching that. Nevertheless, both COVID lockdowns principally affected non-tradable services such as hairdressers, restaurants, hotels and airlines. In contrast, Brexit has impacted tradable goods and financial services with agriculture and fisheries hit hardest. 

This year’s fall in goods trade was much greater for EU traded goods which raises 4 potential reasons:

  1. After completion of the TCA, the EU Commission imposed new bureaucratic barriers, other than tariffs and quotas that required London to impose customs checks on U.K. exports to the EU. (Checks on imports from the EU were delayed until Dec. 31, which explains why the drop in imports is significantly less than the drop in exports to the EU); 
  2. January 2021 was the first month in which U.K. exporters had to complete the new customs checks using electronic forms that were complicated and often difficult to follow.  We expect those problems to go away with time;
  3. In anticipation of either a no-deal with Brussels, or a hard Brexit, companies stockpiled goods in the final months of 2020. They did the same in 2019 when they anticipated Prime Minister Teresa May leaving the EU without a satisfactory, or indeed any deal. But the export decrease in 2019 was 10-15 percent, not the 38 percent decline in January 2021; and,
  4. As a consequence of Brexit, the U.K. government has amended its data collection methods. The Office of National Statistics expects the change to reduce measured exports to the EU and possibly increase measured exports to non-EU countries.  Therefore, we should expect to see the results of these changes in the June 2021 data. 

There is a further barrier to goods trade, namely the cost of the new bureaucratic customs and health checks. Individual U.K. companies are now assessing whether they can pass those additional costs onto customers, swallow them, or terminate their current business model. The Federation of Small Businesses, representing 5.9 million small businesses (employing less than 50 people) and 4.5 million businesses employing only one person reports that one out of four U.K. exporters have stopped trading with the EU, 4 percent of which stopped permanently.  The majority of companies surveyed preferred to wait and see. The reasons given are the lengthy and complex paperwork required to assure the EU that TCA rules of origin and health certificates have been met. Completing these forms takes time and the hiring of consultants to do this work adds approximately $49 to each consignment of goods exported. We must expect the number of consignments and costs to increase when customs checks on imports go into effect at the end of 2021. Added to this, the French are determined to demonstrate that leaving the EU is both arduous and costly.

On the bright side, as of May 5, 66.1 percent of the U.K. population have received their first COVID19 vaccine and 30.2 percent have received their second shot. The protection is expected to result in a strong rebound in economic activity and a strengthening of the British Pound, although the market appears to await a new and more significant driver to reignite investor interest and deliver any real gains. That driver is future trading with the EU and is anticipated to be seen 12-18 months after signing the TCA. Will the rebound from COVID-19 be strong enough to compensate for the decrease in the export of goods to the EU? We may have to wait until the spring of 2022 to give us a reliable answer on the principal cause of the decline in goods trade. 

In the minds of U.S. investors, COVID-19 remains forefront. Their hopes of a solid U.K. economic recovery in the first quarter were muted by the 3.5 percent fall in industrial production and 4.2 percent fall in manufacturing. But we note that those numbers were better than had been feared. Of greater concern is the laggard performance of  multinational banks with strong U.K. portfolios. Investors may change their minds as the prime minister’s second roadmap for reopening the economy allows non essential retail stores, restaurants and pubs to open their doors on May 17. Meanwhile, the Financial Times Stock Exchange 100 extended its gains and trading on May 5 closed up 1.7 percent, its highest since February 2020.  

In the near term, investors in the U.S. and U.K. appear to be focused on COVID-19 vaccination rates and the opening of the British economy more than the long term impact of Brexit.

Diana Villiers Negroponte is a global fellow with the Global Europe Program at the Woodrow Wilson International Center for Scholars.

Tags Brexit Economy of the United Kingdom Foreign relations of the European Union Politics of the European Union Predicted impact of Brexit Trade negotiation between the UK and the EU United Kingdom and the European Union

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