Unbound: UK Trade post-Brexit

Executive Summary

This study provides a comprehensive analysis of the significant and persistent impact of the Trade and Cooperation Agreement (TCA) on UK-EU trade relations, three years after the UK’s departure from the EU Single Market and Customs Union. The findings reveal a sharp decline in both UK exports and imports with the EU, underscoring the enduring challenges posed by Brexit on the UK’s trade competitiveness.

Between 2021 and 2023, monthly data show a 27% drop in UK exports and a 32% reduction in imports to and from the EU. Even when considering annual data to smooth short-term fluctuations, the declines remain substantial—17% for exports and 23% for imports. The analysis indicates that exports primarily declined at the extensive margin, with a 33% reduction in the variety of goods exported, while the intensive margin remained stable. Conversely, imports adjusted predominantly at the intensive margin, declining by 28%, with the variety of imported goods remaining stable. The contraction in export varieties highlights a significant reduction in the range of goods the UK trades with the EU.

Robustness checks confirm these findings, indicating the profound and ongoing stifling effects of the TCA on UK-EU trade. The analysis reveals a heavily disrupted and weakening UK-EU supply chain post-TCA, evident across consumer, intermediate, and capital goods. The significant decline in consumer goods exports to the EU and corresponding UK imports suggests a disentanglement of the UK from EU value chains, with a shift towards local production. Despite the TCA’s dampening effect on UK exports, the UK remains dependent on the EU for intermediate and capital goods.

The study highlights that the negative impacts of the TCA have intensified over time, with 2023 showing more pronounced trade declines than previous years. This suggests that the transition in UK-EU trade relations post-Brexit is not merely a short-term disruption but reflects deeper structural changes likely to persist.

The analysis also uncovers considerable heterogeneity in the TCA’s impact across different goods categories, countries, and sectors. Smaller and more distant EU economies have been more adversely affected by the reduction in UK export varieties, while larger economies like Germany and France have experienced relatively smaller declines. This indicates a decoupling of the UK from EU markets for final goods, with a shift in UK supply chains towards more geographically proximate and smaller trading partners within the EU.

Sector-specific analysis reveals that non-tariff measures (NTMs), particularly in agriculture and food products, have significantly impacted the extensive margins of exports. Industries with larger-scale production and lower product concentration have fared better, while those with higher product differentiation and concentration have experienced more substantial declines.

Policy Implications

The challenges facing UK trade post-Brexit shown in this analysis highlight that the disruptions induced by Brexit remain significant and are likely to be long-term. This necessitates strategic adjustments in UK trade policies and measures that go beyond trade policy. Given the significant and persistent negative impact of the TCA on UK-EU trade, policymakers must carefully prioritise actions to stabilise and enhance the UK’s economic position. This study identifies three critical areas for effective policy intervention: mitigating the adverse effects of the TCA, reconfiguring supply chains to bolster efficiency and resilience, and supporting firms in adapting to new trade barriers while enhancing productivity.

Mitigating the Adverse Effects of the TCA

The TCA has introduced considerable barriers to UK-EU trade, particularly through increased NTMs. Addressing these issues through targeted improvements to the TCA is crucial to ensuring that UK businesses remain competitive in the European market. A structured, multi-faceted approach is necessary:

• Sector-Specific Negotiations: The UK government should prioritise sector-specific adjustments to the TCA, particularly in areas like agrifood, textiles, and material-based manufacturing, which have been disproportionately affected. A targeted approach could alleviate barriers, boost trade, and stabilise supply chains, benefiting both large industries and SMEs.
• Streamlining Customs Procedures through Digital Technologies: Simplifying and modernising customs processes through digitalisation is essential to reducing delays and lowering costs. Implementing advanced customs platforms that automate documentation, provide real-time tracking, and integrate with EU systems should be a priority in future negotiations.
• Reducing Regulatory Divergence: The divergence in regulatory standards between the UK and the EU has created significant trade barriers. Efforts to reduce unnecessary differences, particularly in highly regulated sectors like chemicals and pharmaceuticals, could significantly lower compliance costs. Negotiating mutual recognition agreements in key sectors would help alleviate the burden of dual compliance for UK firms, enhancing market access and investor confidence.

Strategic Reconfiguration of UK Supply Chains

The post-Brexit landscape indicates a notable shift in the previously tightly integrated EU supply chains. The current global environment where supply chain reliability and resilience are becoming more critical than the earlier focus on efficiency and cost-minimisation means there is an urgent need for a strategic reconfiguration of the UK’s supply chains to adapt to new trade realities and strengthen long-term resilience and competitiveness. Key recommendations include:

• Enhancing Trade Infrastructure: Investing in trade infrastructure, including upgrading ports, expanding logistics networks, and improving customs facilities, is essential for reducing transit times and ensuring the seamless movement of goods.
• Strengthening Domestic Supply Chains: Encouraging reshoring and increasing domestic sourcing of critical components can bolster UK supply chains. Government incentives such as tax breaks, grants, and subsidies can support businesses in local manufacturing and supply chain capabilities.
• Diversifying Global Sourcing: UK businesses should diversify their sourcing strategies, seeking suppliers in regions like Asia, Africa, and the Americas to reduce dependence on any single market. The government can support this by facilitating trade missions and negotiating new trade agreements.
• Fostering Strategic Partnerships: Building strategic partnerships with countries outside the EU is crucial for securing access to essential materials and components. Negotiating bilateral agreements and participating in multilateral trade initiatives will help reduce the vulnerability of UK industries to external shocks.

Supporting Firms in Adapting to New Trade Barriers and Enhancing Productivity

With new trade barriers likely to persist, firms—particularly SMEs—require targeted support to adapt and thrive. Key initiatives include financial assistance, export training, and policies aimed at enhancing productivity through innovation, technology upgrading, and R&D. This could involve tax incentives for R&D, grants for innovation projects, and the creation of innovation hubs that foster collaboration between businesses, research institutions, and government agencies.

Future Research Needs

Further research is needed to understand the long-term impacts of the TCA and inform future policy decisions. Key areas include:

• Trade-offs and Sectoral Impacts: Developing metrics to assess and rank the impacts of different trade policy adjustments will help policymakers prioritise actions that deliver the greatest benefits with minimal unintended consequences.
• EU Impact and Comparative Analysis: Studying the impact of the TCA on both the UK and the EU, including supply chain reconfigurations and market access, will provide a more balanced view of the trade relationship and help identify best practices.
• Supply Chains and Deeper Impact Analysis: Investigating the long-term consequences of disrupted EU-UK supply chains, particularly in industries reliant on integrated supply chains, will be critical for shaping effective trade policies.
• Wider Spillovers and Brexit’s Broader Economic Impact: Examining the broader economic implications of Brexit, including its effects on investment, innovation, and labour markets, will be crucial for addressing regional disparities and supporting long-term growth.
• Resilience and Adaptation Strategies: Research should focus on the resilience of UK businesses in adapting to the new trade environment, identifying strategies that firms are employing to mitigate risks and exploring areas where further support is needed.