Brexit hit to UK trade less than predicted, says study

Brexit has hit UK trade less than many forecasters predicted thanks to larger companies adapting to red tape at the border, according to research by the London School of Economics.

Researchers estimated UK worldwide goods exports and imports fell 6.4 and 3.1 per cent respectively between 2020 and 2022, compared to the levels predicted for the country remaining in the EU, according to analysis of company-level trading data from HM Revenue & Customs for the first two years after Brexit.

The report by economists at the LSE’s Centre for Economic Performance concluded that while the EU-UK Trade and Cooperation Agreement signed in 2020 “undoubtedly decreased trade”, the decline was “at least in the short run, smaller than forecasters expected”.

The drop in trade as a result of Brexit amounted to a £27bn hit to exports and £20bn lower imports in 2022, according to the LSE.

However, while the report found larger businesses had proved more resilient, smaller companies were hard-hit with more than 16,400 businesses quitting exports to the EU after 2021.

Thomas Sampson, co-author and associate professor of economics at LSE, said that while the 6.4 per cent reduction in overall goods exports was “not trivial”, it was still smaller than many pre-Brexit studies had forecast.

He added the TCA had been “a disaster for small exporters”, with many stopping exporting to the EU altogether, but “at the same time, larger firms have adapted well to the new trade barriers”.

The LSE findings, which are limited to goods trade, will add to the increasingly controversial debate over the economic impact of Brexit. The effect on UK trade was initially clouded by the Covid-19 pandemic, which caused massive disruption to global supply chains, and other methodologies have modelled larger hits.

Economists at Aston University have estimated annual exports to the EU are 17 per cent lower and imports 23 per cent behind than if Brexit had not occurred, with the negative impact increasing during 2023. 

By contrast the LSE report estimated only a 13.2 per cent fall in the value of goods exported to the EU as a result of using different modelling techniques and a narrower sample.

Jun Du, a professor of economics at Aston University, said in her view the LSE numbers were likely to be an underestimate because the analysis focuses on those companies that were already strong enough to be trading with the EU and the rest of the world.

“These firms are the survivors, so if you infer the negative impact of Brexit only from the good companies you get a more rosy picture,” she added.

The Office for Budget Responsibility still estimates Brexit will cause a 4 per cent long-run hit to GDP as a result of impacts not just on trade, but also reduced investment and productivity in the UK economy.

On trade, the OBR’s forecast, last updated in May, is that total UK exports and imports of goods and services will “be 15 per cent lower in the long run”. The OBR declined to comment on the LSE paper.

The LSE said that while there was “early evidence” of companies adjusting to life outside the EU, the effects of Brexit would depend on the long-run impacts of the TCA which are “yet to be fully realised”.

Business has warned of so-called “Brexit 2.0” effects, with new EU regulations — for example carbon border taxes or new supply chain reporting requirements — leading to trade with the bloc becoming more difficult over time.

However, even allowing for these future effects, the LSE’s Sampson said they would have to increase significantly for the OBR’s prediction of a 15 per cent long-run hit on imports and exports to be proved correct.

Sampson added that while larger businesses had initially adapted better than expected, that did not mean they were not facing higher costs and reduced productivity as a result of dealing with new customs procedures.

“Adjusting to the new trade barriers creates extra costs for businesses, which is likely to show up as lower productivity,” he added. “There is also a risk to future trade growth, because we know that tomorrow’s big exporters are today’s small exporters, and they have clearly suffered.”

The Cabinet Office said the government had taken many steps to help smaller businesses, including the Export Support Service which was launched in 2021. “We want to reset the relationship with our European friends, to tackle barriers to trade and make Brexit work for the British people,” a spokesperson added.