Brexit or COVID-19? How the fall in British trade affects the United States

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

According to the UK Office for National Statistics, UK goods exports to the EU fell 42% in January 2021 compared to January 2020. This was the first month following a Trade and Cooperation Agreement (TCA) with the EU, and this only offers a glimpse of future business relationships. February figures showed a 46.6% jump in exports to the EU, but overall exports were still below last year’s levels. Of greater concern was the UK’s economic growth of just 0.4%. It remains 7.8% lower than the same period in 2020. Prime Minister Johnson assures us that growth will rebound better, but will it?

In the same month, UK imports from the EU fell 16% from January 2020 before recovering slightly in February. The declines in exports and imports are significant and require action by the UK government not only to explain them, but also to address them in the months ahead. The remedy depends on the cause and we wonder if the two decreases are due to TCA or to COVID19 and its variants? The administration of Prime Minister Boris Johnson explained the fall referring to both virus and storage in December 2020 to get ahead of the new TCA rules, but analysis of data from January and February suggests that Brexit may explain the new trade position more accurately.

First, there is a major divergence in trade in goods between the EU and non-EU countries, including the United States. While UK goods exports to the EU fell by 38%, goods to non-EU countries were down just 8% on the previous year. Similarly, imports, which fell by 16% with the EU, contrast with a drop of only 9% with non-EU countries. If COVID-19 explained the fall in merchandise trade, we would expect to see a similar drop in EU and non-EU exports and imports.

How easy is it to decouple Brexit from COVID-19 and its variants? In the first 5 months of 2020 UK citizens faced strict lockdowns with manufacturing shut down to stop the spread of the virus. At this time British trade in goods fell, but bounced back in the second half of the year. In addition, during these first months, the drop in exports and imports of goods affected both EU and non-EU countries. We can conclude that the COVID lockdown in early 2020 caused both the overall decline in the demand for goods and the export of goods worldwide. In contrast, the UK Christmas lockdown of December 2020 led to a much larger drop in trade with the EU than trade outside the EU. Perhaps it was due to the anticipation of a hard Brexit, or something close to it. Nevertheless, the two COVID lockdowns mainly affected non-market services such as hairdressers, restaurants, hotels and airlines. In contrast, Brexit had an impact tradable goods and financial services, with agriculture and fisheries being the hardest hit.

The fall in trade in goods this year has been much greater for goods traded with the EU, which raises 4 potential reasons:

  1. After the completion of the ATT, the European Commission imposed new bureaucratic barriers, other than tariffs and quotas which required London to impose customs controls on UK exports to the EU. (Controls of imports from the EU have been delayed until December 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 UK exporters had to complete the new customs checks using complicated and often difficult to follow electronic forms. We expect these issues to go away over time;
  3. In anticipation of a no-deal with Brussels or a hard Brexit, businesses stockpiled goods in the final months of 2020. They did the same in 2019 when they expected the Prime Minister Teresa May is leaving the EU without a satisfactory deal, if any. . But the drop in exports in 2019 was 10-15%, not the 38% drop in January 2021; and,
  4. Following Brexit, the UK government changed its data collection methods. The Office for 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 June 2021 data.

Another obstacle to trade in goods is the cost of new bureaucratic customs and sanitary controls. Individual UK businesses are currently assessing whether they can pass these additional costs on to customers, swallow them or end their current business model. The Federation of Small Businesses, representing 5.9 million small businesses (employing less than 50 employees) and 4.5 million businesses employing one person reports that one in four UK exporters have ceased trade with the EU, of which 4% have ceased permanently. The majority of companies surveyed preferred to wait and see. The reasons given are the long and complex documents needed to assure the EU that the ATT rules of origin and health certificates have been respected. Completing these forms takes time and hiring consultants to do this work adds approximately $49 to each shipment of exported goods. It is to be expected that the number of shipments and the costs will increase when customs import controls come into force at the end of 2021. In addition, the French are determined to demonstrate that leaving the EU is both painful and costly.

From the good side, from May 5, 66.1% of the UK population received their first COVID19 vaccine and 30.2% received their second injection. The protection should result in a strong rebound in economic activity and a strengthening of the pound sterling, although the market appears to be waiting for a new, bigger driver to rekindle investor interest and generate real gains. This engine is future trade with the EU and should be seen 12 to 18 months after the signing of the ACT. Will the COVID-19 rebound be strong enough to offset the drop in goods exports to the EU? We may have to wait until the spring of 2022 to give us a reliable answer on the main cause of the decline in trade in goods.

In the minds of U.S. investors, COVID-19 remains front and center. Their hopes for a strong British economic recovery in the first quarter were muted by the 3.5% drop in industrial production and 4.2% in the manufacturing sector. But we note that these numbers were better than feared. More concerning is the lagging performance of multinational banks with strong UK portfolios. Investors could change their minds as PM’s second-in-command roadmap for reopening the economy allows non-essential retail stores, restaurants and pubs to open on May 17. Meanwhile, the Financial Times Stock Exchange 100 extended his earnings and trading on May 5 closed 1.7% higher, its highest level since February 2020.

In the short term, investors in the US and UK appear to be more focused on COVID-19 vaccination rates and the opening up of the UK economy than the long-term impact of Brexit.

Diana Villiers Negroponte is a global member of the Global Europe program of the Woodrow Wilson International Center for Scholars.

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