Brexit caused a ‘major shock’ to U.K. trade patterns, study says

Brexit caused U.K. imports from the European Union to collapse and led many small British businesses to give up exporting to the EU altogether, according to an analysis of the first full year of the new trade deal.

Researchers from the London School of Economics’ Center for Economic Performance found that the value imports from the EU fell by 25% relative to what the U.K. bought from the rest of the world. The number of British export relationships with EU firms dropped by 30% after the U.K. left the single market and customs union in January 2021.

The comprehensive study also found that trade was largely unaffected in the 4½ years directly following the vote to leave the EU in 2016. That was despite uncertainty about the shape of the final Brexit deal. It was only after implementation of the new agreement that the consequences emerged.

“The U.K.’s departure from the EU’s single market and customs union at the start of 2021 caused a major shock to U.K.-EU trade,” the report’s authors wrote.

The researchers said the purpose of the work was “to document how disintegration affects trade flows.” They stressed that the results may “reflect temporary changes,” since the study captures only the first year of Brexit and didn’t asses trade in services. They controlled for biases by looking at about 1,200 products and stripped out distortions caused by COVID-19.

Britain’s new deal with the EU ensured trade remains tariff free but left companies facing higher administration costs stemming from tighter border controls. Those additional burdens have hurt smaller U.K. exporters.

The research found that the variety of different products exported from the U.K. to the EU fell by 30% due to “by the destruction of low-value trade relationships.”

The authors wrote, “We conjecture that the TCA has increased the fixed costs of exporting to the EU, causing small exporters to exit small EU markets.”

Larger U.K. businesses were able to absorb the costs. Since they accounted for the vast majority of trade by value — overall export values held steady. The authors said the sharp drop in imports from the EU was “surprising … since the U.K. delayed the introduction of many customs checks until 2022.”