Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

What do new UK trade data reveal about the impact of lockdown and Brexit?

Lockdown probably contributed to the fall in UK exports and imports reported in the January 2021 trade data. But the bigger declines in trade with the European Union than with other countries are likely to reflect the impact of higher trade barriers due to Brexit.

The January 2021 trade data offer a first glimpse of how the Trade and Cooperation Agreement (TCA) governing economic relations between the UK and the European Union (EU) will affect UK trade.

The headline numbers are startling. Compared with the previous January, UK goods exports to the EU in January 2021 fell by 38% from £13 billion to £8 billion. As Figure 1 illustrates, the decline meant that exports to the EU were lower in January than during the short-lived trade collapse following the start of the Covid-19 pandemic in early 2020.

By comparison, goods exports to non-EU countries were only 8% lower in January 2021 than the previous year and were higher than in December 2020.

Figure 1: UK goods exports (£ million)

Source: Office for National Statistics (ONS); data exclude trade in precious metals

Goods imports from the EU also fell, as Figure 2 shows. EU imports were 16% lower in January 2021 than in January 2020, while non-EU imports were down 9%. Data on the geographical breakdown of services trade for January are not yet available.

Figure 2: UK goods imports (£ million)

Source: ONS; data exclude trade in precious metals

What lies behind the dramatic changes in UK trade in January?

Brexit is the most obvious suspect, but are other factors also responsible?

One possibility is that the post-Christmas lockdown in the UK had an effect. As Figures 1 and 2 show, UK goods trade fell by more than a quarter during the first lockdown in early 2020 before quickly rebounding in the second half of the year. But the charts also show that lockdown led to similar declines for both EU and non-EU trade, and for both exports and imports.

By contrast, the declines in January were much bigger for exports than imports and for EU than non-EU trade. It is not obvious why lockdown would lead to this pattern of changes. But for Brexit, there is a natural explanation.

The TCA has led to the introduction of new barriers to UK-EU trade, but not to trade with non-EU countries. Consequently, one would expect EU trade to fall by more than non-EU trade.

In addition, customs checks on UK exports to the EU were imposed at the start of January 2021. But the UK has delayed introducing checks on imports from the EU until 2022. Therefore, it is not surprising that exports to the EU fell by more than imports from the EU.

In summary, lockdown probably contributed to the fall in trade in January, but the difference between the declines in EU and non-EU trade are most likely to be due to Brexit and the impact of higher trade barriers with the EU.

Which export sectors have been most affected?

Looking across sectors, EU trade fell across the board, as Figure 3 shows. The biggest decline in exports to the EU was for ‘food and live animals’ where exports fell by 54%. Within this sector, fish and shellfish exports were particularly hard hit with a drop of 83%, while meat exports fell by 59% and dairy exports by 50%.

The big impact on agriculture, food and fishing exports is consistent with the fact that the EU imposes stringent health and safety restrictions on imports of animal and plant-based products.

Figure 3: Change in UK trade with the EU by commodity (January 2021 relative to January 2020)

Source: ONS

Is the impact of Brexit on trade likely to be temporary or permanent?

Probably a bit of both, although it’s too soon to say what proportion of the trade changes in January was caused by temporary effects. There are several special circumstances that reduced EU exports in January, but will have little or no effect on trade in future months.

  • Teething problems: January was the first month that UK exporters and EU importers had to deal with the new customs checks required because the UK chose to leave the EU’s customs union and single market. Over time, the impact of these checks will lessen as firms learn how to navigate the customs border.
  • Stockpiling: Some of the January decline was a side effect of firms involved in UK-EU trade stockpiling goods in late 2020. Figure 4 shows the percentage change in UK goods trade with the EU compared to the previous month from January 2019 onwards. The 33% decline in January 2021 is the biggest fall during this period. But note that trade also fell 10-15% in both April 2019 and November 2019. These are the months immediately following dates when the UK was scheduled to leave the EU (although in both cases, the departure date was eventually postponed). The trade declines in these months reflect the consequences of stockpiling in advance of the expected Brexit dates.
  • Data collection methods: An administrative consequence of Brexit is that the UK has changed how it collects data on exports to the EU starting from January 2021. For imports from the EU, the same change will be made in 2022. The Office for National Statistics (ONS) expects the change in methodology to reduce measured exports to the EU in January 2021 and possibly also to increase measured exports outside the EU. It is not yet certain how big these measurement issues will be.

Figure 4: UK goods trade with the EU (change relative to previous month)

Source: ONS; data exclude trade in precious metals

Taking these special circumstances into account suggests that trade with the EU will bounce back to higher levels in February than January. But some part of the fall in trade is expected to be permanent. Even once teething problems fade, doing business with the EU will be more costly from now on than it was before Brexit. For firms on both sides of the border, customs checks constitute red tape that creates additional costs and makes trade less profitable. Some firms will bear these costs and continue to trade, but others will choose not to.

Moreover, the increase in trade barriers that occurred in January marks the start, rather than the end, of trade cost increases due to Brexit. Customs checks on UK imports from the EU are not scheduled to begin until 2022. And over time, regulatory divergence is likely to reduce trade further, as firms face the challenge of satisfying different regulations in the UK and EU markets. It will be many years yet before the full effects of Brexit are known.

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Author: Thomas Sampson, LSE
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