New trade figures out today show another small increase in Britain’s trade with the EU in March after a big drop after the UK left the single market in January. But trade still remains well below pre-pandemic levels, even as trade with other nations has recovered much more strongly after the initial shock of the pandemic to be only 4% lower in March 2021 than two years previously.
Last month we published analysis comparing trends in trade with the EU-27 and the rest of the world since the start of the pandemic that showed that whereas trade with both sets of partners followed similar trends during 2020 – both were hit by the pandemic by roughly similar amounts – only EU trade fell dramatically in January. We argued that it was Brexit rather than the pandemic that has been the primary factor behind the 27% additional fall in EU trade in January and the 19% additional fall in February (both relative to their levels two years earlier).
Extending this analysis to include the latest month of data does not change this picture. In fact, the figure for March lies in the middle of these two – the fall in trade with the EU-27 relative to two years earlier was larger than the fall in trade with the rest of the world by 22 percentage points. This corresponds to a reduction in the UK’s total goods trade with the rest of the world of 12% in March, in line with other, more sophisticated estimates of the impact on trade of leaving the single market.
Drop in EU trade on two years previously remains much larger in March
Source: TBI analysis of ONS trade statistics.
How should we expect these estimates to develop going forward? The March figure for the impact of Brexit may be exaggerated as the March 2019 trade quantities were inflated by stockpiling of goods in advance of a possible no-deal Brexit at the end of that month. The reduction in trade with the EU-27 in March 2021 relative to two years previously thus appears particularly large. As there was then a 14% drop in trade in April 2019 as the stockpiling unwound, we should expect next month’s estimate to be correspondingly smaller. It is not until figures for May are released in July that we should expect a clearer picture of how the impact of leaving the single market on trade is developing.
What’s interesting though is that leaving the single market already seems to have reduced trade by as much as some of the long-run estimates produced during the 2016 referendum campaign suggested, even ignoring the reduction in trade that occurred between the referendum and leaving the single market in 2021. The OECD estimated that Brexit would reduce UK trade by between 10% and 20%, and the LSE 12.6% in the scenario of leaving the EU with a trade deal. Other estimates from NIESR and the Treasury estimates were larger, though much could still change as firms adjust to the new trading arrangements. This matters because lower trade was one of the main channels by which Brexit was forecast to reduce national income. It still seems then, as we said last month, that Project Fear is becoming Project Fact