Figures from the ONS today tell us what happened to trade in July. It’s been a few months since we checked on what’s been happening to trade with the EU and other nations since the UK left the Single Market in January, so let’s see what we’ve learned over the summer.
In May, we saw that trade with the EU had fallen by 22% relative to non-EU trade (revised to 21% in the latest data). But EU trade has recovered in subsequent months. In July, trade with the EU was down 12% on the same month two years previously, but non-EU trade was down only 6%. This would suggest that the impact of Brexit on EU trade had declined to just 6% little over six months after the UK left the Single Market.
However, we should be cautious about concluding that the impact has declined so rapidly. Since we are comparing July 2021 to July 2019, we need to be sure that Brexit hadn’t already begun to affect the UK’s trade with the EU by that point. Remember, this was the month that Boris Johnson entered Downing Street with a clear hard Brexit agenda. It wouldn’t be surprising if firms had already seen what was on the cards and started to change their supply chains accordingly. And indeed, this is what we see in the data. In July 2019, trade with the EU was up only 1.4% on two years previously, whereas trade with the rest of the world was up 7.2%.
If instead we compare trade in July 2021 with three years previously (i.e. July 2018), we see that trade with the EU was 12.5% lower but trade with other nations was just under 1% higher. The impact of Brexit on trade with the EU using this methodology would therefore be around 13%. Comparing changes in EU and non-EU trade from a fixed point in time gives similar results. Trade with the EU in July was 13.5% lower than in January 2019, whereas trade with the rest of the world was less than 1% lower; again, if the difference was solely due to Brexit, this implies that leaving the Single Market reduced trade with the EU by 13%. And even if we go right the way back to before the referendum in June 2016, trade with the EU has increased by just 4% since then compared to 18% for non-EU trade, suggesting that leaving the Single Market has reduced trade with the EU by 12%.
Trade with the EU has fallen relative to trade with the rest of the world since the referendum
Note: Chart shows trade in goods excluding precious metals relative to their June 2016 value.
Source: TBI calculations using ONS trade data.
Nonetheless, the latest data does still give a lower impact of Brexit on the UK’s total trade than in our previous analysis at around 6-7%. This is below the pre-referendum estimates of the OECD, the LSE, NIESR and HM Treasury among others. However, any sense of relief that the impact may not be as bad as had been feared should be tempered:
Our estimates may be underestimating the impact of Brexit on trade if it also impacted non-EU trade. Given the complexity of supply chains involving the UK, the EU and third countries, it would not be surprising if increased trade barriers with the EU also reduced trade with the rest of the world.
Other factors have affected EU and non-EU trade in different ways since January. For example, there appears to have been a big increase in UK exports to Belgium and Ireland to provide ingredients for Covid vaccines. As this increase in trade would still have happened if the UK had remained in the Single Market, the observed trends in trade with the EU might have been the result of a larger negative impact of Brexit combined with a small positive effect from vaccines. Therefore, attributing all differences between the trends in trade with the EU and the rest of the world to Brexit may be incorrect.
Other, more sophisticated estimates do not show this decline in the impact of Single Market exit over time, having previously shown impacts of a similar magnitude. It is difficult to draw definitive conclusions when different methodologies show different results.
The pre-referendum studies sought to estimate the long-run impact of leaving the Single Market on trade. As the latest data extends scarcely six months after the end of Brexit, it is too early to make a final assessment of their accuracy.
It remains clear that leaving the Single Market has reduced the UK’s trade. This matters because this was one of the key mechanisms by which Brexit was expected to reduce national income. Although the scale of the impact is still unclear, today’s data demonstrates once again that the idea that it is possible to leave the world’s most integrated trading bloc without reducing trade is implausible.