It was always clear that the UK’s exit from the EU was going to be disruptive in the short term: increased regulatory burdens, health and agricultural control checks, all impose an additional cost on trade with the EU.
Research at Durham University Business School clearly predicted an ‘overshooting effect’ on the UK economy, as firms take time to make adjustments to the new trading arrangements, and so UK trade with the EU falls substantially initially, before rebounding to its new, lower, long run equilibrium. The last-minute nature of the deal only compounded these additional costs, meaning that firms did not have sufficient time to adjust to the new reality they faced with the EU. These effects have been clearly felt, particularly with agricultural and fisheries products, and have only been made worse by the Covid-19 pandemic, which has imposed additional testing on hauliers travelling to and from Europe and closed cross-channel ‘accompanied freight’ for several days in the run-up to Christmas.
A pandemic Brexit
This closure, in the immediate period before the new regulatory burdens were imposed, introduced further severe disruption into the Business situation. One ‘benefit’ of the pandemic has been to potentially dampen the immediate impact of the new restrictions, given the collapse in demand by the hospitality and non-essential retail sectors both in the UK and EU, which has lowered trade volumes between the UK and EU.
In the near future, things are likely to improve dramatically from this low point: firms will adjust to the new trading arrangements, becoming more skilled at navigating the new regulatory environment. The disruptive effects of the Covid-19 pandemic will diminish over time. Customs systems will become bedded in and more adept at swiftly processing the paperwork associated with UK-EU trade. New firms will enter the market to provide more specialised customs services. All of these factors are likely to lead to a reduction in the cost of UK-EU trade and therefore drive the expected rebound in trade volumes.
The long term, however, is a very different proposition. Currently, the UK’s regulatory system is identical to the EU, given the transition of all EU law into UK law. As UK law starts to diverge, the difficulty of complying with both UK law (for domestic sales) and EU law (for exports to the EU) increases steadily. In the longer term, this is likely to drive smaller, less productive exporters out of the market, concentrating market share down, and lowering total UK-EU trade. It is likely that a large portion of these ‘lost’ exports will be made up for by increased trade with non-EU countries, given the possibilities of new free trade agreements and the economic growth trajectories of the rest of the world compared to the EU. However, such gains are not guaranteed and it may take a significant period of time to make up for lost UK-EU trade.