Post-Brexit, the best job in the UK government was that of trade secretary. While other ministers dealt with the Brexit fallout, or were tasked with tackling Covid-19, then trade chief, Liz Truss, was filling up her trophy cabinet.
EU trade deals were rolled over, repackaged, and celebrated by the domestic press. New free trade agreements with Australia and New Zealand, and a digital agreement with Singapore, were tangible examples of the UK’s ability to move quicker than the EU.
Applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP; a trade agreement with 11 current members including Australia, New Zealand, Canada, Japan, and Singapore) provided a platform for the UK to signal its non-European trade ambition and demonstrate continued commitment to rules-based trade, something that had been called into question following its exit from the EU.
The overall UK trade story for this period is not positive, although numbers have been distorted by Covid-19 supply chain disruption and now the war in Ukraine. The most recent ONS data show that the total Q1 trade in goods and services deficit, (excluding precious metals) is the largest since records began in 1997.
Immediately after the transition period ended, UK exports to the EU collapsed, but soon bounced back. However, the composition has changed. New research by economists at the LSE’s Centre for Economic Performance finds there has been a large drop off (around 30%) in the number of firms exporting goods from the UK to the EU, as small-and medium-sized British businesses are put off by the high fixed costs of exporting to the EU.
Both the OBR and the LSE paper found a lasting drop in UK imports from the EU (18% and 25% respectively). That imports from the EU suffered more than exports to the EU poses a conundrum, given that UK border controls are still significantly lighter touch than the EU’s. One reason for this could be that it is easier for EU exporters to replace UK buyers with alternatives within the single market than it is for (large) UK exporters to find local replacements. It may be a temporary phenomenon – the latest ONS data show EU imports rising rapidly and roughly back to 2019 levels in March.
The UK’s total trade position – its exports and imports with the whole world – has faltered compared to similar countries, though imports are now rising. Non-EU exports have performed particularly badly. This poses another conundrum – there is no obvious reason why UK rest-of-world exports should have underperformed countries such as Japan, Germany, France and Canada during this period. This could be explained by the UK not being a significant exporter of goods such as electronics that saw booming demand during the pandemic, or the result of Brexit preparation and response leading to UK firms having reduced capacity to capture new opportunities.
With the Australia and New Zealand trade deals (close to being) done, the UK has exhausted its supply of low hanging fruit.
Internal UK government dynamics have also changed. The departure of Lord Frost means there is no longer a political figure at the centre powerful enough to force through a pro-liberalisation trade agenda. The views of DEFRA, and more protectionist Tory MPs, who do not want to replicate the food tariff liberalisation agreed with Australia and New Zealand in deals with larger economies, will hold more sway.
The chart below provides insight into the intensity of the UK’s trading relationships with other countries, in descending order. Of the top ten relationships, the UK already has free trade agreements (pink) with six.
Chart: Total UK trade (exports and imports) with partner countries as a percentage of UK GDP, 2020
Source: Author’s calculations (ONS Pink Book, 2021)
Of the four remaining (blue), only India is currently in play, with the overall economic benefits contingent on the content of the eventual deal, and the extent to which UK traders can take advantage of any first-mover advantage.
A full free trade agreement with the US remains a long-term objective and a deal with China/Hong Kong is politically unfeasible (although China could re-enter the discussion in the context of CPTPP). Looking further along the x axis, deals with Saudi Arabia, Taiwan, Brazil, Thailand, Malaysia, Indonesia, and Pakistan are varying degrees of possible in the medium-term.
Existing trade agreements can be improved – for example with the addition of modern digital trade provisions – and will evolve over time. In the absence of deep economic and regulatory integration, additional economic gains will be marginal.
There is also a non-insignificant risk that the trade deal with the EU falls away.
Improving the UK’s trading position requires more than just new trade deals. Here are five areas the UK should prioritise:
Border modernisation. The government wants to have the most effective border in the world by 2025. This will require the UK to work closely with industry to ensure that border processes are not only efficient, but also adeptly manage fiscal, security and regulatory risk. Success will require an all-of-government approach, and increased investment and focus, particularly if the UK is to, for example, achieve its new objective of implementing a modern food safety regime that applies equally to imports from the EU and rest of world by the end of 2023.
Stabilise the UK regulatory regime. UK regulation remains in flux. Businesses operating in, or selling to, the UK market face considerable uncertainty. Much is temporarily outsourced to the EU, with CE product markings being accepted until 1 January 2023, the deadline for companies transitioning their EU chemical authorisations being extended until October 2025, and EU medicine batch testing and release procedures being accepted in the UK indefinitely, with a two-year notice period. The Brexit Freedoms Bill, introduced in the May 2022 Queen’s Speech, creates additional uncertainty, given its objective of empowering government to repeal inherited EU rules with minimal parliamentary involvement.
An ever-changing and ambiguous regulatory regime has a negative impact on the UK business and trading environment. To address this the government should be clearer about its regulatory intentions, stick to self-imposed deadlines rather than continually pushing them back at the last moment, and only make changes when there is a clear economic rationale to do so. Opportunities to do differently from the EU do exist – for example, the UK could fast track the authorisation of medical devices already approved in the US or elsewhere – but divergence should not be pursued for the sake of it.
Continuity and improvement. Some the UK’s existing trade agreements require renegotiation. A failure to renegotiate, for example, the rolled over agreements with Canada, Mexico and South Korea could see temporary rules of origin facilitations – which make it easier for UK exports to qualify for tariff-free trade – fall away. Locking in these temporary arrangements would increase the confidence of businesses using the agreements and improve utilisation.
There is also scope for the UK’s relationship with the EU to deepen, with improved labour mobility provisions, for example, possible, if the wider political relationship improves. Temporary rules of origin accommodations for electric vehicles and batteries will also need to be extended if the products are to continue trading tariff-free.
Data transfers. Services firms are more likely to invest in, and operate out of, the UK if they are easily able to use it as a location to access, store and process data sourced from multiple regulatory jurisdictions. One thing the UK could do to cement its status as a global hub for internationally traded services is further develop its regime for international data transfers, and position itself as a trusted partner to as many like-minded countries as possible.
The UK government has already identified a number of priority destinations for future adequacy arrangements, including Australia, South Korea, Brazil, Singapore and the US The government should fast track this process. While there is a need to tread carefully to ensure the UK’s adequacy decision with the EU is not threatened, the recent EU-US decision to create a new Trans-Atlantic data privacy framework reduces this risk for the UK.
Improving trade policy engagement and education. HMG’s engagement with business on trade policy has improved significantly since Brexit, with greater structure and openness. But government’s default setting is still broadcast. Greater government-business collaboration is needed to ensure trade opportunities are not missed. HMG should also act to support those SMEs who have lost their EU trading relationships because of new post-Brexit trade barriers.
Sam Lowe heads Flint’s Trade and Market Access Practice. Prior to joining Flint, Sam was a senior research fellow at the Centre for European Reform, a leading European think tank. He has also held positions as a member of the UK government’s Strategic Trade Advisory Group (2019-2020), a senior advisor to the Blakeney Group, and the Brexit and trade lead for a prominent environmental charity.
Sam is also a visiting senior research fellow at The Policy Institute, King’s College London and an influential commentator on trade and Brexit matters.
To find out more about how Flint can help with these matters, or any other trade and market access issues, please get in touch.
