The UK-EU trade deal has now been operating for a month, and the lengthy queues at ports and empty supermarket shelves predicted by some (the ‘cliff edge’ we heard so much of) have failed to materialise. But equally, it is clear that businesses were not fully prepared for new trade arrangements and that EU trade rules on agri-food products are extremely restrictive.
The last month has also confirmed that the Northern Ireland Protocol is unworkable. If unchecked, it will seriously harm the province’s economy. The UK government needs to be ready to take radical unilateral action, if necessary, to alter it.
But what else have we learnt about the deal? Here are ten quick lessons from the last month:
Fears of long queues at ports have proved groundless:
For several years we have been assailed with claims that the UK leaving the EU customs union and single market would lead to massive queues at UK ports, snaking back for many miles. This has not happened. Systems requiring trucks to get pre-clearance before embarking for the EU have avoided this problem and a relatively small number of trucks has been turned back for not having proper documentation.
Shortages of goods have failed to materialise:
Another common prediction was that exiting the EU customs union and single market would cause widespread shortages of food and other goods. Again, this has not happened. This may partly reflect massive stock-building by UK firms at the end of 2020, but in addition most goods seem to be moving better than many people expected: Unilever has described the additional border paperwork as ‘trivial’ and ‘not…a big impediment’.
Trade flows were depressed in January:
Cross-channel trade flows appear to have been depressed in January, with some estimates suggesting flows might be down around 25 per cent on a year ago. But trade flow seems to have picked up during the month, with the UK Transport Minister saying the number of trucks leaving Dover for France reached around 6,000 per day by the end of the month (about 15 per cent lower than a year before).
Large-scale stockpiling and front-loading of deliveries by UK exporters last November and December are bound to have led to January trade being weak. We saw a similar pattern ahead of the abortive deadline for UK-EU exit in the spring of 2019: in March that year, UK exports to the EU rose six per cent and imports from the EU by ten per cent, but in April, exports crashed by 20 per cent and imports by 16 per cent. On top of this, of course, the UK entered a new coronavirus-related lockdown in January.
Exclusion of financial services isn’t a big deal:
Prior to, and just after the Brexit vote, it was widely suggested that the UK would haemorrhage tens or even hundreds of thousands of financial services jobs. This didn’t happen, with at most a few thousand posts being created in the EU by UK firms. UK financial services firms have continued to prosper. This explains why the UK government was prepared to exclude financial services trade from the EU-UK deal – especially as the EU’s price for inclusion would have been regulatory alignment. Since January, financial services trade has continued with no obvious difficulties; UK firms made the necessary adjustments long ago.
Many firms were not prepared for new trade arrangements:
Despite pre-deal surveys showing large shares of UK firms saying they were ready for the UK’s exit from the EU single market and customs union, it is now clear many were not. In particular, it seems that a significant minority of firms (especially in the agri-food sector) had not properly researched the necessary documentation for exporting to the EU or realised how rules of origin requirements would restrict certain kinds of trade. This probably reflects a mixture of the last-minute nature of the deal, inadequate UK government preparation and inertia among firms. Some of these problems will go away over time, but not all: some business models from the time of EU membership won’t work now or will need changing.
Small firms have the biggest problems:
Many new trade costs are of a fixed nature, such as flat rate costs for obtaining certain certificates. These costs are quite easily absorbed by large-scale traders who are moving consignments of identical or similar goods. For example, for a container worth £10,000, additional paperwork of say £75-125 is a small fraction of the value. Some costs will also decline over time. Reproducing identical customs declarations once the original has been correctly created, for instance, is quick and won't cost much.
However, fixed costs of this scale are a deal-breaker for smaller firms dealing in low value consignments with EU partners. This kind of fragmented ‘B2C’ trade is likely to largely disappear, although it must be stressed that it represents a very small share of overall UK trade with the EU.
EU agri-food trade barriers are extremely high:
‘Mainstream’ estimates of the extent of EU non-tariff barriers to trade are often exaggerated. However, one area where such barriers are undoubtedly high is agri-food. The experience of the last month has confirmed this. Exporting agri-food produce to the EU requires a significant amount of documentation and is subject to potential inspection delays that can damage the value of fresh produce. Many UK agri-food exporters appear to have been unprepared for the scale of these non-tariff barriers (perhaps not understanding that high EU tariffs on foodstuffs are often not the main impediment to trade) and serious problems have ensued as a result.
The EU’s SPS (sanitary and phytosanitary) regulations are not designed for the large-scale movement of fresh produce; they are, in fact, a major hindrance to it. In particular, attempting to move mixed loads of various goods including agri-food products is a major headache with a multiplicity of paperwork. This mode of transporting such goods will probably need to end.
The fishing industry has (again) got a raw deal:
As with other agri-food producers, UK fishermen appear to have been unprepared for the extent of barriers to trade with the EU. Some have instead sailed to Denmark to land catch, this being the better option than sending goods by land down to the channel ports. This situation has exposed how bad the UK-EU trade deal is for UK fishermen.
While it seemed likely that UK exports of fish to the EU would decline due to Brexit, we thought the expected large-scale transfer of quota to UK boats from EU boats would more than make up for this. But the actual transfer, totalling just 25 per cent of the EU’s catches in UK waters by 2026, is not nearly big enough to allow this – a transfer of 60-80 per cent was expected. What's more, UK fishermen now face the ridiculous situation that EU boats have a big competitive advantage against UK boats in terms of landing fish caught not just in EU waters but in UK waters too.
The Northern Ireland Protocol is totally unworkable:
Overall, we would say that the first month of the UK-EU trade deal has worked out better than many predicted albeit with notable exceptions. But for one part of the UK – Northern Ireland (NI) – this is not the case. There, new rules (especially SPS rules) have clearly disrupted trade. Some GB-based firms have stopped selling to the province and the range of goods available in supermarkets has narrowed. This problem will get much worse once ‘grace periods’ covering checks on supermarket produce expire later this year, as major UK retailers have already warned.
Concerns have also surfaced over a variety of detailed issues, including the import of seed potatoes and pet movements between GB and NI. Michael Gove’s recent letter to the EU’s Maroš Šefčovič outlines the UK’s worries on all these issues – issues which tend to undermine of the integrity of the UK internal market.
Regulatory barriers to trade between GB and NI are a much bigger problem than those that now exist between GB and the EU. NI is heavily reliant on GB for supplies of goods of all types. What's more, for many key goods it is estimated that, in some cases, supplies from GB account for 70-90 per cent of NI imports. So, NI faces a much bigger economic shock from trade frictions created by the NI protocol than the UK as a whole does from leaving the EU customs union and single market.
If unchecked, the protocol will, over time, cause a significant rise in prices for NI consumers and cause massive inefficient trade diversion towards the EU. Some NI exporters (especially, but not exclusively in agri-food) also face issues given the crucial importance of GB-sourced inputs in making their goods (typically around 30 per cent of inputs are from GB). The province’s more agricultural trade pattern and smaller average size of firms worsen all these effects.
On top of all this,
with NI left behind in the EU single market for goods, it stands to benefit less from smarter regulation and new trade deals than the rest of the UK. It's clear that Northern Ireland faces serious economic harm if the Protocol is not radically changed.
The obvious solution to the problem is to exempt the bulk of GB to NI trade, which goes to identifiable end-customers, from both customs and regulatory checks. We doubt the EU will agree to this or anything like it. But given the scale of economic damage and trade diversion the Protocol could cause, the UK government would have a strong case for doing so unilaterally under the aegis of Article 16 of the Protocol.
The EU’s own abortive and misguided use of Article 16, to try to prevent Covid-19 vaccines from moving into NI and then on into GB, makes this politically easier. Such a move would endanger the broader UK-EU trade agreement. But with the EU having shown in the vaccine debacle that is willing to simply disregard its agreements with the UK if it sees fit, it is open to question whether the agreement can be stable in the long term in any case.