UK and EU trade relationships decline as small firms struggle with Brexit rules

The Brexit trade agreement led to a "steep decline" in the number of trading relationships between sellers in the UK and buyers in the EU, a new report reveals.

Researchers from the Centre for Economic Performance at the London School of Economics and Science (LSE) analysed 1,200 different product types and found trading relationships between UK exporters and EU importers reduced by a third after the introduction of the Trade and Cooperation Agreement (TCA) on 1 January 2021.

Overall EU exports from the UK to the EU have returned to pre-pandemic levels, but the report said it "masks a steep decline in the number of varieties [of goods] exported, driven by the exit of 'small' varieties that account for a low share of total exports".

The impact of Brexit on small businesses

Since Brexit, new customs controls and other changes for importers and exporters have been introduced. The study said small businesses in particular are struggling to deal with the new processes and some have quit exporting to the EU completely.

The report added: "We conjecture that the TCA has increased the fixed costs of exporting to the EU, causing small exporters to exit small EU markets, but not (or at least not yet) severely hampering exports by large firms that drive aggregate export dynamics."

It used rules of origin as an example of a regulation change that is impacting on small businesses:

"To obtain tariff-free, quota-free access under the TCA, products must meet rules of origin requirements. These requirements usually specify the share of a product’s value that must originate in the UK or the EU to qualify to utilise the TCA.

"Not all goods meet these requirements, and, in some cases, the potential tariff savings from satisfying rules of origin are smaller than the costs of proving compliance. Consequently, trade under the TCA is not always completely tariff free. In the first seven months of 2021, tariffs were paid on around 30% of UK exports to the EU that could have benefitted from preferential zero tariff entry under the TCA."

Further changes to UK/EU trading processes, including full border checks on meat entering the UK from the EU, are due to be introduced in July, September and November but according to press reports, prime minister Boris Johnson has hinted that they might be delayed for a fourth time.

UPDATE 29/04/22: Brexit opportunities minister Jacob Rees-Mogg has announced that the changes due to be introduced in July will no longer be introduced this year. He said the government now aims to introduce them at the end of 2023. He claimed the decision to delay the rules will save British businesses an annual £1bn.

Enterprise Nation has regularly called for more support to encourage small businesses to trade internationally.

The government launched the SME Brexit Fund last year to help SMEs tackle Brexit but only £6.8m of the available £20m was claimed amid complaints that the application process was too complex.

A 2021 report by Enterprise Nation and GS1 recommended an improved version of the fund with a less cumbersome application process that could be used to encourage worldwide exports.

Responding to the LSE report, a government spokesperson said:

"Through our Export Support Service, expanded export academies and a landmark export strategy, we are ensuring that businesses of all sizes have the support they need to trade effectively with Europe and seize new opportunities as we strike trade deals around the world."

Although the study said the overall decline in exports was temporary, it also found "that the implementation of the new trade relationship led to a sudden and persistent 25% fall in UK imports from the EU, relative to the rest of the world".

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