Macro Focus: UK trade post-Brexit and consequences for the economy
On Christmas Eve, the EU and UK finally agreed on a free trade agreement, four and a half years after the referendum and with only a week left before the UK’s exit from the Single Market and Customs Union. As of January 1, the EU and UK have been trading under the terms of this agreement.
- Tariff-free trade with the EU, but non-tariff barriers will be significant.
- Limited short-run effects on EU-UK trade despite initial disruptions.
- Third-country deals may partially offset reduced trade, but resumed EU talks will be key.
Importantly, the agreement provides for no tariffs or quotas on goods that fulfil all rules of origin requirements, and the agreement also contains some additional facilitations. Extensive non-tariff barriers to trade will still come into effect and reduce trade between the EU and UK. The costs incurred by British traders will differ between sectors and will likely be the largest for agricultural and food products, but that constitutes a small share of overall trade. The agreement is thin with respect to services - additional blow to British trade.
In the short run, we expect the negative effect on British trade and the economy to mainly follow from disruptions and frictions introduced by the non-tariff barriers. The UK’s decision to phase in customs checks during the first six months will ease import disruptions relative to those to exports, however, and trade facilitating measures are also expected to limit the damage somewhat. The removal of some uncertainty could furthermore help to alleviate the negative short-run impact of the exit.
In the longer run, trade effects will follow more from the reallocation of investments and production, and we expect EU-UK trade frictions to reduce British involvement in cross-European supply chains. Some loss of productivity will ensue, and also from reduced EU labour supply, while deregulation and growth-stimulating policies will offset some of the negative effects. The UK will partially mitigate the trade contraction by entering into new free trade agreements with third countries, but in due course we expect the EU and UK to resume negotiations to further enhance economic integration.
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