Brexit damages UK-EU trade

The Good Friday Agreement, which helped to bring an end to 30 years of conflict in Northern Ireland, marked its 25th anniversary on April 10th. With the signing of the Windsor Framework in March, the UK and the EU have ensured that a customs border will not be erected on the island of Ireland, sharply reducing the risk of a return to violence—a main concern in the wake of the Brexit vote.

However, while the tensions caused by the Northern Ireland protocol have now been smoothed over, the impact of Brexit on the UK’s trade with the EU has not. The UK’s exit from the single market has harmed key British sectors such as automotive, financial, legal and cultural activities. Goods import volumes have held up reasonably well, owing to the UK limiting the checks required for EU goods entering the UK, but goods export volumes have rebounded slowly as exporters struggle to adjust to EU tariffs and non-tariff barriers (such as customs checks, extra paperwork and health inspections). Exports to non-EU markets have recovered slightly faster, but overall exports remain sluggish compared to many other countries in the region. British services exports globally have, in contrast, grown strongly, returning to their pre-pandemic trend line.

Net foreign direct investment (FDI) to the UK has fallen since 2016, from both EU and non-EU countries. This, in large part, reflects uncertainty about the UK’s future relationship with the EU—an issue that will continue to deter EU investors. Many global firms previously used the UK as an entry point to the EU single market, but this prospect is now less attractive.

Brexit has worsened the UK’s terms of trade with the country’s largest trading partner, widening the UK’s current-account deficit—although the commodity price spike caused by Russia’s invasion of Ukraine is currently having a greater impact. Regulatory and logistical constraints on doing trade with the EU (which remains by far the UK’s largest trading partner) are adding to already elevated import costs and damaging British exporters’ competitive advantage in the EU.

The Windsor Framework may open the door for the UK government to pursue a streamlining of some of these restrictions, improving the outlook for UK-EU trade. However, given the antipathy to this from within a large part of the Conservative Party base, this may have to wait until a government under the opposition Labour Party is in place. We forecast that this will happen after the next election, in 2024.