Looking for Love ❤️ Outside the EU

The trade consequences of Brexit already include a dramatic shrinking of commerce with the European Union, an expansion of trade with other allies, redrawing of supply chains for companies, and the separate counting of foreign trade with Northern Ireland, according to an analysis of import and export statistics from Trade Data Monitor, the world’s top source of trade data.

Now that the UK is completely independent and outside the EU, it’s Brussels’ third-largest trading partner, after only China and the U.S. But already that status is shrinking. In January, UK exports to the EU dropped 41% from the previous month to $11.3 billion. To be sure, the Covid-19 pandemic has thrown global trade out of whack, but still, Brexit is a huge challenge for trade: In 2020, seven of the UK’s top 10 trading partners were in the EU. 

There are signs UK companies are seeking out buyers in other countries, but those markets pale in comparison to the EU, a bloc of around 450 million people. Exports to Australia increased 25% in January to $458.3 million. Exports to India rose 13% to $431.8 billion. And shipments to South Korea went up 15% to $352.6 million. The challenge for UK officials and businesses will be to grow those markets. 

Brexit is a Historic Turning Point in Global Trade

The dismantling of the UK’s free trade zone with the European Union is a unique experiment in global economic history. Brexit is another sign of the end of the free-trade consensus that has governed international relations since World War Two. When Britain joined the European Union in 1973, freer trade was the union’s primary purpose. EU nations badly needed liberalized economies to rebuild and prosper. Now, a new global trade system is emerging that must take into account protectionist politics driven by regions and constituents that have suffered from free trade.

The New Deal With the EU: Non-Tariff Barriers

What’s replacing the UK’s customs union with 27 other EU countries isn’t nothing. The EU-UK Trade and Cooperation Agreement (TCA), a 1,246-page treaty, signed in December 2020 includes deals on a range of topics like fisheries, law enforcement, and rules of origin. Overall, tariffs will remain nonexistent or very low. Instead, the challenge for companies and the banks and institutions that finance their trade, are non-tariff barriers and the risk of emergency tariffs in the future. Over time, it’s possible that political conflict will trigger tariffs as retaliatory moves, forcing companies to adjust their supply chains. UK negotiators had a tough task. EU negotiators clearly had the upper hand in making the deal. The UK has accounted for only 15% of total EU exports outside the bloc, while over 40% of UK exports go to the EU. 

The non-tariff barriers imposed by the EU include the high cost of registering chemicals, strict health and safety standards, and rules of origin which mean that the UK can’t just assemble parts made in China and count them as a UK export. The net effect will be to prompt companies to set up supply chains to avoid routing goods through the UK to avoid extra costs.

Free-Trade Deals, Anyone?

With Brexit, the UK isn’t just losing easy market access to the EU. It’s also dropping out of over 50 trade deals the EU has signed with third countries. 

The UK has been actively pursuing markets for its companies outside the EU, pursuing trade deals with the U.S., Australia, and New Zealand. In October 2020, it signed a free trade deal with Japan. In January 2021, the government said it would apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, which includes Australia, Canada, Japan, and New Zealand. 

The biggest market, of course, is the U.S., which is still the world’s biggest overall importer. In 2020, UK exports to the U.S. increased 13.4% to $6.2 billion. The biggest exports to the U.S. in 2020 were gas turbines and other industrial machinery ($992.1 million), organic chemicals ($960.4 million), and autos and auto parts ($838 million). 

Although the UK’s trade deal with the US didn’t expire until Jan. 1, 2021, companies have been rearranging their supply chains to avoid risk and prepare for new arrangements. Total trade with Russia increased 56% to $27.2 billion; with Hong Kong up 63% to $25.3 billion; and with Canada, up 0.4% to $22.5 billion. And total trade with China shrank a mere 2.4% to $82.3 billion. 

Top UK exports to the U.S.

Source: Trade Data Monitor

Getting High on Your Own Supply

One sector that expects to suffer from Brexit is large industrial enterprises with complex supply chains, such as automotive, petrochemicals, industrial alcohols, and plastics. For example, Germany’s imports of cars and car parts from the UK fell 16% to $4.2 billion in 2020. Shipments of organic chemicals declined 29% to $1.3 billion. 

The issue is especially acute for companies whose supply chains span a tight network of North Sea ports and industrial hubs that include the ports of Antwerp and Rotterdam, and the Rhine/Ruhr area in Germany. The establishment of a globally powerful petrochemical hub harnessing North Sea oil, starring companies like BASF, Ineos, and Solvay, is one of the great industrial victories of European integration in the past decades. And it’s what’s now been put at risk by Brexit. 

Registering a chemical typically costs over 50,000 euros a year. If sales are below that, it might not be worth making or selling in the UK, forcing costs up for British buyers.

The issue for companies reconsidering their supply chains is the cost of registering chemical products with European authorities. Under so-called REACH regulations, companies must register any chemical sold into the EU. Once Britain leaves, companies will have to establish production in the EU or have their importer register the chemical. At the same time, anything made in the UK for shipment to Europe would have to be registered with British authorities. Registering a chemical typically costs over 50,000 euros a year. If sales are below that, it might not be worth making or selling in the UK, forcing costs up for British buyers.

Northern Ireland’s Trade Surplus with the EU

Finally, the UK government decided to leave Northern Ireland in the customs union in order to avoid a hard border in Ireland that might resurrect tension on the island. In the first months of 2021, Northern Ireland exported $606.6 million of goods to the EU, including autos and auto parts ($73.2 million), electronics ($41.1 million), and beverages and spirits ($34.6 million). 

In return, Northern Ireland purchased $507.2 million of goods from the EU, giving this odd duck of a territory a nifty, and surprising, $99.4 million trade surplus with Brussels.