Three Years On: How UK-EU Trade Has Changed Since Brexit

On this day, January 31, 2023, the UK marks the third anniversary of its departure from the European Union. While Brexit officially took effect on January 31, 2020, the economic reality began to shift on January 1, 2021, after the transition period ended and the EU-UK Trade and Cooperation Agreement (TCA) came into force.

Three years in, the impact on trade between the UK and the EU is clearer. For businesses, this period has been defined by adapting to new rules, navigating red tape, and recalibrating supply chains. While some industries have found opportunities in new markets, others have struggled under the weight of increased costs and complexity.

This blog explores how trade between the UK and the EU has evolved since Brexit, focusing on key trends, challenges, and opportunities.

The Big Picture: Trade in Numbers

Brexit has had a noticeable impact on the trade relationship between the UK and the EU. According to the latest trade statistics:

1. Decline in Trade Volumes

• UK exports to the EU fell sharply in early 2021 due to the sudden imposition of customs checks and paperwork. Although trade volumes have since recovered somewhat, they remain below pre-Brexit levels.

• EU imports to the UK have also declined, as businesses on both sides adjust to the added complexities of cross-border trade.

2. Shift in Trade Balance

• The UK’s trade deficit with the EU has widened. While imports from the EU have declined, they still outpace the decline in UK exports to the EU.

3. Sectoral Variations

• Some sectors, such as agriculture, fishing, and automotive, have been hit harder due to specific regulatory barriers.

• Other industries, like services, particularly financial services, have faced reduced access to EU markets due to the absence of comprehensive equivalence agreements.

Challenges for UK-EU Trade

1. Increased Red Tape

One of the most immediate and tangible effects of Brexit has been the introduction of customs declarations, rules of origin requirements, and regulatory checks. For UK exporters, these changes have meant:

• Delays and higher costs: Goods now take longer to reach EU customers due to customs inspections, and businesses face additional expenses for compliance.

• Loss of competitiveness: The added costs make UK goods less attractive compared to EU competitors.

For instance, small businesses that previously traded freely across borders have struggled to cope with the administrative burden, with many choosing to stop exporting to the EU altogether.

2. Non-Tariff Barriers

While the TCA ensured tariff-free trade for most goods, non-tariff barriers (NTBs) have risen significantly. These include:

• Divergent standards and regulations between the UK and the EU.

• Sanitary and phytosanitary (SPS) checks on agricultural and food products.

• Restrictions on the movement of goods within supply chains that cross the UK-EU border multiple times.

3. Rules of Origin Requirements

To qualify for tariff-free trade under the TCA, businesses must prove that their goods meet strict rules of origin requirements, demonstrating that a certain percentage of the product originates within the UK or EU. For complex supply chains, meeting these rules has proven difficult, adding further costs and uncertainty.

4. Loss of Services Market Access

The TCA provided limited provisions for services, which account for a significant portion of UK-EU trade. Key impacts include:

• Financial services firms losing passporting rights, limiting their ability to operate freely in EU markets.

• Professionals in fields such as law, architecture, and engineering facing restrictions on working in the EU without additional qualifications or permits.

5. Impact on SMEs

Small and medium-sized enterprises (SMEs) have borne the brunt of Brexit-related trade changes. Lacking the resources to navigate new regulatory landscapes, many SMEs have either scaled back their trade with the EU or ceased it altogether.

Sectoral Impacts

1. Agriculture and Food

Brexit has been particularly challenging for the agricultural and food sectors:

• The introduction of SPS checks has created delays and increased costs for perishable goods.

• Exports of UK meat and dairy products to the EU have faced significant hurdles due to stringent EU health standards.

• Some smaller food exporters have abandoned EU markets entirely, deeming them no longer viable.

2. Fishing Industry

The fishing industry, a prominent symbol of Brexit, has faced mixed outcomes:

• While the UK regained control over its waters, disputes with the EU over fishing rights have persisted.

• Exporters of fish and seafood have faced significant delays at the border, leading to financial losses for time-sensitive products.

3. Automotive Industry

The automotive sector, deeply integrated into EU supply chains, has struggled with:

• Rules of origin requirements for vehicles and components.

• Increased costs due to customs checks and delays.

• Uncertainty over future regulatory divergence, particularly in environmental and safety standards.

4. Financial Services

Brexit’s impact on financial services has been profound:

• UK firms lost automatic access to EU markets, requiring them to establish EU-based subsidiaries to continue operations.

• While London remains a global financial hub, some business has shifted to EU cities like Amsterdam and Paris.

Adaptations and Opportunities

Despite the challenges, some businesses and sectors have adapted to the post-Brexit landscape, uncovering new opportunities along the way.

1. Diversification of Markets

UK exporters have increasingly looked beyond the EU to tap into global markets, leveraging trade agreements with countries like Australia, Japan, and New Zealand. The UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) also holds promise for exporters.

2. Nearshoring and Reshoring

To mitigate supply chain disruptions, some businesses have adopted nearshoring (sourcing from closer markets) or reshoring (bringing production back to the UK). This shift has created opportunities for domestic suppliers and manufacturers.

3. Focus on Innovation

Industries such as pharmaceuticals, technology, and renewable energy have continued to thrive, driven by innovation and demand for high-value products. These sectors are less dependent on traditional trade routes and benefit from the UK’s strong research base.

4. Increased Trade Facilitation Support

The UK government has introduced measures to support exporters, such as:

• Simplified customs procedures for trusted traders.

• Grants and advisory services to help businesses navigate post-Brexit trade rules.

• Enhanced funding for UK Export Finance (UKEF) to de-risk international trade deals.

The Role of Trade Agreements

Since leaving the EU, the UK has sought to establish itself as a global trading nation. While the EU remains its largest trading partner, the UK has pursued bilateral trade agreements with countries worldwide.

Trade with the EU

• The TCA, while ensuring tariff-free trade, does not replicate the seamless access the UK enjoyed as an EU member.

• Negotiations are ongoing to address unresolved issues, such as the Northern Ireland Protocol and equivalence in financial services.

Trade with Non-EU Countries

• The UK has signed trade agreements with countries like Japan, Canada, and Australia, offering opportunities for exporters to diversify.

• However, these agreements have not yet compensated for the decline in EU trade, as the EU remains the UK’s largest and closest trading partner.

What Lies Ahead for UK-EU Trade?

As the UK marks three years outside the EU, the trade relationship remains a work in progress. Key questions for the future include:

1. Will Regulatory Divergence Continue?

The UK has expressed interest in diverging from EU regulations to establish a more flexible framework. However, this could create additional barriers to trade with the EU, particularly in highly regulated sectors like chemicals and pharmaceuticals.

2. Can SMEs Re-Enter EU Markets?

With targeted support, smaller businesses could regain access to EU markets, but this will require significant investment in training and resources.

3. Will the UK Improve Customs Efficiency?

Streamlining customs processes and investing in technology could reduce delays and costs for exporters.

4. How Will Trade Relations Evolve Politically?

Political developments, including ongoing negotiations over the Northern Ireland Protocol, will continue to shape UK-EU trade dynamics.

Conclusion

Three years after Brexit, UK-EU trade has undergone a significant transformation. While some sectors have adapted and found new opportunities, the overall picture is one of increased complexity and cost. The EU remains a vital trading partner, but the relationship is now defined by barriers that did not exist before.

For UK businesses, the road ahead requires resilience, innovation, and adaptability. Whether the UK can fully realize its vision as a global trading powerhouse will depend on its ability to address ongoing challenges and capitalize on new opportunities in a rapidly changing world.

As we reflect on this anniversary, it’s clear that Brexit has reshaped not only UK-EU trade but also the broader economic landscape. The next few years will be critical in determining whether the UK’s new trade strategy can deliver long-term success.