The Trade and Cooperation Agreement: achieving ‘even more business with our European friends’?

On 24 December 2020, Boris Johnson, announced the European Union (EU) – United Kingdom (UK) Trade and Cooperation Agreement (TCA). He described it as

‘a deal which will, if anything, allow our companies and our exporters to do even more business with our European friends’.

Whatever view one takes of the impact that Johnson, through the manner of his public interventions, has upon the quality of political discourse, it remains important to hold senior politicians accountable against the statements they make. It is not satisfactory to allow apologists to price in hyperbole and invent rationales for him, or for opponents simply to dismiss him. Consistently measuring performance against explanations offered at critical moments is the best means by which we might make assessments regarding the value of the TCA and by extension the wider Brexit project.

A preliminary observation that might be made is that the TCA largely left services untouched. An important component of the UK economy, in 2019 they accounted for 46 per cent of exports and 30 per cent of imports. Therefore, even if the outcome of ‘if anything…more business’ in this sector was achieved, it would in a sense be irrespective – or perhaps despite – the TCA. In any case – and unsurprisingly – there is, as we will see, strong evidence of poor Brexit-related performance in services.

How are we to measure the Johnson claim against the reality to date? He referred specifically to ‘exporters’; but this can reasonably be interpreted as envisaging not only exports from the UK to the EU, but transactions in both directions. This interpretation is useful, since it allows us – with the apparent endorsement of Johnson – to move beyond the idea of a direct trade-off between exports and imports. For some, the balance between the two might be the most important indicator, with the desirable outcome being a shift towards exports to the EU and away from imports from the bloc. From this perspective, a decline in exports might even be a worthwhile outcome of the TCA if accompanied by an even greater fall in imports. A more sophisticated view – seemingly proposed by Johnson – is that trade in general is potentially beneficial, and decreases in its total volume, whatever the balance between exports and imports, is regrettable. This outlook recognises that imports – needed by external producers and consumers – entail a more open, competitive economy. Johnson, then, seems to have presented trade as a whole, in both directions, as a good. While he did not expressly rule out a reduction in the volume of ‘business’, the strong implication is that it would be at least as strong under the TCA, with a strong chance of its being greater. A decline, in the light of the Johnson claim of 24 December 2020, would require some explanation.

Assessing assertions against reality is not straightforward. With trade, disentangling particular effects is never easy; and faces in this case a particular complication in separating the economic impact of the global pandemic. Various observers have developed methodologies for overcoming these barriers; and on a basis of their work some preliminary observations regarding the impact of the TCA are becoming possible. The figures that follow, therefore, represent attempts to measure what has happened for the UK against what would have been the case without Brexit.

It should be noted that, according to modelling published by the Centre for European Reform, even before the TCA came into force at the beginning of 2021, there had been a 10 per cent loss of trade in goods in the period since the European Union referendum of 23 June 2016, relative to what the total would have been had this vote not produced a ‘leave’ result. Similarly, services also appear to have suffered from the Brexit process, before departure had actually occurred. Research published by Aston University shows reductions in services exports by an average of £18.5 billion per year during 2016-2019, with insurance, telecoms, transport and travel suffering in particular.

Under the TCA, monthly analysis by the Centre for European Reform suggests, total trade in goods has tended to be between 11 and 16 per cent lower per month (after a more severe drop-off for exports at the beginning in 2021). The most recent calculations, for October, show a reduction of 15.7 per cent (equivalent to £12.6 billion). The UK Trade Observatory has found that, for January – July 2021, there was a 14 per cent decline in goods exports (focused on January); and a 24 per cent fall in imports: amounting to £44 billion in total (£11 billion and £32.5 billion respectively). The Observatory has also noted that, for the first half of 2021, services exports dropped by 11.5 per cent while imports decreased by 37 per cent. These changes were relatively constant over the period and – in contrast to the export of goods – not concentrated early in 2021.

For advocates of the TCA, its central benefit is in the extent to which it avoids the introduction of tariffs on post-Brexit EU-UK trade. Where it is less effective is in preventing the introduction of non-tariff barriers – regulatory requirements that can introduce considerable friction in trading relations (the UK has not yet applied in full regulatory mechanisms on incoming goods, and has repeatedly postponed their introduction). Yet it seems that non-tariff barriers, allowed for by the TCA, have had the effect of reducing the extent to which UK exports are able to access TCA provision for tariff free trade. The UK Trade Observatory has found that, during January – July 2021, between 26 and 32 per cent of exports to the EU which might have been tariff-exempt under the TCA were not. Rather than deal with the bureaucracy, exporters in these transactions opted to pay tariffs, at a total cost of £534.6 million.

The idea of being held to account for their pronouncements through evidence-based analysis conducted by experts has always been a source of discomfort for participants in the Brexit project. The discussion above suggests why it might be so. The TCA has fallen short of the apparent claims made on its behalf by Johnson. Even if we allow for the so-called ‘teething troubles’ of January 2021 and their effect upon exports in goods, it seems trade in both directions, in goods and services, has suffered. Brexit was always an exercise in self-inflicted economic damage; felt even before it had taken place, and before the transition period had come to an end. An arrangement such as the TCA could only be an exercise in harm-reduction; one that fails to work fully even on its own terms, given the problems in take-up of tariff exemption. Absorbing the costs of tariffs cannot be beneficial to competitiveness; but neither can be the regulatory compliance that is the alternative. The implementation in full of checks on incoming goods, when it comes into force, is likely to create further friction, this time for imports. As the trade claims for Brexit fall away, increasingly the justifications must be sought elsewhere. Perhaps those who wish to reverse Brexit need both to expose the fallacies in the business case, while also promoting a vision of EU membership that is about more than relative economic benefit.