It has been well over two years since the UK became the first and only ever country to leave the EU block. Since that time, quite a lot has happened: a global pandemic and a new war in Europe perhaps to name the most significant. This article looks at what has happened to the trade agreement the UK had with the EU in that time, and where it appears to be heading…
Staying Friends
The EU-UK Trade and Cooperation Agreement as outlined by the Brexit Team The EU-UK Trade and Cooperation Agreement (TCA) was ratified by the UK government in December of 2020 and came into force some six or so months later in May 2021 (and was previously discussed on the Nu-Credits Insights page).
It was signed by the EU trading bloc, the European Atomic Energy Community (Euratom), and the UK, and is a free trade agreement that was designed as a framework to oversee the relationship between the UK and Europe after Brexit’s transition period had run its course. Figure 1 shows the path that negotiations have taken.
Its provisions allow for free trade in goods and services (limited mutual market access), as well as cooperative efforts in a variety of policy areas, evolving provisions for the UK’s access to EU regulated fisheries, and the management of the UK’s participation in some EU driven programmes.
The agreement provisionally became active from January 2021. Elements of cooperation that existed between the entities but no longer do (before the Brexit Withdrawal Agreement and the creation of the TCA) are the free movement of people between the entities, UK membership in the European Single Market and Customs Union, the inclusion of the UK in most EU driven programmes, narrower EU-UK collaboration in crime investigation, reduced defence and foreign policy collaboration, and reduced authority of the European Court of Justice in UK affairs.
The Brexit Team states on their website that the idea behind the TCA is to ‘…make trade easier between the United Kingdom (UK) and the European Union (EU) than it would be without such a deal.’ As can be seen, in figure 1, designing and implementing the agreement has been a long and winding road.
Lack of Variety
The number of trading relationships that the UK has with the EU bloc has precipitously declined according to the Financial Times (FT) citing the results of new research having been undertaken by the London School of Economics (LSE) Centre for Economic Performance.
It is widely agreed that UK exports to the EU have rebounded to pre-pandemic levels. However, trading data has shown that the number of partnerships between buyers and sellers has fallen by as much as a third after the trade deal was initiated in January of 2021.
The wider business community has been expounding on how smaller companies have been unable to financially tolerate customs controls as well as VAT and regulatory red tape. The research from the LSE supports this, and some businesses have halted exporting services and merchandise altogether.
The data itself indicates that the rebound to pre-pandemic levels of trade is masking a decline in the different species of trading (varieties of goods). In essence, smaller commodities that would before have been exported by smaller businesses – and also commodities that added to the variety of exported merchandise wholesale but were proportionally responsible for a lesser amount of the whole – are no longer being traded.
In effect, the data revealed the burden of bureaucracy and red tape on more minor businesses in the export marketplace. Thomas Sampson (associate professor of economics at LSE and co-author of the research) is reported by the Financial Times as saying, “…The research found that after the trade agreement came into force, the number of buyer-seller relationships between the UK and the EU fell by nearly one-third, with the vast majority of those being shed in the first quarter.” Thomas Prayer (doctoral student and co-author) explained too, how it appeared that the UK has largely stopped selling products to smaller countries in the EU. Euronews described the research simply as “British firms stopping trade with the EU.”
Missing Out
The FT also describes how the UK’s Office for Budget Responsibility – a government spending watchdog – was warning that the UK had ‘missed out on a good deal of the recovery in global trade after the pandemic and had actually fallen behind all other G7 economies (the G7 being an inter-governmental political forum made up of the UK, the US, Canada, France, Italy, Germany, and Japan).
The findings of the LSE have highlighted unease around the future effect Brexit will have on trade between the UK and the EU. Sampson described for the FT how trade in the future is reliant on the growth and expansion of minor firms today.
Should trade for these developing businesses be impaired or halted in the present, it may impede financial growth in the future when those firms should have naturally expanded. Ultimately, the TCA appears to have created a situation where smaller or less diverse businesses are rendered less competitive.
Generally speaking, SMEs – potentially developing businesses as indicated above – already must face a number of challenges in order to gain financing, let alone then having to navigate the pitfalls of cross-border red tape that the TCA has exacerbated.
In another article previously discussed on the Nu-Credits Insights page, SMEs have to ride a regulatory rollercoaster in order to get financing in some cases with criteria for success being things like submission of lengthy and audited financial statements, submission of details and references of company directors, provision of extensive details of company assets and liabilities, showing financial forecasting, providing credit reports, and submitting comprehensive strategic plans.
Aggravating these issues further is that much of the time SMEs are unable to play the game adequately: their understanding of the marketplace is poor, and they tend to quit in the face of early rejection. Having more red tape to cut through can only realistically end in one outcome.
With these longstanding stumbling blocks in situ, it is no surprise that it’s the smaller firms that cannot deliver the time, money, or logistics, to establish themselves within the bloc, and it is inevitable that it is they who are the first to suffer.
It seems there might be a niche developing for the fintech sector since it is in being able to slice through the red tape that financial technology is particularly good at, among other things. In contrast to all of this and more hopefully however, the FT does quote the Department of International Trade as saying that the TCA allowed businesses in the UK to be able to trade freely with the EU and was working on supporting exporters via its Export Support Service. With time then, perhaps the trading landscape between the UK and the EU will be able to settle down and SMEs will find themselves in a less hostile environment.