Brexit has brought “zero benefit” to UK business

In this article we show that:

1 While underlying UK goods export growth since 2020 looks relatively weak this is more due to a decline in exports to non-EU economies than exports to the EU. Despite some claims to the contrary, there is no evidence the drop in non-EU exports is a Brexit effect
2 Looking across a wide range of possible ‘counterfactual’ series that could indicate where UK exports would have gone in the absence of Brexit suggests that UK exports to the EU may only be a few percent below the ‘expected’ level. This is a much better outcome than many critical studies of Brexit claimed would occur prior to the UK leaving the EU customs union and single market
3 Looking at past UK export recoveries after global downturns suggests a delayed recovery is unremarkable. It may just be that the UK’s particular export structure and/or corporate strategies produce this kind of pattern with Brexit not an important factor
4 If UK exports had indeed been badly hit by Brexit then this should be visible in the performance of UK manufacturing industry. But in fact, UK manufacturing has outperformed that of the other G7 countries since 2020
5 UK services exports show no apparent impact from Brexit, in contrast to past claims that they would be hard hit. After a slump during the pandemic, their recovery has been at the top of the range of the recoveries seen among the G7 economies
6 The OBR and others claim that Brexit has reduced the UK’s economic openness with a big negative impact on productivity. But the degree of ‘openness’ has at most declined by a very small amount which is not consistent with the claims on productivity. Moreover, the actual data do not show signs of lower productivity in the market sector of the economy – only in the public sector which has nothing to do with Brexit

Source: ONS, author’s calculations

On the face of it, this suggests claims of a big impact from Brexit might be correct. But a closer look at the data suggests things are not so clear cut. If we break total exports down into sales to EU and non-EU markets we can see it is sales to non-EU markets that have been the main factor behind the weakness of overall UK exports since the end of 2020, not exports to the EU. UK exports to the EU in Q4 2022 were only slightly below their flat long-term trend while exports to non-EU countries were some 15% below their (strongly upward) long-term trend.

It is far from obvious how the weakness of non-EU exports can be related to Brexit. Kren and Lawless claim it is the result of Brexit ‘spillover effects’ such as higher costs or reduced availability of EU-produced components but produce no real evidence for this.

A more plausible explanation is that UK non-EU exports have been hit by some large sector specific shocks. It is notable in this regard that just a handful of sectors account for the great bulk of declines in underlying exports to non-EU economies from 2018-2022 – cars, mechanical machinery and works of art and jewellery. Of these, car exports have certainly been affected by global disruptions to the computer chip market; the fall in art and jewellery exports cannot, given the nature of the products involved, have much to do with supposed component shortages or cost increases due to Brexit (and notably, art and jewellery sales to the EU rose); and while mechanical machinery exports to non-EU destinations have suffered, exports of machinery to the EU have done well which seems surprising if there is a problem with the availability or cost of EU inputs used in these products.
Counterfactual- what counterfactual?

Some observers have argued that the best way to see if UK exports have been hit by Brexit is to compare the actual data with some kind of counterfactual series that would indicate where UK exports might have gone in the absence of Brexit. But there is little agreement on exactly how to do this. Sampson et al. compare UK exports to the EU with exports to non-EU destinations, reasoning that the latter were unaffected by any new trade barriers with the EU. Using this approach they find only a temporary and small decline in UK exports to the EU related to Brexit. On the other hand, Kren and Lawless compare UK exports to the EU with EU trade with non-EU economies and find a large effect.

Neither of these proposed series have a very strong historic correlation with underlying UK exports to the EU: the simple correlation on levels is around 55% for non-EU exports and just 40% for EU extra-EU imports. One problem with using EU extra-EU imports is that these were strongly boosted in 2020-2021 by imports of consumer electronics from Asia due to changed spending patterns during the pandemic. This is a sector in which the UK has little presence.

In our previous work, we have argued for using EU industrial output (excluding Ireland due its highly distorted data) as a counterfactual on the basis of a better historical fit – with a simple correlation with UK exports to the EU of around 80% (see Chart 2) – and because a large part of UK exports to the EU comprises components and semi-manufactures used in EU industry. Using this approach, we have found a small or even zero impact from Brexit on UK exports to the EU.