Services exports grow strongly but trade in goods is hit by Brexit: LSE experts

International trade allows the UK economy to specialise in the activities it does best.
- Dr Catherine Thomas
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UK trade has been negatively affected by Brexit, with small firms particularly hard hit - and the full effect is still to come as not all changes are yet in effect, a new analysis concludes. 

Researchers at the Centre for Economic Performance (CEP) say that the introduction of the post-Brexit Trade and Cooperation Agreement (TCA) in 2021 did not affect large firms’ exports but has led to sharp falls in goods exports to the EU by smaller firms.  

The CEP election analysis Brexit and UK trade shows that the total value of UK exports has been more resilient to the effects of Brexit than economists had expected, this is because the impacts of the TCA have been concentrated on small firms. 

The briefing shows that total UK exports have grown at a similar rate to exports of other European economies because strong growth in UK services exports offset a relative decline in UK goods exports. But total UK imports have grown more slowly than imports of other major economies. 

 The report also finds: 

  • In real terms UK exports and imports of goods are lower than in 2016. 

  • Since 2020, the value of UK services exports has started to exceed the value of goods exports. This needs to be unpicked, but is likely to be a reflection of how Brexit has changed trade costs for goods. 

  • There is continuing regulatory divergence between the UK and EU. 

 The authors say UK trade policy faces a basic trade-off: move closer to the EU to increase UK trade and living standards or remain distant from the EU and continue paying the price of new and emerging trade barriers. 

Thomas Sampson, associate professor of economics at LSE, said: “The TCA has reduced goods exports to the EU by around 30% for small firms. But larger exporters and services firms have adapted well to the new trade regime and aggregate exports have performed better than expected. Total UK exports have grown at a similar rate to exports of other major European economies since 2016.” 

Catherine Thomas, associate professor of managerial economics and strategy at LSE, said: “it is worth remembering why trade matters for economic performance. International trade allows the UK economy to specialise in the activities it does best. Exporting to foreign buyers allows UK firms to increase their scale and make profitable investments in new technologies. Importing from foreign sellers allows UK firms to produce at lower costs, as well as giving UK consumers direct access to international products. The gains from these trading opportunities can improve living standards in the UK. UK trade policy should focus on maximising opportunities for gains from trade by lowering trade costs.” 

Behind the article

The full report is available here: CEP Election Analysis: Brexit and UK trade 

The Centre for Economic Performance, LSE, is producing a series of briefings that aim to provide an impartial, evidence-based analysis of the key issues in the 2024 UK general election.