This report provides the most detailed assessment to date of the impact of the TCA on trade flows. Many papers assessed the potential impacts of Brexit before its final form was known, but far fewer have assessed the final deal, and even fewer have modelled the granular impacts across regions and sectors of the economy. Our approach to assessing the impacts also innovates on existing modelling approaches, enabling an assessment of regional outcomes and of the adjustment paths to the Brexit shock. Based on a detailed reading of the TCA and the associated literature, the new relationship with the EU implies an increase in trade costs of 10.8 per cent for exports to the EU and 11.0 per cent for imports from the EU, and these rise to 16.2 per cent and 16.6 per cent when we account for the fact that the EU is likely to integrate further in future years.
Trade barriers look set to increase by more in agriculture and services (and particularly in more highly-regulated professional services) than in manufacturing. This is bad news for UK exports, as 20 per cent of our services exports to the EU are in the highly-regulated category of finance and insurance, and a further 18 per cent are in other highly-regulated services sectors, including legal and accounting, architecture and engineering, and air transport services. The combined share is almost twice these sectors’ share of global services exports. So, although the provisions in the TCA are comparable with other agreements that are considered to be deep on services, they secure only a very small share of the services market access that the UK enjoyed as part of the single market, and this is particularly important for the UK’s oversized regulated services exports. As with other comparable agreements, the services provisions in the TCA, tend to simply lock in the liberalisation that already applied to non-EU trading partners, rather than securing equivalence agreements that would replicate the pre-existing market access (an example would have been agreeing equivalence to replace EU passporting rights for financial services). These new barriers to trade with the EU are set to lead to substantial changes in output, with regulated and professional services sectors expected to be hit harder than most other sectors. For example, the ‘other professional, scientific and technical activities’ sector is set to shrink by 13 per cent compared to the counterfactual of remaining in the EU.
Within the manufacturing sector, there is considerable variation in the performance of individual industries, reflecting the differing opportunities available to them to reorient to the domestic market. A few will gain, such as food manufacturing, which is expected to be 5 per cent larger, but others will see significant falls in output, such as the manufacture of basic metals. In the primary sectors, the new trade barriers (considered in isolation) are expected to deliver gains for British agriculture, but fishing is expected to be one of the hardest hit sectors, with output set to be 30 per cent lower. This is because British fishers are reliant on exporting to the EU for their revenues, and now face new barriers to sell to EU consumers. On the other hand, British farmers are set to benefit from less fierce import competition from EU producers, who had been successful in supplying produce to the UK market, and these greater domestic opportunities are expected to outweigh any lost market share overseas. However, the extent to which British farmers can take advantage of these opportunities will also depend on policy choices beyond trade, including on migration.
These shifts will mean significant labour market adjustment for the relatively small numbers of workers in the worst-hit sectors. For example, the 5,000 workers employed in the fishing sector in 2019 and the 75,000 employed in the manufacture of basic metals may face a painful adjustment, with increased job uncertainty and potentially big hits to their livelihoods. Those that do experience involuntary job loss not only face an immediate income hit but are also expected to return to jobs that pay less than the one they left. For example, our previous research showed that, in the period from 1995 to 2020, median real hourly pay growth was 1.1 per cent lower among those who had experienced an involuntary period out of work within the previous year, compared to an average of 2.1 per cent growth among all workers.