It is almost four weeks since the UK’s post-EU trading arrangements kicked in and on balance the experience so far has not been good. Admittedly Nissan announced that the trade deal agreed between the UK and EU gave it a competitive advantage vis-à-vis other UK producers. But a lot of evidence has come to light over recent weeks to suggest that the new arrangements imply a significant increase in trade frictions – as many of us warned all along would happen.
Good news from Nissan. But is it Brexit-related?
Let us, however, start with the good news following Nissan’s announcement last week that it will continue production at its Sunderland operations in north east England. A trade deal was vital for the auto industry, which exports around 40% of its output to the EU. Under the terms of the UK-EU trade agreement, so long as cars meet local content rules they will avoid the 10% import tariff levied by the EU. Nissan currently makes about 30,000 Leaf electric cars per year in Sunderland, most of which are powered by a locally-sourced 40 kWh battery and as a consequence they will remain tariff-free. More powerful versions of the vehicle use an imported 62kWh battery which Nissan has decided to produce locally so that they will also remain tariff-free, and will likely create additional jobs into the bargain. But Nissan’s decision may be less Brexit related and more to do with its troubled relationship with Renault. Following the fracturing of the alliance between the two carmakers in the wake of Carlos Ghosn’s well-documented difficulties, industry sources suggest that Nissan is keen to put some distance between itself and Renault and is seeking an alternative to French production locations. If true, this makes the company’s decision less to do with Brexit and more to do with company-specific issues.
Looking across the car industry more widely, Honda announced in 2019 that it would shut its Swindon plant in summer 2021 and investment in the sector has fallen by 71% since the 2016 referendum compared with the period 2011-2016. Recent difficulties in sourcing parts, thanks to delays at ports, has posed problems for a sector that has relied heavily on just-in-time inventory management. The more we look at the bigger picture, the more difficult it becomes to link Nissan’s decision to the trade deal, welcome though it is.
Fishing: A metaphor for all that has gone wrong
Elsewhere there are mounting recriminations regarding the impact of the new rules on cross-border trade flows. Nowhere is this more evident than in fishing – the totemic issue at the heart of Brexit. The pro-Brexit Daily Express carried a story at the weekend citing a former Brexit Party MEP who claimed that the deal "sold UK fishermen down the drain." Quelle surprise. After all, the government has form in selling out the interests of minority stakeholders in order to secure an overall deal. Moreover, fishing was never realistically going to be allowed to scupper the prospect of a trade deal given its relative unimportance to the UK economy. So much obfuscation took place during negotiations that it is important to be aware of the full facts. For one thing the UK is a net importer of fish, exporting much of its catch to the EU (France is the largest market) whilst much of the fish consumed in the UK is imported from countries as diverse as China, Germany and Iceland (the three largest sources of imports). The fishing industry was naïve to believe that it could block EU access to British waters whilst continuing to have access to EU markets, and the government was extremely cynical in pandering to these demands knowing it could never deliver.
Under the terms of the UK-EU trade deal, it is still possible for UK fishermen to export to the EU but the administrative burden of doing so has risen enormously. With fish sales to the EU falling sharply in the run-up to 31 December, prices collapsed thus reducing the incentive to put to sea. The higher administrative burden further increases the cost pressures on fishermen, making it uneconomic for many of them to remain in business. The fishing lobby has turned its anger on the government but the increase in red tape was always foreseeable given the relatively hard Brexit that the government ultimately delivered. The FT ran a piece on the travails of the fishing industry at the weekend. It is notable that the reader comments (always worth a read on FT articles) were scathing of the greed of the fishing industry, with many pointing out that they pushed for Brexit merely to serve their own purposes without a thought for other sectors which are highly dependent on EU trade.
But trade frictions are impacting much more widely. Sky News reported last week that truck traffic between the UK and EU in the first three weeks of the year was 29% below year-ago levels (chart 1). This may not all be Brexit-related given that the Covid pandemic is leaving its mark on trade flows. However more damning evidence is that the cost of moving goods from France to the UK has risen by 47% in early 2021 compared with the same period a year ago, while the rejection rate (the extent to which hauliers across the continent are turning down cross-Channel work) has jumped by 168%. Trade across the Irish border has also been impacted whilst the trade border between Northern Ireland and Britain, which runs down the middle of the Irish Sea, acts as a disincentive for producers on the mainland to deliver into Ireland.
These trade frictions raise the cost of doing cross-border business and increase delays, whilst ultimately reducing consumer choice in Britain. Those UK businesses which source items from outside the EU and sell them on to EU-based customers now have to pay duties due to the fact they no longer meet local content rules. Similarly, UK consumers buying from EU suppliers also face higher charges. Naturally, this eats into profit margins, which is a particular problem for small businesses which do not have the capacity to cope with the enhanced administrative burden. This led to the bizarre news story last weekend that advisers working for the Department for International Trade are encouraging British firms exporting to the EU to set up facilities in continental Europe. This will, of course, come at the cost of domestically-based jobs.
To some extent what we have witnessed in the last four weeks represent teething troubles, some of which will be ironed out as businesses adjust. There is no doubt that businesses were unprepared for many of the changes, largely because they did not know until Christmas Eve what sort of regulations they were transitioning towards. But the wider point is that this is a new normal to which we will have to adapt. The claims by many Brexit supporters that leaving the EU would lead to a reduction in red tape were highly disingenuous. In his speech on 24 December, Boris Johnson claimed that “in the context of this giant free trade zone that we’re jointly creating … there will be no non-tariff barriers to trade.” This is manifestly not true (nor is the notion of a giant trading zone – the UK and EU are more separated than at any time since 1972).
It is now four years since Theresa May’s infamous Lancaster House speech in which she announced the UK would leave the single market. I have always maintained that this is an act of economic self-harm because it is impossible to envisage any circumstances in which the perceived benefits of increased sovereignty will outweigh the economic costs. According to Thomas Sampson of the LSE (p106 of this report) the deal concluded in December could reduce trade flows by 13% after 10 years compared with the alternative of staying in the EU and reduce per capita incomes by 6% (chart 2). In the near-term, the dramatic costs of Covid will overshadow Brexit costs. But we should be under no illusions that the trade deal represents the sort of hard Brexit we were warning about in late-2018 – the deal served only to prevent a disorderly outcome, and delivered instead a disruptive one. I have noted previously that the only way to demonstrate to people that Brexit comes with costs attached is to implement it. It could be a very costly experiment.
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