Brexit And The Impact Of New Trade Ties On The UK Outlook

Trade disruption will deliver a sizable hit to UK manufacturing output this quarter, while lingering uncertainty and potential instability surrounding the UK-EU trade deal will keep a lid on investment. We expect consumers to lead a sharp GDP rebound this year, but higher costs and disruption will likely prevent a full recovery before late-2022.

Despite the deal, there's been plenty of disruption

The dust has begun to settle on the new UK-EU trade deal, where initial pre-Christmas relief has quickly given way to widespread reports of disruption. The deal achieved tariff-free trade, but the UK’s exit from the single market and customs union has heralded large - and abrupt - changes to the way the UK trades with Europe.

So what’s been happening? Well firstly, it’s pretty clear that trade between the EU and UK has slowed noticeably since the start of the year. New ONS data shows fewer visits by ships to UK ports, while there have also been fewer lorries crossing the Channel. 

Visits by cargo ships to the UK are lower than usual

Source: ONS - Measured as total visits to port across UK

Rules of origin and VAT changes are creating a headache

Partly this is because firms stockpiled during 2020, opting to ‘wait-and-see’ what happens in the first few weeks of January (and therefore traffic will inevitably build again over coming days). But increasingly it is also because many firms are struggling to adapt to the new trade barriers, which are many and varied, but ‘rules of origin’ is arguably one of the biggest. These barriers dictate whether a good qualifies for tariff-free entry and can be a bit of a minefield, particularly for those businesses who’ve only ever traded with the EU. 

Generally speaking, a good needs to have had significant work done to it in either the UK or EU to move across the border free of tariffs. That means that, for businesses that use the UK essentially as a distribution hub for servicing other parts of Europe, a tariff may still be payable. And even where a good does meet origin requirements, anecdotally firms say it is often costly and complicated to document.

That’s just one example - VAT is another commonly cited headache, and there will be many more.

Fewer transport options have amplified the hit from new customs processes

But the situation has been amplified by transport issues - and the lack of lorry queues shouldn't be mistaken for a lack of disruption. 

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Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information ...

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