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Wednesday, November 30, 2022

The Brexit Trade problem

The impact of Brexit continues to hit the UK economy with the Independent reporting that new figures reveal that more than 40 per cent of British products previously exported to the EU have disappeared from European shelves since we left the free trade area.

The paper says that trade economists trying to assess the effects of Brexit warned in research published on Monday that new bureaucracy was putting off exporters on a grand scale. They also said their research showed the export gap created by the policy has “widened rather than closed” in a year of the new trade system being in place:

The researchers, from the Centre for Business Prosperity at Aston University, found that small businesses were the least likely to be able to deal with the government’s new red tape and would be most likely to give up selling abroad.

“We find that, due to the [EU-UK Trade and Cooperation Agreement], the UK has experienced a significant contraction of trading capacity in terms of the varieties of goods exported to the EU,” the researchers write.

“Our estimate suggests that as many as 42 per cent of the product varieties previously exported to EU have disappeared during the 15 months following January 2021.

“We argue that this decline has unfolded in three ways: a large number of exporters has ceased to export to the EU, the remaining exporters have streamlined their product lines, and fewer exporters are choosing to enter the EU market.”

The academics said that losing these exporters is likely to damage the UK economy in the long run by breaking “the pipeline for future export growth and harm the UK’s already frail productivity”

Under the terms of the Brexit deal with the EU, British exporters have to fill out reams of new paperwork and bureaucracy in order to be able to export to the continent.

There could though, be worse to come. Politico reports that three years after leaving the EU to chart its own course, Britain finds itself caught between two economic behemoths in a brewing transatlantic trade war.

They say that in August the United States Congress passed the Biden administration's much-vaunted $369 billion program of green subsidies, part of the Inflation Reduction Act. This has started a potential trade war with the European Union, who fear Washington's subsidy splurge will pull investment — particularly in electric vehicles — away from Europe, hitting carmakers hard:

The EU is preparing its own retaliatory package of subsidies; Washington shows little sign of changing course. Fears of a trade war are growing fast.

Now sitting squarely outside the ring, the U.K. can only look on with horror, and quietly ask Washington to soften the blow. But there are few signs the softly-softly approach is bearing fruit. Britain now risks being clobbered by both sides.

“It’s not in the U.K.’s interest for the U.S. and EU to go down this route,” said Sam Lowe, a partner at Flint Global and expert in U.K. and EU trade policy. “Given the U.K.’s current economic position, it can’t really afford to engage in a subsidy war with both.” The British government has just unleashed a round of fiscal belt-tightening after a market rout, following months of political turmoil.

For iconic British motor brands, the row over the Biden administration's IRA comes with real costs.

The U.S. is the second-largest destination for British-made vehicles after the EU, and the automotive sector is one of Britain's top goods exporters.

Manufacturers like Jaguar Land Rover have warned publicly about the “very serious challenges" posed by the new U.S. law and its plan for electric vehicle tax credits aimed at boosting American industry.

They add that in response to Washington's plans, the EU is preparing what could amount to billions in subsidies for its own industries hit by the U.S. law, which also offers tax breaks to boost American green businesses such as solar panel manufacturers. Britain faces being squeezed in both markets, while lacking any say in whatever response Brussels decides.

The consequences of leaving the world's biggest free trade area could well be severe for the UK economy.
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