The effects of leaving the EU on the geography of UK trade

Abstract

This paper investigates the effect of the 2016 Brexit referendum and the Trade and Cooperation Agreement (TCA) signed by the UK and the EU in December 2020 on UK-EU trade in goods up to December 2021. The 2016 referendum introduced uncertainty, but new trade barriers between the UK and the EU were not put in place until the new agreement, the TCA, entered into force in January 2021. Using a set of different econometric techniques, and looking up to the end of the first year of the implementation of the TCA, we find no evidence that the 2016 referendum had any impact on aggregate UK-EU trade relative to comparator trade flows. On the other hand, our results show that the TCA reduced UK trade with the EU, but asymmetrically for exports and imports. After a sharp drop of around 41% in January 2021, UK exports to the EU quickly recovered in the following months. This pattern of recovery was not the case for UK imports from the EU, which were negatively impacted throughout of 2021, with a cumulative loss over the first year of implementation between -24% and -28%. Asymmetric effects between exports and imports do not appear to be driven by difference in product composition of the two flows. Instead, we find evidence that a plausible explanation for these differential effects is the relative importance of the EU market for UK firms, in comparison to the importance of the UK market for EU firms.