Looking Beyond the ‘Brexit Is Bad’ Narrative

Just about two months from now, many will “celebrate” Brexit’s two-year anniversary. We used those scare quotes because some remain convinced Brexit is disastrous for the UK to this day, arguing the additional paperwork and associated higher costs have squashed UK businesses that depend on frictionless shipping across the English Channel. We agree Brexit has likely had some effects, but the degree to which Brexit is responsible for weak UK trade data is debatable in light of global developments. That so many UK observers seem to emphasize Brexit over extant global issues shows how this event, now long since behind markets, has become a near-permanent feature of background chatter in the UK.

Brexit has indeed distorted UK trade data since June 2016’s vote to leave the EU. The initial Brexit day was set for March 29, 2019. After agreeing on a short-term extension days before the scheduled exit, on April 10 the UK and EU delayed the date to October 31, 2019 in order to avoid a messy no-deal Brexit. That, too, was delayed at the last minute on October 28, pushing the final Brexit date to January 31, 2020 with a one-year transition period in which the UK would stay in the EU’s single market and customs union. That final tie severed, as scheduled, on January 31, 2020.

As Exhibit 1 shows, trade with the EU spiked leading up to March and October 2019 as businesses raced to front-load exports and stockpile ahead of potential no-deal Brexits, which pundits warned ad nauseam risked bringing draconian tariffs and customs barriers overnight. We saw a repeat as businesses pulled activity forward late last year before the transition period ended and customs checks and the Irish protocol took effect. In our view, trade was always likely to drop after those initial bursts of activity—somewhat significantly—and take some time to revert to longer-term trends. The deadlines simply pulled some demand forward, leaving it weak in their wake.

Exhibit 1: The UK’s EU Imports and Exports Since January 2015

Source: ONS, as of 11/1/2021. Exports and imports in goods to the EU, real and seasonally adjusted, January 2015 – August 2021. “Relevant Brexit Dates” refer to June 23, 2016 (UK’s EU membership referendum vote), March 29, 2019 (original Brexit date), October 31, 2019 (pushed-back Brexit date), January 31, 2020 (official Brexit date), and January 1, 2021 (end of Brexit transition period).

But that isn’t the only ad hoc factor skewing trade this year. The post-Brexit transition period ended right as England’s third lockdown began, and trade’s wintertime plunge may also reflect crimped economic activity as ports were forced to implement social distancing measures. With those two distorting events occurring at the same time, it is near-impossible to isolate the impact from either one, in our view.

Many acknowledge this skew and account for it by comparing the UK’s trade with the EU to trade with non-EU nations. While both suffered lockdown drops, trade with non-EU countries has recovered faster, which is the basis for most claims about Brexit having a permanent scarring effect. Yet in our view, this puts too much emphasis on Brexit and ignores long-running trends.

Consider exports. Since monthly data begin in 1997, UK exports to the EU have been largely range-bound once adjusted for inflation. There were some spikes here and there, but even by the Brexit referendum, there had been basically no growth in monthly exports to the EU since mid-2000. Shipments to non-EU nations, which have become an increasingly larger share of UK trade, accounted for the entirety of cumulative goods export growth. Recent relative weakness in exports to the EU seems mostly like an extension of this long-running trend. (Exhibit 2)

Exhibit 2: EU and Non-EU Exports of Goods, January 1997 – August 2021

Source: ONS, as of 11/1/2021. Exports in goods to EU and non-EU, real and seasonally adjusted, January 1997 – August 2021.

Imports tell a somewhat different story, as imports from the EU have grown alongside non-EU imports for decades. This isn’t surprising when you consider that it was cheaper and easier for UK companies to source parts and raw materials from within the EU’s single market. Brexit has eroded that advantage to some extent. Even though most trade between the UK and EU is tariff-free or close to it, customs checks and paperwork add some friction.

Yet judging from the relative strength in imports from non-EU nations, we think it is premature to call Brexit an insurmountable headwind for import-reliant UK businesses. Companies are creative, and it just may be that sourcing materials and components from outside the EU is now more advantageous. We may simply be seeing the seeds of a long-term supply chain reorientation. Then too, much of Continental Europe spent the first half of this year stuck in lockdown—which wasn’t the case for much of the US and large swaths of Asia. Was it paperwork or low availability that kept shipments from Europe weak? We suspect it was a mix of both.

Exhibit 3: EU and Non-EU Imports of Goods, January 1997 – August 2021

Source: ONS, as of 11/1/2021. Imports in goods from EU and non-EU, real and seasonally adjusted, January 1997 – August 2021

Brexit is also getting a lot of credit for some of the most visible signs of stress in UK trade: logjams at ports, huge stacks of empty shipping containers that can’t get where they need to go and a dearth of truck drivers. These issues are all real, and all cause headaches. But we are also in the middle of a global supply chain crunch, making it impossible to know how big a culprit Brexit really is.

Consider: Shipping companies got headlines for rerouting ships from the UK to Amsterdam due to long wait times to secure a berth at big UK ports. But scores of ships are also idling in the harbor for weeks on end by Los Angeles, Long Beach and other major US ports. There are similar backlogs in Asia. Is the UK’s traffic jam worse than it might otherwise be because of Brexit? Who can say? There is no counterfactual.

Same goes for the empty shipping containers. There are around a thousand empty containers stacked up near Felixstowe, the UK’s largest commercial port.^[i] But container stacks are also a global phenomenon. The most prominent example: an estimated 500,000 empty containers near the Port of Los Angeles.^[ii] Seems to us like the UK’s woes aren’t unique.

Nor is the lack of truck drivers. The UK has an estimated shortage of 100,000 drivers, which pundits pin on the departure of EU workers and the UK now being unable to import cheap labor from Eastern Europe.^[iii] Yet experts estimate a shortage of 80,000 drivers in America and 400,000 in the EU.^[iv] Is the UK’s labor shortage worse because of Brexit? Maybe! Or maybe businesses globally are having an extremely tough time finding people to fill jobs that have grueling hours and a sedentary lifestyle at a time when competition for workers in all industries is fierce.

Beyond the hard data, there are some reasons to cheer the UK’s trade prospects in both goods and services. London hasn’t lost its status as a global financial hub. Certain financial businesses have migrated over to the Continent to comply with EU regulation, benefiting cities like Amsterdam, which has become Europe’s largest share-trading center this year—though London remains second.^[v] But many big UK banks set up Continental operations in the lead-up to Brexit, maintaining their share of business regardless of their location. Moreover, most financial firms expect London will remain a top financial center despite Brexit, and rather than losing jobs, London’s banks have been hiring recently.^[vi]

Trade-wise, the UK has struck free trade deals with Japan, Australia and New Zealand and applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—a free-trade area that rivals the EU’s economic size. While membership isn’t certain, we think it is evidence the UK didn’t leave the EU with the intent of turning inward—it is attempting to strengthen global trade ties instead, which bodes well for non-EU activity to continue being a major, long-term driver of UK trade growth.

In our view, Brexit was a classic false fear. Yes, it posed some headwinds and uncertainties, but from stocks’ forward-looking point of view, it is old news. However, Brexit, the narrative, isn’t likely to go away. Instead, we expect many observers to continue citing it as a reason this-or-that data point flagged for years to come. Furthermore, any time trade issues arise between the UK and EU—however normal they may be for any other two sovereign trade partners—expect Brexit blame to ratchet up. Adjust your expectations because Brexit seems more and more like a semi-permanent feature of the background narrative in Britain.