Who bears the brunt of trade barriers with the EU?

With less than six months until the UK leaves the EU, what Brexit will mean for UK trade policy remains shrouded in uncertainty. While the government has stated it wishes trade between the UK and the EU to remain “as frictionless as possible,” it also aims to eventually leave both the customs union and the single market. Leaving these institutions will almost inevitably make it harder for firms in the UK to both import from, and export to, the EU. What has so far been less clear is exactly where in the economy such impediments to trade are likely to have the greatest impacts.

In recent research we have examined in detail how different industries could be affected by potential trade barriers between the UK and the EU and which types of workers are most at risk of negative impacts. This blog post summarises some of the main findings.

Increased barriers to trade with the EU are expected to have a negative impact on the economy as a whole, but these impacts will also vary greatly across different industries. Across a range of trade policy scenarios, manufacturers of transport equipment (including car manufacturing), of chemicals and pharmaceuticals and of clothing are likely to experience the largest negative impacts on their value added (the value of output minus the cost of production inputs). If the UK were to leave the EU without a trade deal, increases in trade barriers would expose these industries to estimated reductions in their value added of between 15 and 20 per cent. These effects are more than seven times greater than the estimated negative impact of trade barriers on the economy as a whole. Negative impacts would be less severe if the UK stayed within the European Economic Area, but these industries would still be exposed to falls in value added of between 4 and 7 per cent.

There are three main reasons why clothing, transport equipment and chemical and pharmaceutical manufacturers are particularly exposed. First, around 25 to 30 per cent of the inputs used are imported from the EU. A UK car manufacturer may for example import engines from Germany and bumpers from Eastern Europe. Second, around 25 to 40 per cent of their output is sold to the EU. As a result, reductions in demand from European consumers as imports from the UK become more expensive would have a relatively large negative impact.

Finally, the trade barriers affecting these sectors are expected to be greater than in other sectors. This could be because delays caused by customs checks are particularly costly for “just-in-time” manufacturing methods, which are common in the car industry. In combination these facts suggest increases in input costs and falls in demand are likely to be larger in these industries than in others.

Our research also finds that the agriculture sector and wood and paper product manufacturers may stand to gain from increased trade barriers between the UK and the EU. If the UK left the EU without a deal, increases in trade barriers are estimated to boost value added by around 11 per cent in the agriculture and fishing industry and by around 3 per cent in the wood, paper and printing industry. Increases in value added are estimated to be smaller if the UK remained in the European Economic Area, but still positive. These impacts are due to UK firms in these industries increasing their market share in the UK as trade barriers cause the cost of EU imports, with which they compete, to rise. However, the industries that could benefit from higher trade barriers make up only a small share of employment, and the benefits to those involved in these industries would come at the expense of consumers who would face higher prices and reduced choice.

Industries most exposed to trade barriers tend to employ workers that are male and have low-levels of formal educational qualifications. Highly exposed industries are particularly important employers of these sorts of workers in Northern Ireland and the west midlands. Process, plant and machine operatives are also more likely to work in negatively exposed industries than workers in other occupations, and there is evidence that this group of workers would find it relatively hard to find equally well paid work elsewhere. Policymakers should therefore consider whether specific interventions (such as greater retraining and employment support) could help workers to adjust.