Study Reveals Small Businesses Hit Hardest by EU Trade Barriers, but Overall Economic Impact Limited
The UK’s departure from the European Union resulted in a £27bn reduction in trade with the EU within the first two years post-Brexit, according to a detailed investigation by the London School of Economics (LSE). Despite this decline, the study suggests that the overall economic toll has proven less severe than initial forecasts anticipated.
Researchers at the Centre for Economic Performance examined data from over 100,000 UK firms and highlighted that small businesses bore the brunt of new trade obstacles. These barriers have forced thousands of smaller enterprises to cease trading with EU nations entirely.
By the conclusion of 2022, two years after the UK implemented the Trade and Cooperation Agreement (TCA) with Brussels, British goods exports had dropped by 6.4%, while imports fell by 3.1%. Despite this, larger firms adapted by finding alternative suppliers and markets, allowing imports to stabilise better than exports.
Thomas Sampson, an LSE economist and one of the study’s authors, commented: “The TCA has been particularly damaging for smaller exporters, many of whom have stopped exporting altogether. Conversely, bigger firms have managed to adjust to the new trade environment, meaning overall export declines have been less pronounced than initially expected.”
The findings also questioned predictions by the Office for Budget Responsibility (OBR), which anticipated a 15% long-term trade slump that would lead to a 4% reduction in national income. While acknowledging that this decline could materialise if conditions worsen, the LSE study points out that the initial two-year trade impact has been far less dramatic.
The research draws upon unique insights from customs data collected by HMRC, offering a clear picture of how individual business relationships have shifted since Brexit. Barriers like customs checks, paperwork, and new rules-of-origin requirements disrupted trade flows, but delays to certain regulatory measures have lessened their immediate effects.
Smaller firms, those employing fewer than 100 workers, struggled the most, with over 14,000 of the examined businesses completely halting their EU trade. In contrast, larger companies proved more resilient, adapting their supply chains to maintain business continuity through alternative sourcing outside the EU.
Kalina Manova, co-author and professor of economics at UCL, stated: “The key challenge for UK businesses will lie in their ability to sustain supply networks and shift export strategies to manage non-tariff barriers over the coming years.”
The analysis did not focus on the movement of services, which are largely outside the scope of customs union agreements. Nonetheless, the findings signal that while the trade shock from Brexit caused immediate disruption to goods flows with the EU, resilience strategies—particularly from larger enterprises—mitigated the severity of these effects.
Ministers will now face pressure to reduce trade barriers further and maintain strategic efforts to ensure the UK economy continues to adapt, as the next phase of TCA negotiations looms in 2024.
