Economists warn small businesses are bearing brunt of trade barriers from EU exit

Small businesses are bearing the brunt of new trading arrangements caused by the UK’s exit from the EU, leading economists have warned MPs and business leaders on the newly formed UK Trade and Business Commission.

The cross-party Commission held its first evidence session on 15 April looking at the short-term and long-term impact of EU exit on the UK economy, hearing from economists on both sides of the Brexit debate.

The three witnesses agreed that new trading arrangements have particularly affected smaller businesses. Vicky Pryce, the former Joint Head of the United Kingdom’s Government Economic Service, warned that “it is smaller firms that go out of business”, leading to greater concentration of larger firms which is “negative for the economy”. She welcomed the setting up of the Government’s new £20 million SME Brexit Support Fund, but said the “funding isn’t anything like enough.”

Associate Professor Thomas Sampson of the London School of Economics discussed the new non-tariff barriers facing UK firms, including customs checks and “additional regulatory red tape”.

Julian Jessop from the Institute of Economic Affairs said that UK exports to the EU had bounced back in February (after the fall in January) and that these barriers should be reduced over time, He called for the Government to invest more in customs infrastructure to lessen the burden on firms.

Witnesses also said that the long-term cost of the EU-UK trade agreement could outweigh the economic damage caused by the pandemic. Vicky Pryce warned that the Office of Budgetary Responsibility has forecast that “the long-term loss of productivity in the UK will be something like 4%, which is higher than the COVID loss expected to be 3%”.

Thomas Sampson added that there remains “considerable uncertainty” and that it could take up to 10 years for the economic impact of the UK’s exit from the EU to fully bed in. He added that it was reasonable to assume that if UK GDP per capita falls by 4%, real wages will also fall by the same amount, but that there will be lots of variation depending on the sector and region.

Julian Jessop argued, however, that while there would be some impact on the UK economic structure, he thought the estimated economic hit of 4% was too high. He added that there had been a “healthy recovery” in exports to the EU in February and that some of the benefits of Brexit have been underestimated.

All three economists agreed it should be possible to unpick the impact on trade from COVID from the changes caused by EU exit, by looking at ‘doppelganger’ projections, comparable economies and changes in UK trade with the EU versus non-EU countries.

Professor Sampson also called on the Government to publish more detailed data on trade between Northern Ireland and Great Britain. He said: “The implementation of the border in the Irish Sea – the customs checks which are carried out there – if nothing else, will produce a lot of data on what is going on across the Irish Sea. For understanding the impact of the Protocol, it would be helpful if that data was published.”

The UK Trade and Business Commission brings together eleven MPs from nine different parties and all four nations of the UK, along with business leaders and experts. It is co-convened by Hilary Benn MP and the Chairman of Virgin Group Peter Norris and the secretariat is provided by the cross-party group Best for Britain. 

The Commission is taking written and oral evidence from expert witnesses, businesses and the public, with a range of voices representing the different sectors of the UK economy. This evidence will be used to make regular recommendations to the Government outlining how the UK’s trade performance can be improved, both through new and amended trade deals. The next evidence session will focus on the impact of new trading arrangements on the food and drink sector, including checks between Northern Ireland and Great Britain, and will take place on Thursday 29 April.

Hilary Benn, Co-Convenor of the UK Trade and Business Commission, commented: “The witnesses we heard from today agree that the UK economy has taken a short-term hit from the end of the EU transition period, with small businesses bearing the brunt of new barriers to trade.

“However, there is a lot of uncertainty over the longer-term implications of our new trading arrangements for the different sectors and regions of the UK, with some likely to face particular difficulties.

“Our cross-party Commission will now be looking in detail at the range of issues raised today and at the challenges and opportunities facing specific industries, from food and drink to financial services.

“We will be looking to the future and not the past, with a focus on practical ways to improve trade policy and help businesses bounce back from the pandemic and EU exit.”

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