Post-Brexit imports, supply chains, and the effect on consumer prices

Summary:

This report documents the decrease in imports and shows how the patterns of imports vary across sectors following the UK’s departure from the Single Market and Customs Unit at the end of 2020. The authors focus on comparisons between imports from the European Union and imports from non-EU countries. Some products experienced a sizeable decrease in trade volumes with EU countries compared to those of non-EU countries in January 2021. Other products experienced minimal deviation in imports from the EU versus non-EU. It is also documented that the timing of import changes varies across products: in some cases, the deviation occurs pre-TCA, and there is some evidence of stockpiling; in other cases, the changes only occur post-TCA, and can be either short term or persistent.

The fall in imports from the EU will affect the United Kingdom economy through its impact on supply chains. Two-thirds of international trade is in products used as inputs to production. We show that imports from the EU fell for products that are used as inputs to production in many industries in the UK. For some sectors there is evidence that imported inputs began to be sourced from non-EU countries pre-TCA. For others the adjustments occurred post-TCA. Evidence suggests that increased access to intermediate inputs can boost productivity, so a reversal is likely to cause a fall in productivity.

Imports also provide cheaper goods to consumers, as well as a wider variety of choice. Focussing on food products, the authors show that the drop in imports after Brexit caused an increase in prices. Products that were more heavily reliant on imports from the EU increased in price following the election of Boris Johnson in 2019, pre-TCA and then increased further post-TCA.

This report therefore shows that changes in imports of goods from the EU have affected UK firms’ supply chains. Part of this change is driven by the adjustment costs incurred as part of the new trading relationship and is likely to be short term, but another part is likely to reflect a long-term increase in the cost of inputs from the EU, which make up a sizable contribution of total imports. This could have a knock-on effect for consumers who will face higher prices, and for workers whose jobs will be affected by adjustments in the supply chain.

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