The post-Brexit UK-EU trade deal took effect at the end of 2020 but the new trading relationship has not proved smooth. Businesses on both sides face new customs requirements and controls that have led to border delays or even halted trade completely. Are these teething troubles - or the new normal for UK-EU trading relations?

UK traders face increased administration, costs, delays and confusion: some are encountering tariffs or customs procedures for the first time. Around 245,000 UK businesses have only ever traded with the EU.

UK fisheries exports to the EU are particularly disrupted with some UK products such as refined sugar or flour risk attracting EU tariffs if rules-of-origin requirements are not met. Brexit is also affecting UK services: British performers face visa restrictions while financial-services firms are establishing offices in the European bloc.

Goods moving from Great Britain to Northern Ireland have been particularly disrupted. Some UK firms have cancelled deliveries to Northern Ireland while others are grappling with new customs formalities.

But worse could be yet to come for UK businesses as temporary customs facilitations that waive health certificates and border checks expire in coming months. Northern Irish supermarkets and UK food and pharmaceuticals producers risk significant disruption. Although the UK intends to extend these grace periods, this could prolong the uncertainty for businesses.

Currently, UK exports to the EU appear to be more severely disrupted than flows the other way because the UK has temporary customs facilitations in place. Stockpiling last year may have also helped to cushion the impact of a hard Brexit on UK imports. Issues around rules-of-origin requirements could affect the UK’s role as a distribution hub. Some UK businesses are establishing warehouses in the EU while European exporters may reconfigure trading routes to bypass Great Britain.

January trade volumes between the Republic of Ireland and Great Britain halved from last year while freight sailings from Ireland to Northern France tripled, although this could reflect stockpiling and COVID-19 restrictions besides Brexit disruption.

Are these disruptions teething problems or something more permanent? Much will depend on whether existing trade facilitations are extended or permanent solutions agreed.

Brexit disruption and rising international freight rates have had a limited impact on UK consumer prices so far. However, companies take time to pass on higher costs. Other Brexit-related costs could also build up over time, including costs associated with regulatory compliance, the recognition of standards and restrictions on labour mobility.

We estimate that non-tariff barriers from Brexit could raise UK consumer prices by 1 per cent in the longer term. Grocery prices are especially vulnerable: the EU supplies around 30 per cent of food consumed in the UK.

In a world that is thinking about reflation, Brexit may pose an additional upside risk to the UK.

First published 3 March 2021.

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