The Windsor Framework - a path to easier trade?

Almost seven years after the UK’s Brexit vote, the recently signed Windsor Framework attempts to solve one of the most gnarly post-Brexit problems.

The Framework, signed with the EU, aims to remove Brexit checks on goods entering Northern Ireland from the rest of the United Kingdom. These checks created barriers to trade within the UK internal market.

The deal will help to smooth the flow of internal UK trade, but do little to mitigate the impact of Brexit on trade with the EU. On that, the data is clear. Post-Brexit, the UK is trading less with the EU, with pronounced implications for wider economic performance.

“The economy of the United Kingdom has seemingly gone from bad to worse over the course of 2022 and will stay the worst performer in 2023 among the Group of Seven (G7) large industrial economies,” says Dana Bodnar, an economist at Atradius.

The post-Brexit landscape 

After a transition period, Brexit finally took effect in January 2021. Its teething pains have been acute.

“Since Brexit we have seen non-tariff barriers in the form of customs bureaucracy and regulatory uncertainty disrupting UK-EU trade,” says Dana.

Brexit put an end to the free movement of goods between the UK and EU, forcing relevant businesses to accept a new world of border checks and paperwork.

Increased bureaucracy has led to queues at the borders, and new regulatory requirements have made it costlier for UK businesses to export to EU counterparts (and vice versa).

Data makes the impact of these new rules apparent. Since Brexit, the UK’s share of trade with the EU has declined significantly. It is trying to compensate for that loss by selling more to the rest of the world.

As graph 1 shows, prior to Brexit there was little difference between the UK’s trade with the EU and with the rest of the world.

“Since Brexit really began, we see these lines diverge with the UK-EU trade (in grey) dragging on total trade,” says Dana. “That persisted through the pandemic and has even widened now.”

The UK’s trade outside the EU is now more important than trade with the EU for the first time since the ONS started collecting data in 1997.

UK trade in goods with the EU over the past year totalled GBP 617 billion, 40% higher than in 2018. But UK trade with the rest of the world has lept by 66% since 2018, to GBP 668 billion.

This shift in focus is reflected in the UK Government’s recent championing of a trade agreement with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a trade deal between Japan, Australia and eight other Asia-Pacific nations.

The need for Europe

Despite this shift, the EU remains the UK’s single biggest trading partner by far, so the consequences of disrupted trade channels have been severe.

The UK is forecast to see the lowest growth of any G7 economy in 2023.  Its economy is unlikely to reach pre-pandemic GDP levels until mid-2024.

The announcement of an annual GBP 21 billion (0.8% of GDP) fiscal loosening over the coming three years in the Spring Budget should keep UK growth in the black this year. Dana expects a meagre 0.3% economic expansion in 2023 followed by a modest rebound of 1.3% in 2024. This anaemic performance isn’t only down to post-Brexit trade barriers, but they certainly don’t help.

“Structural supply constraints, limited fiscal effects and post-Brexit trade disruptions exacerbate the negative impact of the war in Ukraine on energy inflation, consumer sentiment, and business supply chains,” says Dana.

UK inflation sharply increased in 2022, and wages have not kept pace despite a tight jobs market. That has significantly affected consumer purchasing power.

Main driver of the difficulties

In addition, the mini-budget last September led to a wide sell-off of UK assets and dramatically increased the costs of government borrowing. Mortgage rates leapt while pension fund values dived. At the heart of the budget was a series of unfunded tax cuts. These have now been reversed but interest rates remain high, house prices continue to fall and mortgage lending activity is likely to remain subdued, dragging down consumer confidence. 

High interest rates in a nation of borrowers

The Windsor Framework - a path to easier trade?

Against this background, what impact might the Windsor Framework have?

First and foremost, the agreement will reduce costly and time-consuming checks on some of the goods arriving at Northern Ireland ports from the rest of the UK.

Under the new rules, goods from Britain destined for Northern Ireland markets will travel through a new ‘green lane’, sidestepping export declarations and associated checks and paperwork.

But goods destined for the EU will be directed to a separate ‘red lane’ that will be subject to the usual checks for goods destined for EU markets from non-EU countries.

The agreement avoids a hard border on the island of Ireland, while creating smoother trade flows from Britain to Northern Ireland across the Irish Sea. But it changes little in the UK’s trading relationship with the EU.

There is some symbolic impact and the hope is that the Framework signals a thawing of an often frosty post-Brexit relationship.

But it won’t mitigate the UK’s most pressing economic problems. While other nations face many of the same challenges, post-Brexit trade barriers have created a unique drag on the UK economy that leaves it struggling to keep up with its G7 peers.