Looking Beyond the ‘Brexit Is Bad’ Narrative

With the two-year anniversary of the UK’s departure from the EU about two months from now, we have seen some financial commentators argue Brexit remains disastrous for the UK economy to this day, saying the additional paperwork and associated higher costs have squashed UK businesses that depend on frictionless shipping across the English Channel. We agree Brexit has likely had some effects, but the degree to which Brexit is responsible for weak UK trade data is debatable in light of global developments. That so many UK observers we follow seem to emphasise Brexit over extant global issues shows how this event, now long since behind markets, has become a near-permanent feature of background chatter in the UK, in our view.

Our review of UK trade data reveals Brexit-related distortions since June 2016’s vote to leave the EU. As Exhibit 1 shows, trade with the EU spiked leading up to March and October 2019, the earlier Brexit deadlines that were delayed at the last minute. Our research found businesses raced to front-load exports and stockpile ahead of potential no-deal Brexits in which the UK left the EU without a replacement trade agreement, which many observers we follow warned risked bringing draconian tariffs and customs barriers overnight. We saw a repeat as businesses pulled activity forward late last year before the post-Brexit transition period ended and the UK officially left the EU’s customs union and single market.^[i] In our view, trade was always likely to drop after those initial bursts of activity—somewhat significantly—and take some time to revert back to longer-term trends. The deadlines simply pulled some demand forward, in our view, leaving it weak in their wake.^[ii]

Exhibit 1: The UK’s EU Imports and Exports Since January 2015

Source: Office for National Statistics (ONS), as of 1/11/2021. Trade in goods with the EU, real and seasonally adjusted, January 2015 – August 2021. “Relevant Brexit Date” refers to 23 June 2016 (UK’s EU membership referendum vote), 29 March 2019 (original Brexit date), 31 October 2019 (pushed-back Brexit date), 31 January 2020 (official Brexit date), and 1 January 2021 (end of Brexit transition period). “Real” refers to a value that has been adjusted for inflation.

But that isn’t the only ad hoc factor skewing trade this year, according to our research. The post-Brexit transition period ended right as England’s third lockdown began, and we think trade’s wintertime plunge may also reflect crimped economic activity as ports were forced to implement social distancing measures.^[iii] With those two distorting events occurring at the same time, it is near-impossible to isolate the impact from either one, in our view.

We have seen financial commentators acknowledge this skew and account for it by comparing the UK’s trade with the EU to trade with non-EU nations. Whilst both suffered lockdown-related drops, trade with non-EU countries has recovered faster, which is the basis for most claims we have seen about Brexit having a permanent economic scarring effect.^[iv] Yet in our view, this puts too much emphasis on Brexit and ignores the UK’s long-running trade trends.

Consider exports. Since monthly data begin in 1997, UK exports to the EU have been largely range-bound once adjusted for inflation (the general rise in prices economy-wide).^[v] There were some spikes here and there, but even by the Brexit referendum, there had been basically no growth in monthly exports to the EU since mid-2000.^[vi] Shipments to non-EU nations, which have become an increasingly larger share of UK trade, accounted for the entirety of cumulative goods export growth.^[vii] Recent relative weakness in exports to the EU seems mostly like an extension of this long-running trend, in our view. (Exhibit 2)

Exhibit 2: EU and Non-EU Exports of Goods, January 1997 – August 2021

Source: ONS, as of 1/11/2021. Exports in goods to EU and non-EU, real and seasonally adjusted, January 1997 – August 2021.

Imports tell a somewhat different story. Those from the EU have grown alongside non-EU imports for decades.^[viii] We don’t think this is surprising, considering it was cheaper and easier for UK companies to source parts and raw materials from within the EU’s single market. Brexit has likely eroded that advantage to some extent. Even though most trade between the UK and EU is tariff-free or close to it and the geographical convenience hasn’t changed, customs checks and paperwork add some costs, which makes commerce less smooth.

Yet judging from the relative strength in imports from non-EU nations, we think it is premature to call Brexit an insurmountable headwind for import-reliant UK businesses.^[ix] Based on our study of market history, companies are creative, and it just may be that sourcing materials and components from outside the EU is now more advantageous. We may simply be seeing the seeds of a long-term supply chain reorientation. Then too, much of Continental Europe spent the first half of this year stuck in lockdown—which wasn’t the case for much of the US and large swaths of Asia. Was it paperwork or low availability that kept shipments from Europe weak?^[x] Based on our research, we suspect it was a mix of both.

Exhibit 3: EU and Non-EU Imports of Goods, January 1997 – August 2021

Source: ONS, as of 1/11/2021. Imports in goods from EU and non-EU nations, real and seasonally adjusted, January 1997 – August 2021

Commentators we follow have also attributed some of the most visible signs of stress in UK trade to Brexit. Those issues include logjams at ports, huge stacks of empty shipping containers that can’t get where they need to go and a dearth of lorry hauliers. These issues are all real, and all cause headaches. But we are also in the middle of a global supply chain crunch, which we think makes it impossible to know how big a culprit Brexit really is.

Consider: Shipping companies were in headlines of financial publications we follow for rerouting ships from the UK to Amsterdam due to long wait times to secure a berth at big UK ports. But we have also seen reports that scores of ships are idling in the harbour for weeks on end by Los Angeles, Long Beach and other major US ports—and there are similar backlogs in Asia. Is the UK’s traffic jam worse than it might otherwise be because of Brexit? Who can say? There is no control group.

We think the same goes for the empty shipping containers. The Guardian has reported there are as many as 50,000 empty containers at Felixstowe, the UK’s largest commercial port.^[xi] But container stacks are also a global phenomenon, with empty containers piling up outside the Ports of Los Angeles and Long Beach in America.^[xii] Seems to us like the UK’s woes aren’t unique.

Nor is the lack of lorry hauliers. The UK has an estimated shortage of 100,000 hauliers, which we have seen industry experts pin on the departure of EU workers and the UK now being unable to import cheap labour from Eastern Europe.^[xiii] Yet we have also seen experts estimate a shortage of 80,000 hauliers in America and 400,000 in the EU.^[xiv] Is the UK’s labour shortage worse because of Brexit? Maybe! Or maybe businesses globally are having an extremely tough time finding people to fill jobs that have gruelling hours and a sedentary lifestyle at a time when competition for workers in all industries is fierce, based on labour market reports we have read.

Beyond the economic data, we think there are some reasons to cheer the UK’s trade prospects in both goods and services. London doesn’t appear to have lost its status as a global financial hub. Certain financial businesses have migrated over to the Continent to comply with EU regulation, benefitting cities like Amsterdam, which has become Europe’s largest share-trading center this year—though London remains second.^[xv] But many big UK banks set up Continental operations in the lead-up to Brexit, maintaining their share of business regardless of their location.^[xvi] Moreover, most financial firms expect London will remain a top financial centre despite Brexit, and rather than shedding jobs, London’s banks have been hiring recently.^[xvii]

Trade-wise, the UK has struck free trade deals with Japan, Australia and New Zealand and applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—a free-trade area that rivals the EU’s economic size.^[xviii] Whilst membership isn’t certain, we think this development shows the UK didn’t leave the EU with the intent of turning away from the global economy—it is attempting to strengthen global trade ties instead, which bodes well for non-EU activity to continue being a major, long-term driver of UK trade growth, in our view.

We think Brexit was a classic false fear. Yes, it posed some headwinds and uncertainties, but from shares’ forward-looking point of view, it is old news. However, Brexit, the narrative, isn’t likely to go away, in our view. Instead, we think it will remain a popular reason cited by widely followed financial commentators that this-or-that data point was weak. Furthermore, any time trade issues arise between the UK and EU—however normal they may be for any other two sovereign trade partners—we also expect Brexit blame to ratchet up. For investors, we think it would be beneficial to adjust your expectations because Brexit seems more and more like a semi-permanent feature of the background narrative in Britain.