At the start of the year, the Economist quite sensibly suggested that the Brexit trade talks would dominate the agenda for the year ahead.  Suffice to say, since then the coronavirus pandemic has shoved Brexit firmly from the agenda, but that shouldn’t reduce the importance of what has previously been defined as a generational change.

A new paper from Aston University highlights the changes small businesses are making in the UK to prepare for what they increasingly believe will be a collapse in talks and an exit without any sort of trade deal in place.

Trade negotiations between the UK and the EU are resuming this week, and the paper provides clear evidence at the firm level of how UK businesses are responding to the situation.  It shows clear attempts to move exports away from EU markets to elsewhere in the world.

Gravity defying

The authors highlight how the finding defies traditional economic thinking, which suggests most of international trade happens between countries that are geographically close to one another.  The findings emerged from an analysis of the 340,000 or so export transactions undertaken by 26,000 UK firms over a five-year period.

The data showed that the smallest exporters were shifting up to 46% of their export growth from the EU to other markets since the referendum in 2016, with slightly larger firms shifting around 19% of their exports.  It’s a shift that represents around £10.45bn per year.

These diverted exports were mainly going to Commonwealth countries, and the BRICS (Brazil, Russia, India, China, South Africa) markets.

It was a phenomenon broadly observed across firms, although medium-sized firms exhibited a smaller shift of just 7% of their exports.  For the largest firms, their dependence on the EU market actually grew, with the researchers suggesting they were perhaps filling the gap left by smaller firms.

Tariff barriers

The transition away from the EU appeared especially strong among firms who might suffer as a result of future tariff introductions.  Sectors such as chemicals, food and drink, and textiles were among the most enthusiastic shifters.

The researchers suggest that the desire for small firms to move could be because they have a smaller order book that doesn’t allow them to hedge their risk in the way larger firms can.

“This evidence suggests that UK exporters are jumping before they’re pushed – finding alternative markets worldwide for their products even before we know the outcome of the current UK-EU trade negotiations and any potential new barriers,” the researchers say.  “They also seem to be defying conventional theories of trade gravity, preferring to direct their trade flows towards Commonwealth countries where the UK may still have historical linkages, or emerging economies where future growth potential could offset some of the higher costs of trading.”

The researchers accept that the Covid-19 crisis has added a considerable layer of uncertainty to the trading environment, both due to direct trading conditions but also the vulnerability of supply chains.

The very act of diversifying trade patterns itself does not come without any risk, as transport costs are likely to grow, and companies are forced to operate in unfamiliar markets with unfamiliar bureaucracy.  Add in currency and credit risks, and it’s by no means an easy pivot to make.

“Overcoming these risks calls for focused policy support,” the researchers conclude. “The Government and its trade-promoting agencies need to provide guidance on strategies for adapting to these new trade destinations. They need also to ease export admin and stimulate financial support, risk management and education in strategic marketing. Interestingly, these actions are those that were undertaken by countries like Japan and South Korea in their successful export-led growth from the 1960s onwards.”