EU27 And The UK: Product Dependencies And The Implications Of Brexit

Lisandra Flach (EconPol Europe, LMU Munich and ifo Institute), Feodora Teti (EconPol Europe, LMU Munich and ifo Institute), Lena Wiest (EconPol Europe, University of Tübingen and ifo Institute) and Margherita Atzei (EconPol Europe, University of St. Gallen and ifo Institute) !

Key Messages
■ This report provides an overview on product dependencies between the EU27 and the
UK and uncovers several stylized facts.
■ Only few products are imported solely from the UK, and they represent a negligible
share of imports.
■ In almost all the EU27 countries, less than 10% of goods with five or less suppliers come
from the UK.
■ Those goods are sourced otherwise mostly from other countries inside the EU27, which
suggests that it might be easier to substitute these goods across countries.
■ However, for German-UK trade, most of those goods are classified as intermediate
goods, which implies that Brexit may cause an additional distress on supply chains.
■ For the UK, most of the goods that are dependent on five or less suppliers come from
countries within the EU.
■ 54% of them are classified as intermediate goods, meaning that Brexit might cause a
significant increase in trade costs for the UK.

The current COVID-19 crisis has shown the importance of supply chain diversification to mitigate the negative effect of unexpected supply shocks. The decision of the United Kingdom (UK) to leave the European Union (EU) poses additional challenges to foreign trade: Irrespective of the outcome of the Brexit negotiation, trade costs between the UK and the EU will increase as a response to Brexit and cause disruptions in trade relations. Trade shocks hitting one bilateral country pair might be more severe for goods that are highly dependent on few suppliers, as they cause an increase in costs and, in the worst case, supply chain disruptions.

In this report, we take a detailed look at goods that are dependent on few suppliers. We show that (i) only few products are imported solely from the UK, and they represent a negligible share of imports (ii) with exception of Ireland, Malta and Cyprus, all other EU27 countries import less than 10% of goods with five or fewer suppliers from the UK, (iii) those goods are otherwise mostly sourced from other countries inside the EU27, which suggests that it might be easier to substitute these goods across countries, (iv) however, for German-UK trade, most of these goods are classified as intermediate goods, which implies that Brexit may cause an additional distress on supply chains, (v) for the UK, 64% of the goods that are dependent on five or fewer suppliers come from countries within the EU, (vi) nearly 54% of those goods are classified as intermediate goods, meaning that Brexit might cause a significant increase in trade costs for the UK. Given the extent of trade relations between the UK and the EU27, our results unfold the far-reaching consequences of Brexit for the UK economy and the importance of a trade agreement that ceases trade uncertainty and minimizes the costs of Brexit.

Our analysis is based on Comext data for the year 2019. Comext is Eurostat’s reference database for statistics on international trade in goods. The data provides information on bilateral trade flows for the CN classification at the 8-digit level. With the Comext data, we investigate from how many suppliers a product is imported, whereby we define a supplier as an origin country.

Aggregate Trade Patterns between the UK and the EU27

The literature has provided several estimates on the costs of Brexit for the UK, the EU27 and the global economy (Dhingra et al. 2017, Felbermayr et al. 2017, Felbermayr et al. 2018, Graziano et al. 2018, Sampson 2017, Steinberg 2019, Vandenbusche 2019). Most of the quantitative exercises show that both the UK and the EU27 lose from Brexit. However, the extent of the loss differs widely across countries and depends for instance on the intensity of trade with the UK.

In this section we focus on the trade patterns between the UK and the EU27 over time and check if any shifts have taken place since the referendum in 2016. Figure 1 shows the evolution of the trade relation between the UK and the EU27 over time. The left graph shows the share of UK-trade with the EU27 as a percentage of total UK trade flows, the right graph shows the same from the perspective of the EU27.

The figure highlights the importance of the EU27 market for UK trade: in 2019, 50% of the imports and 47% of the exports were traded with the EU27, which makes the EU27 market the UK’s largest trading partner. In 2006, both, the shares of UK exports and imports to the EU27, were at the maximum level; since then both shares are on a general downward trend, the exports more than the imports. Since the referendum in 2016, the exposure to the EU27 market did not significantly change from the perspective of the UK. Hence, especially as a supplier, the EU27 matter for the UK. For the EU27, the UK is much less important as a trading partner: in 2019, only 4% of total exports go to the UK and 6% of the total imports are from the UK, respectively. While the trade shares decrease between 2001 and 2007, they remain relatively stable thereafter. Since the referendum in 2016, we have seen a slight decrease in the trade shares with the UK…

The study is available at https://www.econpol.eu/publications/policy_brief_32