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How worried should we be about the UK’s January trade slump?

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Written by Harry Western

UK trade with the EU slumped in January. Various factors appear to have contributed to this, including late 2020 stockpiling, firms avoiding moving goods due to fears of disruption, low demand due to Covid-19 and new barriers to trade which have especially hurt UK food exports. While the headline numbers look alarming, there is likely to be a significant recovery in trade volumes in the next couple of months as freight flows have already rebounded strongly from their January lows. Longer-term, a decline in the relative importance of the EU as a UK trade partner is likely, but the data so far don’t give us a strong steer on how large this decline will be.

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Trade figures for January revealed a steep drop in the volume of UK trade with the EU, which has predictably generated many excited headlines. Seasonally adjusted UK exports to the EU fell from around £14 billion in December to £8 billion in January, a 40% decline. Imports from the EU meanwhile dropped from £22 billion to £16 billion (see Chart 1).

How concerned should we be about this? In our view the evidence suggests that the decline in January reflects a variety of factors, some of which will wane or reverse over time.


Stockbuilding effects: A glance back to the spring of 2019 gives us our first clue as to what happened at the start of this year. In Q1 2019, ahead of the original deadline for the UK to leave the EU customs union and single market, UK-EU trade rose sharply as UK and EU firms stockpiled goods from EU and UK suppliers respectively in anticipation of possible new trade barriers and border disruptions. With demand having been ‘pulled forward’ by this stockbuilding, UK-EU trade then slumped in April after the deadline passed.

Much the same appears to have happened at the end of 2020 and the start of 2021, just on a bigger scale. In 2019, UK exports to the EU in February-March were about £2 billion higher than the average over the previous few months and were then £1.7 billion lower in April (after the original Brexit deadline). In 2020, over the three months of Q4, UK exports to the EU were about £4.4 billion higher than the average of the previous few months, and in January dropped by £4 billion compared to the average of the pre-stockpiling period (see Chart 2).

With a broadly similar picture visible on the import side, this suggests a large part – perhaps even all – of the January trade slump was just down to the unwinding of previous stockbuilding. However, the impact of the Covid-19 pandemic complicates matters: some of the upward trend in UK-EU trade in late 2020 might have been due to a natural recovery of trade from the earlier Covid-related slump rather than stockbuilding.


If we compare the path of UK exports to the EU with broader EU import demand, it does look like some of the late 2020 rise in UK exports to the EU reflects firmer underlying EU demand. In September, EU imports were down 4% year-over-year but by November this had improved to a flat year-over-year reading. That effect is quite modest though, while the acceleration in UK exports to the EU in the same period, from -7% annual growth to +5.5%, is quite abrupt. So, even allowing for firmer underlying EU demand the stockbuilding effect still looks large.


Weakening underlying demand in early 2021: Another possible factor affecting UK-EU trade in January is weakness of underlying demand at the start of 2021 related to tighter Covid-19 restrictions. Combined import volumes in France, Germany and the Netherlands fell 6% year-over-year in January (see Chart 3), with French imports crashing 16% year-over-year (including a 9% drop in imports from other eurozone countries). This weakness is likely to have contributed to the drop in UK exports to the EU. Demand factors related to renewed lockdowns probably also explain part of the drop in UK imports from the EU in January: notably, UK imports from the rest of the world also weakened in January, indicating a general softness in UK import demand.

Border disruptions: At the end of 2020 there was considerable disruption at the British-French border related to the Coronavirus pandemic, with hauliers required to undertake tests for the virus before crossing to France – a requirement that remained in force into January. This is likely to have deterred some hauliers from using this route and led to some firms delaying deliveries for fear of being delayed up at the border. In addition, some firms appear to have been unprepared for new paperwork requirements, leading them to temporarily halt exports and imports.

Trade barriers: What about higher trade barriers? New non-tariff barriers will have affected a variety of sectors, but most press coverage of the impact of higher trade barriers has focused on food products. A look at the detail of UK export performance in January supports the view that this is the most affected area. UK food exports in January were 60% lower than the average of the previous six months, and fisheries exports were 70% lower (Chart 4). For these sectors, stockpiling and low EU demand look less convincing as explanations of the January trend – in the case of some perishable goods, stockpiling would anyway be less significant.

chart 4

The vulnerability of food exports to trade barriers becomes even clearer if we compare their performance in January with that of other sectors, especially the machinery/transport equipment sectors (which account for a much larger share of UK exports than food). In these sectors, export volumes in January were down only 20-25% compared with the average of the previous six months – despite the many concerns expressed about motor vehicles sector. For these sectors, identifying a trade barrier effect independent from other factors is much harder than for food.

Trade re-orientation/erratic factors: Another possible contributory factor to the weakness of UK exports to the EU in January is UK firms diverting exports to non-EU destinations. In contrast to EU export sales, deliveries to non-EU destinations in January rose £1.3 billion, and were 10% higher than the average of the previous six months. Some of January’s rise will reflect firmer non-EU demand, but that is unlikely to explain all of it. The buoyancy of non-EU exports meant overall UK good exports in January were only 13% lower than the average of the previous six months.

Some erratic factors may also have been in play. In particular, we note the curious weakness of UK crude oil exports to the EU in January – some 50% lower than the average of the previous six months. This is odd because there was no strong drop in oil production that month and because oil exports (unlike e.g. food) do not face any significant non-tariff barriers to entering EU markets.

How might we expect the factors outlined above to develop over the coming months? We already have some evidence from data on freight movements. Cabinet Office data for roll-on/roll-off freight movements at UK ports shows these movements (inbound and outbound) were down 27% year-over-year in January. This lines up almost exactly with the decline in UK-EU trade volume (which casts doubt on the claim that a much larger than usual share of outbound lorries was empty).


In February, the Cabinet Office data suggests both inbound and outbound freight movements returned to normal, being around 2% higher than in the same month of 2020 (Chart 5). On the face of it, this would imply trade volumes were back to normal also, based on the relationship in January. We doubt this, as other freight data is not quite as upbeat. For example, Eurotunnel data for February still shows freight down about 20% year-over-year, albeit this is a considerable improvement from January when freight volumes were down almost 40%. But freight movements have definitely strengthened sharply from January’s lows. Daily cargo ship visits recovered strongly in February after a very weak January, with the improvement carrying on into early March (Chart 6).


Based on the freight data, we are confident that UK-EU trade volumes will recover somewhat in February and March. The effects of previous stockpiling may still weigh for a time, but as traders become more familiar with new systems and processes for moving goods and with the much-trailed ‘ports chaos’ having failed to materialise, much of the disruption of January should ebb. Low EU demand may continue to be a problem given rising coronavirus cases and related restrictions.

But what about the longer term? It is clear that UK-EU food trade is likely to be permanently lower, and probably by a significant amount. Much depends on the extent to which the UK intends to mirror the EU’s restrictive regime for food imports (so far, the UK has taken a very light touch approach in this area) and the extent to which it successfully signs trade deals with other suppliers of agricultural produce, potentially diverting trade from the EU. For other sectors, it is likely the relative importance of EU trade in total UK trade will also shrink, but by varying amounts. We get a hint of this from January’s data, i.e. in the very different performances of different industries, but given various erratic factors affecting some sectors it is far too early to draw firm conclusions.

Finally, we will mention services trade. Some anguish has been expressed about the limited focus on services in the UK-EU trade agreement, but January’s data suggests that – as we have generally argued – this was probably misplaced. In sharp contrast to the drop in goods exports, UK services exports in January fell by less than 1%. Services along with non-EU exports accounted for almost 80% of UK export earnings in January – an important contextual point when considering the significance of developments in UK-EU trade in January.

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About the author

Harry Western