The 2016 British referendum completely transformed the relationship between the European Union and the UK, and according to a new study by the London School of Economics, that change in relationship is now being keenly felt mainly by the UK’s SMEs. In fact, the study has found that it is smaller UK businesses that are suffering the most from Brexit red tape.
That red tape has marked a red line for SMEs, the study found, who make up 99% of all UK businesses, with the British Government’s official figures showing over 5.6 million SMEs in 2021.
The study, ‘Unravelling deep integration: UK trade in the wake of Brexit’ found that SMEs cited the cost and time involved in compliance and paperwork as the key reasons they’ve curtailed export operations.
The report also found that while UK exports to the EU have bounced back to pre-pandemic levels, there is a 30% drop in relationships between buyers and sellers.
The report states, “The estimates imply that the TCA has reduced the number of 8-digit product-country varieties exported to the EU each quarter by around 30%, and this contraction is driven by the destruction of low-value trade relationships.
“Consequently, it would be a mistake to interpret the missing export value effect as evidence that UK exporters were unaffected by the introduction of the TCA.”
It adds, “Instead, we conjecture that the TCA has increased the fixed costs of exporting to the EU, causing small exporters to exit small EU markets, but not (or at least not yet) severely hampering exports by large firms that drive aggregate export dynamics.”
This study has confirmed most of our suspicions; small and medium-sized businesses are – and will continue to – suffer most from Brexit. And, unlike large companies who have the financial resources and manpower to adapt to the UK’s changing relationship with the EU, SMEs simply cannot afford to deal with it. Ultimately, the study found that many SMEs quit exporting altogether due to the Brexit red tape; a decision that will have significant economic repercussions elsewhere.
We’ll see less supply, innovation and variety to the consumer, and ultimately a growth problem for the UK as SMEs make up the majority of its businesses.
Results of the survey should serve as an alarm bell and we need to send the message that simply pulling back from exporting is not an option for the long-term viability of SMEs. What they need to do, is reprioritise export markets. We have seen this work before, particularly in food and drink and fast-moving consumer goods.
Speaking to the Financial Times, the head of trade policy at the British Chamber of Commerce, William Bain, said, “The return to pre-Brexit levels of exports to the EU masks a steep decline in the number of varieties exported, driven by the exit of ‘small’ varieties that account for a low share of total exports.”
One of the study authors, Thomas Prayer, describes the decline as ‘remarkable’.
“It appears the UK simply stopped selling many products to smaller countries in the EU,” Thomas says.
What this all comes down to is that we need to send a strong message to SMEs that exporting to Europe can and should still be done, barriers can be overcome and the support to do it is there.
At OCO Global we are well placed to support companies, clusters and economies to address this challenge. We work with SMEs and governments reprioritise export markets, looking at both the market opportunity and the entry barriers to come up with the right answer.