The United Kingdom completed its withdrawal from the European Union at the close of 2020, with a new free trade agreement passed just in time. The good: the agreement avoided an automatic default to World Trade Organization trading terms and ended a long period of uncertainty. The less positive: The deal comes with economic costs and logistical challenges for trading firms, and leaves some areas unaddressed.

The trade arrangement between the U.K. and EU involves a number of changes to customs practices, leading to additional challenges for exporters and importers across all industries. Atradius analysts predict that the effects of COVID-19, paired with new trade frictions, will cause a sharp rise in insolvencies in the U.K. in 2021, and a less severe rise in business failures across the EU. Industries that rely heavily on exports to the U.K. — automotive, high-tech goods and textiles, for example — likely will be more significantly impacted.

For most sectors, the main challenge is learning to operate within the complex new rules, requiring an additional investment of time and causing delays while businesses ensure that the correct paperwork is in order. This challenge, however, should be short-lived, as firms become more familiar with the forms and the process.

Additional checks on haulage may also cause supply-chain issues in the short term. The initial weeks following the start of the new arrangement saw delays at British ports, which were further exacerbated by travel restrictions due to COVID-19. While these conditions are improving, the impacts coupled with increased demand and escalating prices for shipping saw a materials shortage. Labor availability is also an issue, with fewer overseas workers in the U.K. 

While purchasing planning already factors in delays for non-perishable goods, sectors such as foodstuffs and animal products with new, more stringent import requirements will have a bigger headache working out the kinks. Other sector-specific concerns include:

• In the chemical sector, business leaders have voiced concerns that the trade agreement will drive businesses away and cause repetitive animal testing. One chemical firm, for instance, has estimated that new U.K. regulations could cost the company £70 million.
• For the U.K. paper industry, as the world’s largest net importer of paper, safeguarding the EU trade and supply chain is the critical issue.
• Both the U.K. and EU had to make concessions on fishing rights, one of the keystone issues in the campaign for the U.K. to leave the EU. The outcome leaves areas of concern for the fishing industry, but allows the UK to increasingly regain control of its waters over the next few years.

Firms will no doubt adapt over time, but trade is not frictionless. Some businesses are walking away from Europe altogether due to the extra costs associated. Others, mostly larger firms, are moving EU trade to an EU-based subsidiary to circumvent these costs.

For the most part, the main upside to the trade agreement is that it maintains continuity of supply with the main supply routes and prevents the greater challenges that industries might have faced without it. Meanwhile, bilateral discussions continue to finesse aspects of the trade agreement.

The issues around new customs regimes should improve over time. Trade growth remains a possibility, especially when firms arm themselves with a strong risk-management strategy.  

Uncertainty still lingers, however. The longer-term impact of new complex rules for certain goods and quota issues remains at the center of ongoing discussions between the U.K. and EU. Until those discussions progress, it’s difficult to predict the long-term picture.

Carole Welch is corporate communications manager at Atradius.