The UK’s post-Brexit trade deal with the EU has caused a “steep decline” in the number of trading relationships Britain has with the bloc as red tape at the border curbs the ability of smaller firms to export, new research has found.

Although UK exports to the EU have now recovered to pre-pandemic levels, analysis of trading data shows the number of relationships between buyers and sellers tumbled by a third after the introduction of the EU-UK trade deal in January 2021.

The findings from the LSE Centre for Economic Performance chime with warnings from business groups that smaller firms have struggled to absorb customs controls, VAT and regulatory red tape, with many quitting exporting altogether.

The LSE team analysed changes in trade patterns for 1,200 individual product lines traded with the EU, in what they said was the most comprehensive study to date of the effects of Brexit on UK-EU trade.

The paper found the return to pre-Brexit levels of exports to the EU “masks a steep decline in the number of varieties [of goods] exported, driven by the exit of ‘small’ varieties that account for a low share of total exports.” 

Thomas Sampson, co-author and associate professor of economics at LSE, said the analysis had exposed the hidden impacts of increasing the red tape burden on smaller UK exporters.

“The research found that after the trade agreement came into force, the number of buyer-seller relationships between the UK and the EU fell by nearly one-third, with the vast majority of those being shed in the first quarter,” Sampson said.

The research also found that the sudden drop in the number of products being sold was most pronounced in trade between British businesses and their counterparts in smaller EU countries.

Thomas Prayer, a co-author of the paper who is a doctoral student at the University of Cambridge, said the decline was “remarkable”. He added: “It appears the UK simply stopped selling a lot of products to smaller countries in the EU.”

The findings are another worrying sign of the negative impact that the Trade and Cooperation Agreement between the UK and EU is having on UK exporters.

Last month the Office for Budget Responsibility, the government spending watchdog, warned that UK trade had “missed out” on much of the recovery in global trade and was lagging all other G7 economies.

The OBR, which estimates that total UK imports and exports will be 15 per cent lower over the medium term than if Britain had remained part of the EU, said Brexit “may have been a factor” in the relative underperformance.

Sampson said the LSE findings raised worrying questions about the long-term impact of Brexit on future EU trade. “There’s quite a lot of evidence that future growth in trade comes from firms that are small today,” he added. “If you kill off those exporting relationships it may lead to lower future export growth.”

William Bain, head of trade policy at the British Chambers of Commerce said the findings bore out complaints by businesses for more than a year that the TCA was making them less competitive.

“Inevitably it is smaller firms which don’t have the money, time or logistical capacity to set up within the EU which are being hardest hit. That is also the message from this important new study,” he said, urging the government to work with the EU to reduce trade frictions.

Martin McTague, chair of the Federation of Small Businesses, said exporters were facing “myriad challenges” including increased paperwork and urged the government to launch a new “SME Trade Support Fund” to help firms trade internationally. “Small business must be at the centre of free trade agreements,” he added.

The Department for International Trade said the TCA allowed businesses in Britain to “trade freely” with the EU, and was working to support exporters via its Export Support Service.

“We are ensuring that businesses of all sizes have the support they need to trade effectively with Europe and seize new opportunities as we strike trade deals around the world,” a spokesperson added.

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