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The terms of the EU-UK Trade and Cooperation Agreement (TCA) caused UK exports to the EU to fall by 14% and trade in the opposite direction to fall by almost a quarter in the first seven months of its enforcement – or an estimated combined blow to the UK economy of around £44bn, according to a report out today by the UK Trade Policy Observatory (UKTPO).

After months of brinkmanship and political deadlock, the trade deal was signed on December 31 last year, with provisions that build upon World Trade Organization (WTO) principles, facilitate trade, and address non-tariff barriers such as import and export licensing restrictions. Speaking at the time of the deal’s signing, British Prime Minister Boris Johnson said it would “allow our companies and our exporters to do even more business with our European friends” – words that now ring hollow in the face of the UKTPO’s findings.

Using three econometric techniques that removed confounding factors such as the Covid-19 pandemic, the UKTPO research examines the period between January and July this year, revealing the extent to which new regulations and customs formalities brought in since Brexit are hampering Britain’s business with its largest trading partner.

In goods trade, the UKTPO calculates that a whopping £32.5bn has been lost in potential imports to the UK, and £11bn in exports to the EU, while the Brexit effect was felt even more strongly in the services sector, leading to 12% drop in exports and a 37% reduction in imports.

“The evidence our analysis has uncovered on the impact of UK services trade reflects some of the worrying costs of Brexit for the UK economy,” says Guillermo Larbalestier, research assistant in international trade at the UKTPO. “UK trade with the EU has declined so much since the implementation of the TCA that it has largely compromised the UK’s post-pandemic economic recovery.”

One of the most concerning issues uncovered by the UKTPO’s analysis is that of tariffs. In a first for the EU, the TCA includes 100% tariff liberalisation, whereby no tariffs or quotas are imposed upon the movement of goods between the two sides. However, this condition is only valid if exporters can prove that their goods meet rules of origin, which is often an arduous task, and one for which many companies are ill-prepared. Any failure to adhere to the documentation requirements on qualifying goods means that customs duties are still payable.

In its research, the UKTPO found that tariffs are still being applied to as much as 32% of those UK exports that qualify for preferential treatment under the TCA, as UK firms struggle with the detail needed to meet zero-tariff conditions.

“Even some exporters that can meet the rules of origin may instead choose to pay the tariff because of the cost of the paperwork and requirements for certification,” the report says. “This means that, in practice, firms may end up paying tariffs despite the zero-tariff and zero-quota deal under the TCA.”

In total, the UKTPO finds that UK exports to the EU worth between £7.89bn and £10.56bn incurred tariffs in the first seven months of the new trading conditions. These tariffs aren’t small change: rates on some agricultural products can be over 50%, while for many items of textiles and clothing the tariffs are set at 12% or 16%. Overall, the foregone duty savings amount to an eye-watering £534.6mn, the report says.

Given the importance of the EU as a trade destination, these increased costs and complexity are having a deleterious effect on numerous exporting sectors, the UKTPO says. The worst hit sectors, plagued by persistent and lingering losses, include footwear and headgear, which has seen exports drop by 77.2%, textiles and clothing, which has experienced a decline of 60.2%, and vegetable products, which have fallen by 43.5%.

“For some firms which can meet the rules of origin it is simply not worth it because the tariff is so low, but for other firms such as in textiles and clothing the need to satisfy rules of origin appears to have hit hard, says Yohannes Ayele, research fellow in the economics of Brexit at the UKTPO.

The UKTPO’s analysis does not distinguish between the impacts by firm type or size, but its researchers suggest – as does common sense – that the challenges and impacts of trading with the EU are more likely to be greater for small and medium-sized enterprises (SMEs).

“The immediate impact on UK trade for firms and for consumers has been sharp and in many cases severe,” says Michael Gasiorek, director of the UKTPO and professor of economics at the University of Sussex Business School. “In the longer term, this will affect UK jobs and investment, and the challenges will be harder for SMEs to overcome.”

Some of the reduction in trade flows, notably among UK exports to the EU, may be accounted for by teething problems during the TCA transition period at the start of the year. However, the UKTPO’s research shows that losses have persisted into the second quarter. Effectively, far from allowing tariff-free, quota-free access to the EU market, the terms of the TCA mean that the spectre of Brexit will continue to haunt Britain’s trading performance for some time to come.