The Effects of Covid-19 and Brexit on Firms’ Trading Decisions

This is a preview from the Quarterly UK Economic Outlook, May 2021.

This box focuses on adjustments of firms' product trade portfolio, i.e. the number of products exported and inputs imported, and it looks at the literature on past crises and UK data to infer how UK businesses may be adjusting the range of products traded in response to the twin challenge of Covid-19 and Brexit. A key point is that this adjustment depends on firms' perception of the nature of these crises. Thus, firms tend to maintain their product portfolio when faced with temporary shocks and alter it when faced with permanent ones.

Considering the perceived natures of Covid-19 and Brexit, along with the experience from previous crises, it is arguably the case that the long-run Brexit effects will prevail in firms' product mix decisions, translating into fewer products being traded with the EU. However, much more information is required to disentangle the effects of both shocks and draw more evidence-based conclusions. And while it is not clear how trade in services with the EU will be affected in terms of number of services traded, the lack of a clear service sector deal raises questions for future research and policy-making.

The analysis in this Box has been prepared by NIESR Economist Manuel Tong Koecklin.