Research Area: Trade & GVCs (TG)

The TG theme builds on the previous research of The Lloyds Banking Group Centre for Business Prosperity (LBGCBP) in the areas of trade and productivity. In light of UK’s trading position in the new globalised world (brief, full), we see that UK’s priorities of improving productivity overlap with those for promoting UK trade effectiveness. Indeed, international trade is a key area for research to strengthen businesses’ organisation capital in meeting productivity challenges, as part of the research agenda of  the newly established multi-million ESRC initiative The Productivity Institute (see our positioning paper, Nov 2021).

In the last few years, we have followed closely on the UK’s EU exit and investigated its impact. Our research has informed decision makers and the public about our findings and their implications. Our study focused on UK trade and prosperity by looking beyond Brexit and COVID was the foundation work for the Lloyds Trade Campaign Chapter 2. Our research finds that the prolonged period of policy uncertainty has led to destruction of trade among smaller firms, and consolidation and  re-direction of trade flows from the EU to more distant and emerging extra-EU markets for large firms (see media coverage The Guardian, Daily Telegraph, etc). This research underpins the Lloyds Banking Group Global Trade Campaign “A new world for global British Business” 2021.

The COVID-19 pandemic has been another major disruption to trade, but it won’t kill globalisation  (see our insight paper and our contribution to Parliament’s inquiry of International Trade Committee July 2020).  We documented the unprecedented disruptions in the UK exports through comprehensive and in-depth analysis of the international trade dynamics of UK businesses – the deeper decline and slower recovery in comparison to Germany, Italy, Spain and the US in 2020 (see publication and media coverage Independent, The Times, Reuters, etc.).

Responding to the call for evidence on the 2020 UK-US trade agreement in trade in goods, we provide evidence on the estimated gains from the agreement, UK industrial and regional exposure to the UK-US trade in services, and service trade restrictions and the potential US-UK trade agreement, leading to reflections on the UK-US trade policy. See our written evidence to the Parliament’s inquiry by EU International Agreements Sub-Committee, on 25 September 2020, and our commentary.

Services sectors are hugely important for the UK economy for job and value creation. With the uncertainty of the future UK-EU relationship, Professional and Business Services (PBS) sectors are at stake. See our written evidence for the Parliament Inquiry by the EU Services Sub-Committee in October 2020, and an insight paper and a blog published by the UK in Changing Europe. Our research further underpins the written evidence adopted in UK House of Lords EU Committee Inquiry: The future UK-EU relations on trade in services by the EU Services Sub-Committee report Beyond Brexit: trade in services, March, 2021.

In evaluating the Brexit impact on UK services trade, we estimate that Irish services exports surged by £126bn as the UK’s fell by £113bn from previous trends in the wake of the UK’s EU referendum (see Brief, Full paper and media coverage FT, The Independent; The Guardian). In a follow up analysis of the UK, Ireland and Germany, we assess the uneven impact of Brexit on different service sectors and markets. The most affected services exports are in Transport, Travel, Insurance, Telecom and IP sectors (See our paper and blog, Nov 2021). While the UK lost grounds to the EU rivals, it will take time to find out who will be the real winners of UK’s EU Exit. At the same time, we find that Asia countries grow rapidly in some services fields (see our commentary, July 2021).

Looking forward, our 2021-2022 research focuses on the following areas and questions:

I.    UK Trade Post EU Exit: Challenges and Opportunities

Brexit referendum and the EU-UK Trade and Cooperation Agreement (TCA) fundamentally changed the relationship of the UK with the EU and the rest of the world. New barriers to trade erected between the EU and UK bring challenges for the UK companies who trade goods and services with the EU. At the same time, freedom in developing independent trade policy by the UK government creates some opportunities. We will assess these challenges and opportunities with rigorous and timely evidence.

Project TG-1 Non-tariff Trade Barriers and EU Exit

Funded by ESRC/BEIS through ERC4 funding for WP4 Internationalisation and Productivity (February – July 2022)

Researchers: Jun Du and Oleksandr Shepotylo

This project will offer the first assessment of the changes in the UK exports and imports with EU and the rest of the world in the first three quarters of 2021 based on the sample of the monthly trade at product level (HS-6) of 48 countries. We expect to provide an updated overall picture of the UK trade performance, and in particular a careful assessment of the impact of non-tariff measures (NTMs) on the UK trade post EU exit

Project TG-2 Innovation, Internationalisation and Productivity

Funded by ESRC through The Productivity Institute (March 2022- February 2023)

Researchers: Jun Du, Oleksandr Shepotylo and Mustapha Douch

Building on these arguments our proposed project explores the causal links between innovation, export behaviours and productivity at firm level with a particular focus on the implications for policy support around innovation and internationalisation. Our empirical analysis will use firm-level panel (longitudinal data) which is available in the secure data setting provided by the ONS and HMRC Datalab.

Project TG-3 Trade in Age of Disruptions: An Explorative Study of Business Insights and Conditions (BICS)

(January 2022-December 2022)

Funded by ESRC/BEIS/NESTA-PEC

Researchers: Jun Du, Meng Song, Oleksandr Shepotylo and and Arash Sadeghi

The year 2022 will see the economy turning the tide against the pandemic, although the recovery routes will vary by sectors. A key question we ask here is how to prepare for a new era for the UK economy? This project will investigate the landscape of the businesses in the UK economy in their international trade experience during the recent global trade disruption. Our focal question is: What lessons have we learned and need to harness from the recent experience? We employ the data from ONS BICs Surveys to provide stylized facts on the UK trade, aiming to understand export disruptions, export challenges and effectiveness of export supports using the biweekly data of nearly 40,000 firms during 2021. Using linked data of BICs and IBDR’s Business Structural Database (BSD), our modelling focuses on factors affecting trade disruptions (EU exit, COVID impact due to refinements, COVID induced global supply chains problems) and how they impact on growth.

Project TG-4 Service Restrictiveness, Sourcing and Delivering International Services and Productivity

(September 2021-August 2022)

Researchers: Jun Du, Uzoamaka Nduka and Oleksandr Shepotylo

Stepping out from the EU implies the UK’s retreat from the previous advantageous trade arrangements with no tariffs and minimised non-tariff trade measures (NTMs). The changes to these conditions mean likely higher trade costs and disrupted business value chains across borders. Therefore, firms’ productivity will be affected as a result in the short term and possibly also in the long-term. This project examines the impact of non-tariff trade measures (NTMs) on productivity. It involves first quantifying the NTMs, and then exploring their determinants, and analysing the impact of NTMs through potential Brexit scenarios (customs union, FTA, hard Brexit) on productivity and trade of firms in the UK using ONS International Services Trade Survey (ITIS) and Annual Business Survey data.

II.    Global Value Chains in the Time of Covid and TCA

Global value chains (GVC) become possible in the era of low trade costs and high-speed internet. COVID has highlighted the vulnerability of reliance on a small number of suppliers, yet has demonstrated the remarkable resilience of the GVCs to diversify sources of supply of critical goods. Spikes in transportation costs and new trade barriers between the EU and UK require revising current supply chains. We document the ongoing restructuring of the UK supply chains and its impact on firms, and regions in the UK. Our metrics include productivity, levelling up, and economic growth in the UK.

Project TG-5 Robots, Productivity and Global Value Chains (GVCs)

(September 2021-August 2022)

Seeking funding

Researchers: Jun Du, Uzoamaka Nduka and Michail Kargolou

This is a sector level study investigating the causal links between adoption of robots, productivity and global value chains. The UK’s adoption of industrial robots is surprisingly low. It is the only G7 country with a robot density below the world average. There is a fast growing literature on the labor consequence of robot adoption, but the directionality between productivity, robot adoption and the implications on globalisation is nothing but clear. Our empirical analysis draws on the International Federation of Robotics (IFR) database by industry for 20 countries, their GVCs participation through forward and backward linkages from the OECD Trade in Value Added (TiVA) database, and industry characteristics from EUKLEMS of 21 years between 1995 and 2016. We take an approach of Panel Vector Autoregressive model to account both for dynamic behaviour and cross-dependence of the variables specified as endogenous in its system of equation.

Project TG-6 Global Supply Chains: Vulnerability and Resilience to Covid 19

(September 2021-August 2022)

Researchers: Jun Du, Mustapha Douch, and Oleksandr Shepotylo

Global supply and demand shocks caused by COVID-19 pandemics revitalized debates about costs and benefits of global division of production. There were calls to re-shore production and shorten global value chains by making them more regional. However, the global economy has quickly recovered and demonstrated substantial resilience, which questions the validity of the argument against the global division of production. Our empirical analysis based on the monthly trade data in 2018-2021 consider which global production networks have shown more resilience and which have been less successful in countering the COVID-19 shocks. Based on the network analysis, we study the characteristics of the optimal global networks and develop policy recommendations for strengthening their resilience and economic efficiency.

Business Confidence, TCA Adaptation, and Export Performance

Authors: Jun Du

Business confidence or business sentiment is a measure of how a firm’s managers perceive the external environment and how they feel about their current and future business prospects.i,ii It has both objective and subjective elements. The objective elements relate to business perceptions of both the facts of the operational environment and the arguments being presented about future expectations, while the subjective element relates to how a firm’s management assesses its specific business conditions.
Business sentiment matters because business decisions are likely to be affected by it, although exactly how this occurs remains debatable.iii The expectations of business owners/managers drive their strategic and operational decisions,iv including those to do with the firm’s capital structure, investment, M&A, innovation, and dividends.v,vi Business sentiment is also used to track changes in businesses’ perceptions of export barriers over time.vii

Post-Brexit UK Trade: An Update

Authors: Jun Du, Emine Beyza Satoglu and Oleksandr Shepotylo

This insight paper provides three insights on UK trade post-Brexit. First, we update Du and Shepotylo’s (2022) assessment of the TCA impact on UK trade. By using data up to 2022Q1, we show that the negative, large, and statistically significant impact of the TCA on UK exports has persisted and even slightly deepened into 2022. This highlights the continuing export challenges that UK firms have faced since the TCA was put in force and underscores the need to systemically think about the UK’s post-Brexit trade policy. Second, unlike exports, the negative impact of the TCA on imports has been subsiding. Although there is a confluence of many factors that might explain the Brexit imports puzzle, it appears to be more of a teething problem. The reduction in import bottlenecks might help exports to rebound, although the rising costs of imports are likely to offset the effect of that recovery. Third, the UK has experienced a significant contraction in its trading capacity in terms of the varieties of goods being exported to the EU due to the TCA. An estimated loss of 42% of product varieties over the 15 months since Brexit, combined with an increased concentration of export values to fewer products, signify some serious long-term concerns about the UK’s future exporting and productivity.

This is an updated version in February 2023, from the December 2022 version, including an additional sensitiveness analysis on product counts due to changes in trade statistical threshold of reporting by the HMRC.

TCA Non-Tariff Measures and UK Trade

Authors: Jun Du and Oleksandr Shepotylo

The UK exit from the EU generates additional trade costs between the two parties, and the new trade costs are largely non-tariff related. We calculate ad valorem equivalents (AVE) of non-tariff measures (NTMs) and estimate their impact on the UK trade in 2021 after the end of the Brexit transition period. Using the synthetic control difference-in-difference methodology we find that the EU-UK Trade and Cooperation Agreement (TCA) had a strong, negative, and significant impact on UK bilateral trade with the EU countries, leading to 22% reduction in exports and a 26% reduction in imports. UK trade with non-EU countries has not been significantly affected. The increased trade frictions due to sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) measures as a result of entering the TCA played an important role in the decline of UK exports to the EU. On average for the first six month of 2021, a 1% increase in AVE SPS results in a 13-15% reduction in exports to the EU, and a 1% increase in TBT leads to a 2-3% reduction in exports. This amounts to a staggering reduction of UK exports by £12.4 billion (15.6% relative to the first half of 2019 or 70% of the total documented reduction in the EU exports) over this period by a simple back-of-envelope calculation. These effects are spread across a range of industrial sectors and in all EU countries/export destinations. The results hold to a range of robustness tests and do not appear to be “teething problems”. Further, no such effect is found for UK imports from the EU, likely due to the absence of border checks in the UK. Evidence suggests that UK products subject to a higher level of SPS being diverted towards the non-EU destinations, while the same cannot be said for products with higher TBT measures. Our findings point to specific aspects of UK-EU trade frictions that represent the steepest costs of Brexit and overall highlight the importance of domestic policy and measures in the near term.

The Heterogeneous Effect of Uncertainty on Firms Trade Margins Destruction and Diversion

Authors: Mustapha Douch, Jun Du and Enrico Vanino

[CBP Research Paper 1]

Uncertainty over future tariff schedules and customs arrangements is a key factor in defying firms’ participation in international markets. This paper investigates firm heterogeneity in the effects of trade policy uncertainty on the margins of trade, exploiting the Brexit process as a quasi-natural experiment and using transaction-level trade data for UK firms. Comparing UK trade flows to the EU and extra-EU countries, and the variations of product-specific tariff threats along firm size, our results show an overall reduction in UK-EU trade flows in respect with extra-EU markets, as uncertainty regarding future trade policies increased during the post-Brexit referendum negotiations. This is the result of two contemporaneous effects: a destruction of trade flows for smaller firms more exposed to uncertainty and potential tariffs, while a consolidation and diversion of trade flows, in particular towards more distant and emerging extra-EU markets, for larger firms. Falsification tests and alternative identification strategies corroborate the robustness of the main findings.

UK Covid-19 and UK Trade

Authors: Jun Du & Oleksandr Shepotylo

This paper documents the unprecedented disruptions which affected UK trade during the COVID-19 pandemic in 2020. Overall UK exports contracted by 15% in 2020, while an international comparison depicts similar sharp declines among the UK’s peers, but the statistics suggest that UK had a deeper decline and slower recovery, compared with Germany, Italy, Spain and the US. Drawing on the most recent available monthly trade transactions between the UK and its trading partners up to September/October 2020, we make pioneering efforts to provide a comprehensive and in-depth analysis of the international trade dynamics of UK businesses.