Britain after Brexit: a 10-point response to Peter Foster
But before getting into that, it’s worth looking at the latest data. The latest ONS figures, which came out the day after Foster wrote his piece, show that the premise of my IEA paper continues to hold: Brexit has not harmed UK trade.
UK quarterly goods exports excluding precious metals (using ONS’s Chained Volume Measures (CVM) that controls for inflation), were up 0.8% between Q2 2023 and Q3 2023 to EU destinations but down 1.8% to non-EU destinations. Hard to blame this on Brexit. Q2 to Q3 imports of goods excluding precious metals were down 2.8% to the EU but down 4.6% to non-EU destinations. Again, unlikely to be Brexit-related.
Foster is so obsessed with UK goods trade he failed to notice the record UK service trade. Service exports were 54% of total UK exports in the 3rd quarter of 2023, up from 53% in Q2. Service exports to all destinations were up 2.8% and imports were up 4.2%. The ONS does not divide CVM services trade by EU and non-EU partners; for that, we need to use Current Price (CP) data, which gives much more granular details on the products traded and the country we traded them with.
The FT article had some other complaints about my paper and UK trade that are easily rebutted.
- Foster quotes the Resolution Foundation’s OECD figures for UK goods trade, but as usual, neither he nor the Resolution Foundation mentions services.
I have compared the figures quoted by Foster from the OECD with the ONS’s latest CVM data for goods. They are slightly different. Either the OECD has not noticed last month’s massive revision in the trade data, or they are using a different method of deflating the data. (Surely, they are not using Current Prices!) The bigger question is: why leave out services? As already noted, service exports are now over half of UK exports by value.
Using ONS CVM data: total exports (all goods + services) from Q1 2019 to Q3 2023 were up 3.4%; total imports were down by 7.1%; total trade was down by 2%. I am using Q1 2019 because the Resolution Foundation does. Normally, I would compare Q3 with Q3 to avoid seasonal variations.
- Foster also quotes the Centre for European Reform: ‘the drop in imports from the EU to the UK (while the rest of the EU’s have risen) points clearly to a Brexit impact on UK trade which is plausibly the result of the UK being slowly cut out of EU value chains.’
This just is not true. Trade figures for the 3rd quarter of 2023 show total goods imports from the EU were unchanged from the 3rd quarter of 2022 using deflated CVM figures for both all commodities and for all commodities excluding precious metals.
ONS trade figures show UK imports from the EU of SITC 7 machinery and transport (the UK’s largest goods export sector and the sector most likely to have complex supply chains) were up 11.4% since Brexit (Q4 2019), while exports to the EU in the same sector were up by 12.4%. At £16.3 billion in the third quarter of 2023, UK Exports to the EU in this sector were higher than they have been since 2006, again using ONS CVM data. UK imports in this sector were at their highest since 2006 in the second quarter of this year, again using CVM data. This does not look like the UK is being cut out of EU supply chains.
But I have researched this point more thoroughly for the UK’s largest goods exports: cars, machinery, and aircraft parts using the UN’s COMTrade database as it divides parts from finished goods.
COMTrade data is in Current Prices and I am using US dollars for international comparisons. COMTrade shows German exports of HS 8708 Parts and accessories for tractors, motor vehicles etc were down 2% between 2019 and 2022, French exports were down 6%, Spain down by 4%, Czechia down 5%, and Romania down 3%. The big increases in vehicle part exports were from China, up by 48%, and from Mexico, up by 23%. This change in vehicle part manufacturing from the EU to China and Mexico is probably the reason for lower UK part imports from the EU and can hardly be blamed on Brexit.
Exports of HS 8409 Parts for internal combustion engines show a similar pattern, German and French exports are down by -3% and -18%, while exports from China are up by 41% and from Mexico by 24%.
Unfortunately, COMTrade has not updated their HS 8803 Aircraft parts data for 2022 but in 2021 (during Covid travel bans) the UK was still the world’s largest exporter in this sector, and while our exports were 33% lower than in 2019, Germany, the world’s second-largest aircraft parts exporter was down 37% over the same period and France (4th largest) was down 45%. So, also not about Brexit.
- Foster also quotes the Centre for Inclusive Trade Policy at the University of Sussex, who also suggests that the weak overall performance of UK goods exports post-TCA ‘might be a consequence of the large fall in imports from the EU, which translates into higher cost/less intermediate inputs hence the overall fall in UK exports.’
The key rebuttal here is that there has been no large fall in imports from the EU, nor an overall fall in UK exports.
From Q3 2022 to Q3 2023, there was no change in goods imports from the EU, using CVM quarterly imports, for both all commodities and all commodities excluding precious metals. While imports from the EU since Q4 2019, the last quarter before Brexit, were up 1.3 and 1.2% respectively. So, no real change.
Meanwhile, UK CVM total exports excluding precious metals were down 1% from Q3 2022 to Q3 2023, but up 1% from Q4 2019 to Q3 2023. This includes services which, as stated previously, made up 54% of UK total exports in Q3 2023 using CVM.
Excluding precious metals, the largest sector fall, for both imports and exports, was in SITC 3 Fuels. Fuel exports fell by 29% to all destinations and imports fell by 10% (CVM). This is to be expected as UK fuel trade was unusually high a year ago due to the Nord Stream pipeline explosion and Germany’s shortage of LNG import terminals which made the UK a land bridge for LNG from the US to the EU.
The fall in fuel exports was not caused by a ‘loss of EU intermediate goods’ imports. In fact, it was exactly the opposite – the EU is a large net importer of fuel. As already mentioned, machinery and transport equipment exports, which potentially could have been impacted by higher import costs for intermediate inputs, were not affected. Exports in this sector were higher both from Q3 2022 to Q3 2023 and since Brexit, using CVM to adjust for inflation.
- Foster also claims that while large companies do the bulk of exporting and importing, if the amount of trade they are doing shrinks, it will impact the smaller companies that supply them. Foster claims this is another indirect Brexit effect.
But this is not shown in the trade data and it would be difficult to ascertain precisely the value of exports done by small companies. However, SITC 0 Food & Live Animals, a sector that apparently has more SMEs than most, saw imports fall from all destinations from Q3 2022 to Q3 2023, but exports remained unchanged. That will be good news for UK producers in this sector. Their exports were unchanged, they have fewer imports to compete with and, as food production appears to be stable, the UK population must be consuming more British food. (Please give a minute’s silence as Liz Webster’s campaign to ‘Rejoin the EU to save British Farming’ quietly dies.)
- Foster claims there is a substantial body of evidence that the number of products and trading relationships between the UK and the EU have fallen very sharply since Brexit.
Where is this large body of evidence? This is not shown in COMTrade HS code data, which covers 5600 Chapters, Headings and Subheadings of traded goods. Would the Financial Times like to provide its readers with examples of products no longer traded by the UK? There will be a few cases where technology has made some goods obsolete, such as photocopiers, but as these were almost all imported from South Korea, a fall in imports is not a Brexit effect. Electric vehicles require fewer parts than internal combustion engine cars, but we still make both and import parts for both and again, this is not caused by Brexit.
We can see that in some industries, certain EU countries have become distributors for UK goods around the EU. This can be seen in the ONS current price country by commodity data, but this drop in trading partners does not mean that the UK is selling fewer goods to the EU, they are just being distributed more efficiently. Nor does it mean that SMEs have ceased trading with the EU. By the way, this change in distribution was mentioned on page 16 of the IEA paper.
- New and emerging regulatory barriers, including carbon taxes and various forms of supply chain due diligence … keep appearing over time.
All trade transactions should have had supply chain due diligence even before Brexit. Products made outside the EU would have been charged import duties when imported into the EU. These costs would have been passed on to other EU customers as higher prices. Just because they were not mentioned on any EU-UK customs paperwork did not mean that these costs had not been paid by the importer. Now any good wholly made within the EU can be imported tariff-free into the UK. But goods made in China for an EU brand must pay the UK’s import tariffs, even if they have been sitting in a Belgium warehouse for six months. Luckily, for most manufactured goods, the tariffs are very small.
The EU only started applying carbon taxes from Oct 1 2023 so they are not included in 2019 – 2022 figures used in the IEA trade paper. The EU is initially only applying these tariffs to carbon-intensive products such as cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. These products are rarely made by SMEs and the large companies that do make them will be able to fill in the paperwork and add the additional costs to their products. It is EU consumers who will pay more for these goods if they have been made using a carbon-intensive process.
- Foster, as usual, finds a human interest story involving a company that employs 10 people to explain why Brexit is bad for all UK trade. He interviews the owner of Doncaster Apothecary 87, Sam Martin, who like all good entrepreneurs has altered his original vision for his company to suit his present circumstances, and his business is doing very well domestically.
Doncaster Apothecary sells beard oil and male grooming products and wanted to be more ‘global’ but did not know that exporting cosmetics anywhere, to either EU or non-EU countries, involves a lot of trade compliance.
Male grooming products aren’t a particularly large export product for the UK. But we exported 30,521 tonnes of HS 330710 Shaving preparations, including pre-shave and aftershave products, in 2022, according to COMTrade. I am guessing that beard oil is in this HS category.
This is a small but growing UK export industry and although Foster has found an example of a company that made a financial decision not to export to the EU, other UK companies in this sector are exporting to the EU successfully.
The UK only sold 19,438 tonnes of HS 330710 in 2019 to all markets. But its largest market then and now is Belgium. Exports to Belgium in this sector have increased from 12,120 tonnes in 2019 to 18,967 tonnes in 2022. The UK’s second-largest export market is the US and the third-largest is Canada. (I am using tonnes to avoid accusations of not using deflated figures.)
- Foster is still claiming that ‘another way to measure potential Brexit effects is to look at the UK’s Trade openness (imports + exports as a share (SIC) of GDP) and compare it to peer countries that were suffering other headwinds, like the pandemic and Ukraine energy price shock.’
Foster claims that the Resolution Foundation ‘finds’ that UK trade openness was 3.6 percentage points below its pre-pandemic levels (H1 2019 to H1 2023) compared to a rise in trade openness of 0.2 points across the G7…
This is really a measure of trade intensity rather than openness.
Foster and the Resolution Foundation have the mistaken belief that a higher trade intensity is a better trade intensity. It is not. According to the World Bank, the US trade intensity is only 25% because the US’s GDP is much larger than its trade. China has also seen its trade intensity fall from 64% in 2006 to 38% in 2022 due to its GDP increasing, not its trade falling. China exported a record $3.7 trillion in goods and services in 2022, while its GDP continued to increase, albeit marginally.
German, French and Italian trade intensity jumped by 10, 11 and 13 percentage points respectively, between 2021 and 2022. This was due to their massive increases in imports of more expensive oil and gas relative to any changes in their GDPs. No economist believes that importing massively more expensive fuel is a good thing. But Foster is still trying to sell the effect of these imports on these countries’ trade intensity as a positive to his readers.
The World Bank does not calculate quarterly GDP, but it believes that the UK’s total trade intensity also increased by 10 percentage points from 59% to 69% between 2021 and 2022. As the UK still exports crude oil and some gas, unlike the other EU countries in the G7, high oil and gas prices increased both UK exports and UK imports.
I would be interested to know which countries Foster believes are peer economies to the UK. France and the UK had similar-sized populations and GDPs in 2019, but they export very different things. In 2019, both countries had trade intensities of 64% according to the World Bank, but France’s has risen to 72% in 2022, while the UK’s only increased to 69%. However, while French imports were slightly smaller than the UK’s in 2022, its exports were $50 billion lower and its GDP was almost $300 billion smaller than the UK’s. A higher trade intensity is not always a good thing.
- Foster goes on to quote the Governor of the Bank of England, Andrew Bailey, who also stated in a speech this week that Brexit had led to a ‘reduction in the openness of the UK economy.’
Bailey does not define ‘openness’ but the speech was given at a Financial Services Conference and was predominately about financial services, although he also discusses the importance of keeping international supply chains open, not just EU ones. As the UK’s exports of services have done exceptionally well since Brexit and have been growing to most global markets, it is strange that Bailey would believe the UK service economy is less open.
- Finally, Foster claims he has talked to investors, diplomats and trade bodies who believe that ‘the UK needs a plan’. Foster adds that Stephen Hunsaker, an economic researcher at the UK In a Changing EU think tank believes that if the UK does not really confront the challenges of Brexit, UK trade will slide deeper into the doldrums and will be left behind in future trade deals and business strategies….
Well, luckily Kemi Badenoch and the Trade Department do have a plan and they have been executing it since Brexit. In short, the plan is to sign as many trade deals with as many countries as they can and to improve the UK’s existing trade deals inherited from the EU. They are, if anything, overachieving.
The UK has in force a new trade deal with Australia – the EU doesn’t. The UK has a new trade deal with New Zealand – the EU is trying to ratify a much smaller deal. The UK is joining the CPTPP, but the EU hasn’t even applied to join. The UK has signed Memorandums of Understanding (MOUs) with 6 US states. The UK has renegotiated its trade deals with Japan, and also with Norway, Iceland and Liechtenstein, and is renegotiating its trade deals with Switzerland, South Korea, Canada and Mexico trade deals inherited from the EU. The UK has a new digital economy agreement with Singapore. The UK has rolled over 80 of the EU’s trade deals. The UK has cut tariffs for 65 developing nations. We are currently negotiating new trade deals with India, Israel and the Gulf Cooperation Council. And we have a tariff-free, quota-free trade agreement with the EU.
How has all of this activity gone unnoticed by Hunsaker, the UK in a changing EU and Foster?
I will rest my case here.