Last 20 years of UK-EU trade data show Clean Brexit is safest course. Part 3

August 20, 2018

 

 

 

Export Categories 6–10

 

The second half of UK’s top-ten export categories comprise: computers & electronics (£27 bn), basic metals (£15.7 bn), food products (£13 bn), electrical equipment (£12 bn) and beverages (£7.8 bn). Together, these sectors contribute 25.1% of UK manufacturing exports, and 80.7% when added to the top five. This means the 20-year trends identified among these top ten sectors hold good for almost three-quarters (72%) of all UK goods exports. And unfortunately for UK’s trade with EU, this second tranche of export sectors provide a repeat performance of the first — only worse.

 

Note: All data is ONS 2018 unless otherwise stated. Source spreadsheets and calculations, Tabs 7-11 here.

6. Computers, electronics, optical & measuring equipment

Back in 1998, computers & electronics was by far UK biggest export sector, worth 21.1% of all UK manufacturing exports. Since then, exports to EU have collapsed from £21.4 billion to £12 billion in 2017, wiping out a £6.9 bn surplus and creating a £11.4 billion EU deficit; now one of UK’s biggest. Curiously, though, in a sector where competitive advantage is typically associated with Asian economies, the value of UK exports to (and imports from) non-EU markets has stayed – in real terms – almost flat, though still incurring a major deficit (£12.1 bn).

 

In itself, a collapse in exports in one particular sector is neither surprising, nor bad. Trade should result in specialisation, and free trade should expedite the process. If the Customs Union and Single Market operated as a free trade area, then it should have helped the UK to specialise in those sectors where UK has a competitive advantage or a concentration of entrepreneurialism at the expense of others where it does not. This 20-year result merely shows that, sadly, computing and electronics hardware is not something UK naturally excels at: witness the fate of ICL, Sinclair Research, Apricot, Psion.

 

The problem for advocates of the Customs Union‒Single Market as a free trade area, however, is that there is no trade sector where UK’s experience over the last 20 years balances the dramatic drop in exports of computers & electronics. As previously noted, UK’s exports of aerospace and pharmaceuticals have risen by approximately the amount that computers and electronics have fallen (by £9‒10 billion). But neither of those sectors is materially impacted by the Customs Union. Pharmaceuticals is impacted by the Single Market, but exports stalled over 10 years ago.

 

Since exports of electronics outside the EU have at least held their value, the familiar pattern in UK market share repeats. Despite the Customs Union and Single Market, the EU’s share of UK exports has fallen dramatically from 67.1% of UK exports in 1998 to 45.6% in 2017. Meanwhile the EU has marginally increased its share of UK imports, from 43.5% in 1998 to 46.9%. Again, this result contrasts strangely with the assumption that a loss of UK exports in computers and electronics is due to loss of competitiveness against production based in Asia.

 

Nevertheless, it’s clear that membership of the Customs Union since 1998 has not prevented a collapse in exports in what used to be UK’s biggest export sector — one which, being technology-related, the UK prized highly. Neither has the Customs Union operated in such a way as to encourage equivalent or compensating growth in another sector. This, in turn, compromises one of the principal arguments that is advanced in defence of membership of the Customs Union: that it confers membership of the world’s biggest free trade area. The point being, if the Custom Union‒Single Market is free trade area, it doesn’t behave like one.

 

One other trend is worth highlighting in this sector, however. The one sectoral sub-group in which UK has performed well is in measuring, testing and navigating equipment, which includes watches and clocks. Exports of these electronic products have grown by 77% in real terms since 1998 and are now worth £9.9 billion. In this particular, niche sector where UK appears to be globally competitive ‒ or at least, its companies are commercially astute, which is not the same thing ‒ it’s in global markets that UK performs best, with £6.8 billion or two-thirds of exports going to non-EU countries.

 

7. Basic Metals

Seventh in UK’s top-ten manufacturing sectors is basic metals. This covers iron, steel and ferro-alloys, cast iron, steel tubes and pipes, basic castings, basic precious and non-ferrous metals [1]. However, it also includes trade in non-monetary gold, and this presents challenges for the purpose of analysis.

 

The ONS categorises trade in non-monetary gold as a form of manufactured good - line item 24.4 'Basic precious and other non-ferrous metals'. Unfortunately, the ONS does not report on what proportion of this category is actually gold. More problematic still, this line item - 24.4 - contributes the majority of exports by value to basic metals category throughout this period.

 

For example, 'basic precious and other non-ferrous metals contributed 44% of EU and 45% of non-EU exports of basic metals in 1998 and 54% of EU and 83% of non-EU exports in 2018. 

 

The spectacular growth in exports of basic metals to non-EU countries from 1998, therefore, is very likely due to the sale of non-monetary gold to countries outside the EU - primarily Switzerland, China and India. Since this data contributes to UK's overall CAGR for manufacturing and goods exports, therefore, it is correct to consider the impact on UK's overall CAGRs for goods exports. 

 

A detailed analysis is undertaken here at Section 3. Without reliable numbers on the actual non-monetary gold export values - and the countries involved, precise clarifications are impossible. Nevertheless, stripping out the entire 24.4 line item from all CAGR calculations does have a marginal effect on the outcome. For the period 1999-2018, extraction lowers the CAGR of UK goods exports to EU from 0.31% p.a. to 0.27% p.a. For the same period, extraction lowers the CAGR of UK goods exports to non-EU markets from 3.17% p.a. to 3.02% p.a. 

 

One other point is interesting. With a £1.8 bn deficit in its trade in gold with non-EU countries, the UK is currently a net importer of gold from outside the European Union. Whether the fact of that valuable trade should be excluded from UK statistics is a fascinating point. It may also be the case that the trade in non-monetary gold facilitates trade with some non-EU countries, for example India. Only when ONS makes that data available will it be possible to place the trade in non-monetary gold in proportion and perspective.  

 

 

Case Study: How the EU Customs Union failed UK steel producers

The fact that UK is a large importer of non-gold basic metals (£6.4 bn in 2017) means that analysis of this sector is, nevertheless important to UK manufacturing. The UK’s trade in basic metals also helps analysts to critically assess another of the supposed benefits of customs unions — that it provides strength-through-numbers protection when other members of the world economy act aggressively. Supporters claim that membership of the EU Customs Union provides a form of collective security that helps shelter UK companies from anti-competitive behaviour by major global organisations. Again, experience suggests otherwise.

 

Low world steel prices in the past half-decade are usually attributed to uneconomic Chinese production finding its way onto world markets. Under WTO rules countries or customs unions may impose protective tariffs if they demonstrate unfair subsidies and this was the course taken by the U.S. Department of Trade over two years ago. But the EU did not impose anti-dumping tariffs on Chinese steel until after low prices had hammered the balance sheets of most European steel companies, including UK’s Tata Steel and the Luxembourg-based Arcelor-Mittal.

 

The question then becomes: why? A customs union must take account of multiple political and industrial interests, as well as the inherent tension between the interests of producers and consumers. Germany has by far the largest metal-manufacturing industry in the EU, encompassing hundreds of mid-sized machine-tools companies and a few automotive giants. All these companies benefited directly from low steel prices. This meant that the interests of German industry didn’t align with other, major countries in the EU, whose metal-manufacturing industries comprised a far smaller share of their economies.

 

If Germany’s steel manufacturers’ balance sheets were comparatively the strongest in Europe – and ThyssenKrupp’s probably was – then it was probably in Germany’s overall industrial interest to defer the imposition of anti-dumping steel tariffs for as long as politically feasible. If other steel companies went bankrupt in the meantime, that would eliminate competition within Europe, leaving a more congenial market for German steel makers when prices recovered. Predictably, Tata’s principal UK steel interests, having made spectacular losses, have now been taken over by ThyssenKrupp.

 

An alternative theory posits that UK deliberately constrained EU moves to introduce tariffs because the UK’s then Chancellor was anxious for UK financial services to gain enhanced access to the Chinese market. Of this there is no direct evidence.

 

Either way, with UK inside the Customs Union there was no point in debating whether UK’s steel industry warranted temporary protection, because neither Parliament, nor the UK Government, nor indeed the Welsh Assembly could do anything about it. Had UK been free of the Customs Union, the UK government would at least have had the power to debate options. And even if UK had chosen not to protect UK steel producers, at least the issue would have been openly discussed and accountably decided, and not concluded secretly in remote conclaves.

 

A second example of the inherent liability of customs union membership is unfolding. By remaining part of the EU Customs Union, the UK has become embroiled in a trade war with the US which is not of UK’s choosing, in which UK is not a target, but from which it cannot negotiate an exit. Unnervingly, the EU’s list of punitive counter-tariffs appears engineered to damage other British exports. For example, if the EU imposes tariffs on US-made motorbikes (in practice, Harley Davidson models) and Bourbon Whiskey, that simply invites the US to reciprocate, which will instantly hit two of UK’s most valuable exports to North America: motorcycles, and Triumph sold over 13,000 units in North America in 2016; and whisky, which generated £1 billion-worth of sales for last year.

 

Whatever now unfolds, the incipient tariff war demonstrates that being part of the world’s biggest Customs Union doesn’t necessarily confer protection from predatory pricing or trade wars. Neither does membership automatically confer strength through numbers. Loss of control over trade policy has consequences: the UK cannot negotiate its own way out of the trade war – as Australia and Brazil have done – and will have no practical control over its course.

 

8. Food Products

Next, food – or at least food products[2]. Although the sector contributes just 4.3% of UK’s exports, it shares a prime characteristic with UK’s biggest (motor-vehicles): the industry is vociferous in calling for UK to avoid any imposition of tariffs, while simultaneously generating gigantic EU deficits – in this case the UK’s second-biggest, at £14.1 billion. This may suggest there is a loose correlation between the stridency of industry-sector opinions on Brexit, and the degree to which it has already driven UK trade into the red. 

 

Before gettings stuck int, however, it's worth considering food in a slightly different light to other manufacturing sectors. This is because the UK has been a gigantic net importer of food ever since the Industrial Revolution. When added to agricultural produce (such as cereals), the UK imports £42.9 billion of foodstuffs per year. The UK depends on imported food. So it's worth focussing not so much on where the products in this sector are going to, but rather where they are coming from.

And what makes UK’s trade in food extraordinary – or even perverse – is how tied it still is to the EU: the most expensive food-producing area on Earth. What's more, this dependency is increasing. In 1998, the EU provided 67.8% of UK’s food-product imports; in 2017, that proportion had risen to 76.3%. When you add in primary agricultural produce the result is scarcely more encouraging, with dependency on EU imports rising from 62.1% to 69.9% since 1998.

 

In the long term, the UK’s experience of being inside the EU Customs Union since the mid-1970s has been to supplant the supply of low-cost agricultural produce and food products from around the world with high-cost food from Europe. Critically, this process is still underway. Imports from EU are still growing substantially faster than imports from non-EU countries: 5.4% p.a., as opposed to 2.9%. Perhaps this reflects a cultural trend, with premium, processed foods from Europe attracting a higher share of UK food spending. The result may also reflect the high numbers of EU citizens now living in UK who generate demand for imports of food goods from their home countries.

 

But whatever the cause, UK’s appetite for EU-sourced food products is not reciprocated - or at least, the trajectory does not appear that way. Exports of UK food products is growing at less than half the pace of imports: 2.7% p.a. as against 5.3% p.a. More curiously UK exports outside the EU have grown more quickly outside the EU than inside: 3.5% p.a. At the very least, this implies that global markets display a growing appetite for UK food products, despite the substantial regulatory and tariff hurdles that trade in food invariably attracts. Though a note of caution: the EU still accounts for 70.7% of all UK food-product exports. 

The UK’s position is somewhat more balanced if agricultural products are included, such as cereals and un-processed meats. (Note, agricultural goods are not included in the manufacturing totals, but are included here to provide totals for food and food products). Imports of agricultural products from the EU (£6.7 billion)  slightly eclipse imports from non-EU countries (£5.8 billion – mostly perennial crops). However, even when you add primary agriculture to food products, the net result is, as already noted, that 70% of UK’s food imports are sourced from the most expensive – and on the most highly protected – food-production trade bloc in the world. 

The issue here is – or should be – visceral for UK negotiators. The UK is becoming a global player in niche food products, e.g., smoked salmon, cheeses, crisps, etc., but the UK will never be generally competitive in the production of primary or basic foodstuffs. So, the UK’s clear interest should be in reducing the cost of food by removing tariffs. Unlike in most trade categories, the net benefit to the UK economy would be substantial and immediate, because the EU’s external tariffs on foodstuffs are its highest and consumer interests clearly predominate in trade. For example, the EU’s 60% effective tariff on beef imports drastically raises the price of beef in UK, by keeping Argentinian, Australian or Brazilian beef off supermarket shelves, and forcing UK consumers to purchase expensive Irish beef instead.

 

What would happen in a ‘no deal’ scenario? Undoubtedly the food sector would suffer more turmoil than other sectors, since the EU still takes 67.8% of UK’s existing food-product exports. UK would have to choose between daring the EU into re-imposing tariffs, which would be hugely costly to EU producers and administratively taxing for UK Customs & Excise, or  unilaterally adopting free trade in food, which would place UK exporters at a severe competitive disadvantage in EU markets — though it would also relieve the UK of having to impose the most complex of new customs arrangements.

 

Theoretically, the decision should resolve into a calculation of whether a unilateral reduction or elimination of tariffs on food was worth the loss of long-term negotiating leverage — both with the EU and other food-exporting countries. This is because one of the principle attractions of gaining a trade deal with the UK for multiple countries, from Argentina to New Zealand, is access to UK’s huge and hitherto highly protected food market. Offer that for free, and these countries have less to gain from future trade deals, and therefore less incentive to open their own markets to UK goods and services.

 

But either of these two options is preferably to the status quo. A true nightmare scenario would see a continuation of zero-tariff trade in food with the EU, plus the UK replicating the EU’s existing tariff schedule on non-EU importers, and continuous alignment with Single Market regulations. The result would be the worst of every world: continued, crazy-high prices for UK consumers, unchangeable restrictions on UK food producers, runaway imports from a high-cost food production bloc – and low export growth anyway.

The most critical thing for UK negotiators to realise is that the initiative rests with them; it’s simply a matter of resolving whose interests should predominate: consumers or producers; wealthy consumers or consumers on limited budgets. As Brexit forces UK to debate trade in food – a subject which has periodically dominated UK politics – the UK will inevitably experience a minor re-run of the repeal of the Corn Laws. Emotion will run high. Vocal, vested interests will have to be fought out.

 

There is also the regulatory angle, familiar to anyone in UK who tries to create and sell food products. The pertinent question goes to the heart of ingrained hostility towards the Single Market, and has never been objectively analysed: do existing Single Market regulations inhibit creativity and wealth-generation in the UK food industry?

 

This is a critical issue because the UK food product industry is now more dynamic and open to entrepreneurship than at any time in the twentieth century. It’s one where small-scale producers can – thanks to ecommerce and virtual stores – market their products globally, without surrendering control to food conglomerates or major retailers. For example, small scale food producers in Australia are currently trading on Australia’s brand reputation for high food standards to sell direct into China via ecommerce platforms. The demand is gigantic, and the same opportunity beckons for niche UK food producers.

 

But without breaking from Single Market regulation, food exports may never flourish, because small companies are hampered by regulation that is commonly perceived to be excessive, places them at a competitive disadvantage against bigger producers, and may be applied more vigorously in UK than elsewhere in the EU. Just as with steel tariffs, this is an aspect to trade that requires direct, open political accountability if UK’s true interests are to be appreciated and embraced. 

 

All of which should be a salutary insight for UK, as its politicians try to disentangle the politics, tactics and interests at stake in Brexit negotiations as they pertain to food. In terms of trade, there are clear dangers involved in staying in the Single Market: because it hasn’t boosted UK exports beyond what UK producers achieve in world markets; because high-impact regulation may be acting as a giant break on creativity and entrepreneurship, as well as UK exports; and because the UK electorate may not respond well to politicians who continue to make themselves unaccountable for the food standards they impose.

 

9. Electronics

The penultimate category in UK’s top 10 is electrical goods. As with computers & electronics, UK companies have not demonstrated competitive advantage in this sector since 1998. This appears, for the moment, to be a declining sector for UK industry. As a proportion of manufacturing, exports of electrical goods have fallen from 4.8% to 4% in 2017.

 

Nevertheless, UK's unusually poor trade performance with EU since 1998 stands out. Exports have fallen by 0.9% per year, while exports to non-EU countries have risen by 1.8% per year. The result is that while EU took 57.2 % of UK exports in 1998, this share is falling rapidly, and is now passing 45.6%. In a sector that is generally dominated by Asia-based manufacturing, it’s also curious to note that imports from non-EU countries only modestly outstrip imports from EU countries from 1998 to 2017.

 

Delving deeper into the data, UK’s healthiest trade in this sector is in electrical motors, and electricity distribution and control equipment, with exports worth £4.6 billion in 2017. And just as with other sectors where there is a line of exports in which UK performs particularly well, UK trade is already far more global than the average. In this case approximately 63% of electrical-motors and distribution-equipment exports already go to countries outside the EU.

 

Incidentally, this mini-success story provides a sidelight for automotive analysts. The UK government is currently devising strategic plans for investment in electric-drive vehicles – in particular, in battery-making facilities in the Coventry area[3]. Given UK’s growing exports in electric motors, the UK government has cause to hope that it will be investing in a field in which the UK is already globally competitive and has a growing skills base. It will first, though, have to steer JLR’s electric-powered models home from Graz.

 

 

10. Drinks

Last, the UK drinks sector, which won’t hang about for long at the number ten slot because exports are accelerating. Nevertheless, the familiar, 20-year pattern repeats, with exports to EU growing more slowly than either imports or trade outside the EU. The profile of growth closely resembles UK trade in food with one critical exception, UK exports are already global, with non-EU markets guzzling 63% of UK exports.

 

Nevertheless, the UK, again, is accelerating consumption of EU produce. This time, the culprit is wine. In 2017, UK imported £2.8 billion-worth of wine from the EU (and only £1.08 billion from outside) — and since EU wine is protected by EU’s external tariff, the playing field continues to favour European vineyards. The fact that the UK also imported approximately three times as much wine from the EU as non-EU countries back in 1998 provides another example of how tariffs appear to enable EU products to maintain a dominating market share of UK imports, even while EU provides a shrinking market share for UK exports.

 

And again, the established pattern of deficits recurs. Inside the seamless, frictionless EU, the differential between import and export growth rates has more than doubled UK’s deficit in beverages, now at £2.bn. Yet, outside the EU, in a world of high tariffs – and spectacularly high tariffs in the case of some alcoholic beverages – UK exports have soared, and now generate a cracking £3.3 billion surplus. With UK exports outside the EU growing at 4.3% per year, or twice the pace of EU exports, the EU took just 36% of UK beverages exports in 2017.

 

A rational trade policy for UK would recognise that in a fast-growing sector where two thirds of exports are hampered by tariffs, the UK should shift its focus to try to reduce some of the major tariff and regulatory barriers among global trade partners whose markets are growing most quickly.

This is where whisky is – or should be – a primary concern for trade-policy formulators. Currently, two-thirds of UK beverage exports are distilled drinks, of which 75% is scotch whisky. The UK now exports twice the value of distilled drinks to countries outside the EU as compared to countries inside the EU (£3.6 bn as opposed to £1.7 bn — that same ratio that niche, fast growing UK exports seem naturally to achieve). Critically, neither the EU nor the US imposes tariffs on whisky, although tariffs imposed by major whisky markets ‒ including Gulf Co-operation Council (GCC) countries, India, Pakistan and Southeast Asia countries ‒ are extremely high, in the region of 90–150%. And it should be noted, because it’s highly relevant to future UK exports, that India is in volume terms the biggest whisky market in the world[4].

 

So here is a major opportunity for UK if it acts quickly. The UK – or rather Scotland – would suffer minimal commercial loss in its beverages sector from withdrawing totally from the EU Customs Union in so far as its trade in beverages is concerned, especially since French viticultural interests, would impel the EU to seek a continuance of free trade in beverages on current terms. The UK could unilaterally eliminate tariffs on beverages, which would simplify customs issues in Ireland. Alternatively, UK could reciprocate its current tariff schedule against the EU, which would nicely boost the prospects of UK’s sparkling wine industry.

But either way, the UK has everything to gain and almost nothing to lose in its trade in beverages by exiting the Customs Union as fast as possible and pursuing a rapid tariff-reduction policy with some of the world’s biggest potential markets in South Asia, China, Japan and Southeast Asia. The Scotch Whisky industry knows this and wants open and liberal trade. But time matters. Investment is pouring into whiskey distilleries in Japan and Tasmania[5], whose owners would be thrilled to gain low-tariff entry into fast-growing Asian markets before Scotland – and build their brands first.

 

Recognising that there is an opportunity cost to the proposed Brexit ‘Transition Period’ is vital. It would be tragic for Scotland’s whisky industry if on the cusp of being able to negotiate free access, it had to watch new-world competitors grab market share while UK sits out its transition term. In India, a fast-rising middle class and huge existing tariffs mean the commercial opportunity for the Scotch Whisky industry is gigantic. If competitors get their first; they will set the pace in terms of brand and taste.

 

Conclusion

Contrary to popular belief, the Customs Union and Single Market have not added value to UK exports in any appreciable way since 1998. This analysis shows exports to have risen by 0.14% per year, which is significantly slower than the long-term growth rate of Euro economies. But with UK’s EU-export growth concentrated at the start of the period, it is disheartening to observe that (in 2015 prices) yearly exports to EU were higher from 1998 – 2007 (£128.6 bn) than from 2008 – 2017 (£122.2 bn). UK’s goods exports to EU are already stagnant and some sectors are in profound, long-term decline.

In every single one of the ten trade categories analysed here – which make up 72% of all UK goods exports ‒ exports to the EU have grown more slowly than imports, by an average margin of precisely 3.2% per year. What’s more, imports from EU have often grown faster than UK’s own long-term economic growth rate. And in every single trade category analysed here, exports to non-EU countries have grown far more quickly than exports to EU countries, also by an average of 3.2%.

 

In critical trade categories – especially vehicles, machinery, pharmaceuticals and food – EU producers have captured or retained 61–85% of the UK import market. EU producers are gaining market share of UK imports, in machinery, chemicals, computers, food and beverages, and hanging on to very high markets shares in motor vehicles (83%) and pharmaceuticals (74%). And yet the EU provides an average of almost zero growth rates for UK manufacturing exports, and a swiftly declining market share in almost all categories. This implies a ultra-severe imbalance in how the benefits of seamless trade are distributed across the EU.

 

To reiterate an earlier point, the gigantic trade deficits that the UK now has with EU might be worth enduring if UK enjoyed a commensurate gain through trade in services. But this is logically obtuse since services aren’t subject to tariffs or customs procedures. And even if the UK did want to strike a hybrid, Customs Union‒Single Market deal, the figures are brutally unfavourable to UK. Using the last available, comparable data from ONS, services exports to EU comprise just 38.7% of UK’s global services exports; financial services contribute just 29.9% of those EU exports, and the Single Market only regulates at most one-third of financial services.[7] This means that in trade negotiations terms EU, currently, has little to offer UK in return.

And even if the EU did un-bend, the UK should be wary. A trade off would pit the commercial interests of some vague portion of £27 billion of services exports, which deliver a £23 billion surplus, against the best interests of £164 billion of EU goods-export trade which delivers a £95 billion deficit in a long, dismal procession of deteriorating trade outcomes.

 

To be clear, the issue isn’t the deficits themselves. If the Single Market and Customs Union operated as a free trade area, then analysts should expect to see deficits emerge as resources are diverted into industries or services that achieve competitive advantage, thereby encouraging specialisation. The fundamental problem for UK is that there is only one sector where UK can show a major surplus in its trade with the EU – in Financial Services – and the success of that sector is not commensurate with mounting deficits in UK goods trade, nor is its surplus wholly and directly attributable to the Single Market.

 

Or, to put the question in the opposite sense: if UK’s experiment of un-restricted trade with the Single Market inside a Customs Union were a success, then either the graph showing annual growth rates across manufacturing trade would depict exports and imports of goods growing at a similar healthy pace from 1998 to 2016 (as they do for UK’s trade with non-EU countries), or there would be sufficient, growing surpluses in some goods and services sectors to balance the deficits in others (as, again, is the case with UK’s trade with non-EU countries). Neither of these has happened.

 

Perhaps the reason this seems surprising is the historic misapprehension on the part of UK: that the primary purpose of the Single Market and Customs Union is to create a free trade area. As seems better understood on the continent, the primary function of both constructions is to merge European economies under the direction of a central, organising entity, and thereby further European political integration.

 

As Professor Patrick Minford has repeatedly pointed out, the Single Market is, in technical terms, an accretion of highly prescriptive regulatory measures that define not just what can be sold, but how articles must be made. It is – if you like – the reverse of a free trade area. And it still achieves its intended objective if it leads to an atrophy in members states’ trade, since its primary function is simply to exist and grow as a central governing entity. And perhaps its because EU representatives in Brussels have failed to grasp this point that they have failed to meld it into a trade area that delivers palpable benefits to UK industry. 

Source: Eurostat

 

Because, once you compare UK trade performance in the EU with other EU economies, it’s easy to see why Euroscepticism is strongest in UK. According to data published by Eurostat (See UK Trade in Goods & Services, Tab 3, Section 5), the UK’s export/import ratio is easily the worst of any major economy in the EU. It is also, as the analysis in this paper demonstrates, on a clear, downward trajectory. Which means that for all the money and political energy poured into the EU over two decades, the UK has failed not only to increase goods exports, it has also performed notably worse than its partners.

 

So, if the Customs Union and the Single Market have not added value to UK industry in 20 years, if they help EU producers to capture or retain market share in UK without reciprocity, if growing sectoral deficits indicate that investment and jobs are moving from UK to EU, if UK is forced to impose high external tariffs in sectors where consumer interests should predominate, and if UK can’t negotiate down other countries’ high tariff rates in markets where UK goods are growing quickly, then UK’s clear interest is in exiting both as quickly as possible.

 

If UK did so without agreeing a Trade Deal, then the UK would then have two options, both of which are attractive. Adopting WTO terms would enable UK to act to redress the imbalances in UK’s overall trade (for example in motor vehicles) or at least take measures to ensure that deficits in some sectors are balanced by more profitable terms in others. The existence of those tariffs on EU trade (which could be lowered at the discretion of UK ministers) would form UK’s medium-term bargaining leverage once UK’s trade policy and internal political economy was sufficiently mature to allow UK to prioritise strategic trade objectives.

 

Alternatively, UK could unilaterally adopt free trade in any or all sectors. This would have the prime benefit of being easy to implement for UK’s under-skilled civil services, and it would quickly generate benefits to UK consumers. It would remove an unnecessary impost on the UK economy, and would place UK in the vanguard of countries that wish to liberalise global trade. Britain would resume an ancient role, pick up powerful friends with little exertion. 

 

And for those concerned with the Irish Border, a unilateral declaration of free trade would place the burden of resolving the border firmly in Dublin and Brussels. The UK wouldn’t need to do anything: the Irish Republic would attract the opprobrium of having to erect and defend a hard border, or negotiate its way out of the dilemma with Brussels. The UK could sit back and do nothing. And if concluded that its ultimate responsible to Ulster  - and the surest strategy for preserving the Union - lay in economic growth, then it could simply declare Ulster a giant free trade zone. As a policy for eliminating sectarianism, wealth generation and a spirit of entrepreneurialism is probably unbeatable. By giving Northern Ireland a head start in free trade, the UK could finally redress one of the sorriest tales in its post-war economic history.

 

But if the UK refuses either of these paths, and is committed to agreeing a trade deal with the EU, then UK trade negotiators need to answer some uncomfortable questions:

 

  • Why, from 1998‒2017 was UK’s trade performance worst where the impact of the EU Single Market and Customs Union were greatest? (The answer isn’t slow growth rates inside the EU). 

  • Why is UK industry most successful in precisely those areas where the Single Market and Customs Union offer little or zero advantage?

  • Given the opportunities now present in emerging markets, e-commerce and globally liberalised trade, are the advantages of tariff-free trade with EU as clear today as they were 20 years ago. Are they as obvious in practice as they are in theory?

  • Is it logical that the one sector that demonstrably benefits from the Single Market (financial services) should be required to exit that market, whilst all the UK goods sectors that have demonstrably not benefited should be forced to stay in?

  • Why are the loudest voices in favour of frictionless trade and adherence to Single Market rules coming from those industry sectors that accrue the biggest deficits?

  • Would any of the Treasury economic models—gravity or otherwise—supplied with UK data for 1998 predict the state of UK trade in 2017? If not, why use them?

  • Is it possible that hostility to the rules of the Single Market outside London provide a fair reflection of the degree to which they benefit UK producers? Wouldn’t all UK producers prefer that those who make market rules are politically accountable?                                                                                                           

  • Finally, to what degree is the UK’s quest for a trade deal an expression of the fear of change? Wouldn’t, say, £20 billion saved in exit fees provide a sufficient tactical reserve for managing change?

 

Lastly, there are four practical points to No Deal that are generally missed. First: just because UK announces a reversion to WTO rules, it doesn’t mean UK has to start collecting all EU tariffs from Day One, or instantly enforce collection with physical checks. After all, it’s not in UK’s interests to instantly start adding to consumers’ costs. The UK could simply announce rolling implementation, starting with those sectors (say motor vehicles) that are easiest to collect. Thus, talk of shortages is absurd, since the power to cause them will sit in London and nowhere else. 

 

Second, if the EU obstructs efforts to maintain regulatory approval of existing imports post-Brexit, then UK needs to recognise that it is being subjected to threats which have nothing to do with the eventual terms on which the UK and EU will trade. And if UK is being threatened, then UK’s government should know it has more ammunition than its adversary. The UK doesn’t have to maintain forces on the European mainland, nor maintain security co-operation, nor does it have to provide free passage for Irish exports to the EU through UK ports, nor channel defence procurement through EU consortia, nor provide a free market for Irish beef, nor refrain from placing an easy-to-collect tariff on £48.1 bn of right-hand drive motor-vehicle imports, which could be as high as UK liked.

 

Third, there is the No Deal issue of EU countries impeding UK exports through lack of efficient customs. If EU countries chose this route, then UK exporters have the option to re-route exports to other entry points. Rotterdam is the biggest port in Europe, and quite capable of taking additional cargo from outside the Customs Union at short notice. This is a contingency for which the UK government and businesses should prepare. But the critical point is that no equivalent contingency exists for EU exporters to UK under a No Deal scenario. There can only be one import point – the UK – which means the UK, in the last resort, retains the upper hand. 

 

Fourth, this analysis reveals that UK goods exporters are already highly adept at managing customs processes and procedures around the globe. There is not a single category of UK’s top-ten goods trade in which exports to non-EU countries have grown more slowly than to EU countries that do not, and it's worth remembering that 73% of non-EU exports are already conducted under WTO terms. This implies that claims of the transactional cost of customs processes – as opposed to the commercial cost of paying tariffs – are overblown. As is now typical in Brexit controversy, challenges are more frightening in theory than in practice. In this case, UK businesses have already proved it.

 

So rather than bend to its own fears, the UK should focus on its overriding strategic objective: to liberalise trade with fast-growing markets outside the EU as fast as possible, while ensuring that UK trades on best possible terms with the EU. Since the terms on which UK currently trades with EU deliver poor and deteriorating outcomes, the UK should not exert any effort to maintain them – at least until trade analysts can agree one why exports to EU have barely grown in 20 years. 

 

What’s more, now is a tactically poor time to set those trade terms in stone, since the current UK government is convinced its own bargaining position is weak, and seems frightened of walking away without a deal. But in the cold light of logic, it makes no sense for UK to negotiate away so much in money, time and reputation, just to preserve a trading relationship that has proven unable to add significant value to almost every UK export sector in 20 years.

 

In so far as evidence can prove such things, the safest course for the UK is now, also, the boldest.

 

 

 

 

NOTES

[1] Note, HMRC account for gold as a separate line item, but HMRC's method for valuing the trade is different to ONS, and therefore cannot help to identify the proportion of gold in trade in Basic Metals. Comments on how to address this issue are welcome. 

 

 

[3] This is a generous description of the process. In many countries, global car companies solicit government aid for development and investment in a manner that is both blunt and threatening. This is why the substance of Carlos Ghosn’s agreement with the current UK Prime Minister is unlikely to become public.

 

[4] Though to purists, Indian whisky is no such thing, since it’s typically distilled from molasses.

 

[5] Just 25 years after the first distillery opened in Tasmania, there are now 20 establishments on the island. Tasmanian whiskies are winning international awards.

 

 

 

 

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