Last 20 years of UK-EU trade data show Clean Brexit is safest course. Part 1

A single assumption underpins all debate on UK’s post-Brexit trade objectives: that trade within the Customs Union and the Single Market delivers real value for UK industry and creates jobs. By eliminating customs duties and import checks, the Customs Union is supposed to facilitate UK’s £423 bn[1] trade in goods with the EU and give UK companies preferential access to EU markets. By creating uniform standards, the Single Market is supposed to ease the cost of regulatory compliance.

But what if the Single Market and EU Customs Union have failed to operate as anticipated? What if the overall impact on UK of tariff-free EU trade and a single set of product rules has been to pull investment from UK to continental Europe without providing an expanded market for those goods and services in which UK has a global competitive advantage? What if the Customs Union and Single Market EU doesn’t operate as a giant free-trade area and hasn’t created jobs — at least, not in UK?

These questions are vital because the UK’s £95 billion EU trade deficit is a clear sign that something unhealthy has happened to UK’s EU trade. Back in 1998, UK‒EU trade was almost in balance. Now the deficit is so big that a £36 billion surplus in UK’s trade in services still leaves a £58.3 billion gap in UK accounts. On a global scale, this deficit is huge. Today, the UK‒EU trade deficit is 16 percent larger, per head, than the equivalent US deficit with China, which helped propel Mr Trump into the White House.

If UK’s trade deficit with the EU signals something deeply unhealthy in existing trade arrangements, then UK should reconsider before trying to replicate them – especially if the cost is a huge exit fee, and sub-optimal border arrangements in Ireland. If ‘frictionless’ trade doesn’t add value, then UK’s safest course may be to accept the disruption of change, and either unilaterally adopt free trade, or to begin trading with EU on World Trade Organisation (WTO) terms — as soon as practicable.

Source: All graphs from ONS Data unless otherwise stated

Fortunately, the data to test these assumptions is now available. On March 28th, 2018, the Office for National Statistics (ONS) published new data on UK trade since 1998 that enable analysts to compare how UK trade has fared inside and outside the Customs Union and Single Market for precisely 20 years. Subsequently updated (in September 2018) the data enables analysts to make multiple comparisons: between growth in specific goods and services sectors; between sectors that should benefit commercially from the Customs Union and those can’t; and between sectors that are regulated by the Single Market and those that aren’t.

The results are shocking. Since 1998, the growth rates of the principal elements of UK trade are inversely proportional to their exposure to the Customs Union and Single Market. UK goods exports to the EU have grown just 0.22% p.a. since 1998. Close to stagnant, this is far slower than the long-term growth rates of EU economies. UK goods exports to EU are easily the worst-performing element in UK trade, and yet it’s the element that is most impacted by the Customs Union and Single Market.

In contrast, the UK’s most successful area for exports since 1998 is the one least impacted by any aspect of EU memberships. Exports of services to non-EU countries have grown by 5.6% per year since 1999 and are now worth £162 billion per year. These services exports – incidentally, 78% non-financial – will shortly overtake UK’s non-EU goods exports to become UK’s most valuable trade. And this element of UK trade owes nothing either to the Customs Union or the Single Market.

These observations are counter-intuitive, but they beg two questions: if giving the EU preferential treatment in UK trade has not added significant value to UK industry in 20 years, then why continue to give EU preferential access to UK markets? And, second, if UK companies have proven to be far more successful trading on WTO terms over the past two decades – and approximately 73% of all non-EU goods trade is conducted on WTO terms [2] – then why precisely should UK fear to trade with the EU on WTO terms as well?

Using the new ONS data it’s possible to peer deeply into UK’s trade over two decades and see what went wrong with UK‒EU trade, and when. It’s also possible to see what is not to blame. And from this analysis, it is clear that the near-total absence of growth in UK’s export of goods to the EU is definitely not due to general industrial un-competitiveness, nor the comparatively slow growth of EU economies, but multiple reasons depending on the sector.

The UK’s 20-year EU experience: a brief overview

Step through the fortunes of each of UK’s top-ten goods-export sectors since 1998, and a curious pattern emerges. Exports to EU stagnate, imports from EU race ahead and UK is left with a procession of huge, growing EU deficits — especially in motor vehicles (£28 bn), in machinery (£7.2 billion), chemicals (£3.5 bn) and computing & electronics (£11.4 bn). Add together food products and agricultural produce, and UK has a £18.7 billion deficit with the world’s priciest food manufacturers.

But the clincher is pharmaceuticals. Here is an industry where UK has the advantage of world-class science and world-leading pharmaceutical companies. Exports have grown faster than in any other sector; contributing just 4.1% of manufacturing exports in 1998, pharmaceuticals now contribute 9.3%. And yet the same pattern. Export growth to EU ground to a halt in 2009 and has never recovered. Since 2012, imports have rocketed, creating UK’s fastest-growing sectoral deficit, worth £8.8 billion in 2017.

Meanwhile, UK’s trade outside the EU is the model of a healthy relationship. Conducted almost entirely on WTO terms, it is balanced and fast-growing with goods exports and imports both expanding at 3.3% per year since 1998. With none of the supposed benefits of the Customs Union and Single Market membership, UK companies have accelerated into new markets, particularly in pharmaceuticals, aerospace products, motor vehicles, machinery and basic metals.

In real terms – i.e., accounting for inflation – exports to non-EU countries grew 74% between 1998 to 2017, whereas exports to EU grew by just 3.7%. And even this figure is flattering. Without the post-referendum, low-exchange-rate spurt in exports during 2017, the UK’s long-term goods-export growth rate to EU would be very close to zero.

The services surplus: how UK‒EU numbers don’t add up

UK’s £117 bn of services exports to EU are widely supposed to compensate for this goods deficit. And why not: a free trade area is supposed to encourage specialisation? Digitisation and collaboration tools make it far easier to export services today than even a decade ago. Perhaps the trade data simply reflect a re-orientation of UK industry away from manufacturing into services — a process aided and expedited by participation unified market rules and a vast free-trade area.

But there are three hurdles to this assertion. First, trade in services isn’t affected by the Customs Union and only a small portion is affected by the Single Market. The service industry most impacted ‒ Financial Services ‒ contributes just 31% of UK‒EU services exports, and EU rules only affect a part of that trade, perhaps one-third to one-fifth [4]. Consequently, the success of UK’s services exports cannot be attributed to participation in a free trade area, and even at the most generous estimate, only one-tenth can be have benefited from the Single Market. So UK‒EU services export-growth will carry on growing rapidly regardless of Brexit, or the outcome of Brexit negotiations.

Secondly, the values of benefits/deficit gained with EU trade don’t match up. For the sake of argument, suppose that UK’s entire £31 bn trade in financial services and its £23 bn surplus is attributable to freedoms gained under the Single Market. Neither the trade nor the surplus in financial services compares with UK’s £68 bn trade in motor vehicles and parts, or the £28 bn deficit the UK incurs. It is written off by just one goods-sector deficit. And there is no other major UK‒EU services surplus to compensate for the cumulative deficits UK incurs right across its goods-export sectors.

And third, the assertion falls over completely when you analyse UK trade in services outside the EU. There, UK generates a colossal surplus of £78 billion on trade that is approximately 50 percent larger, plus a £28 billion surplus on financial services — all with no help from the Single Market. Unlike in EU trade, the UK’s trade in services outside the EU pays for a £42 bn deficit goods. The values speak for themselves: there is no sense in which UK’s trade in services with EU balances the deficiencies in UK’s trade in goods.

So, the evidence that UK benefits long-term from the Customs Union and Single Market is conspicuously absent. And, as will be seen in the sector-by-sector analysis (Section 2), stagnant or slow-growing exports cannot be directly attributed to slow growth in EU economies, or un-competitiveness in UK companies. For multiple reasons, the Customs Union and Single Market have not aided UK exports in those sectors where UK might be expected to benefit, and have expedited imports from the EU in sectors where UK would definitely benefit if they hadn’t.

The net result is that the Customs Union and Single Market have failed to benefit the one element of UK trade where UK citizens have every right to expect it ‒ in the growth-rate for UK's goods exports to the EU. Which means UK needs to face uncomfortable questions before deciding what sort of EU trade arrangements it wants or is willing to pay for. This sector-by-sector analysis provides several insights:

  • First; that despite the supposed advantages of seamless, frictionless trade, UK’s trade with the EU has failed to add any significant value to any sector of UK industry in 20 years.

  • Second; that UK exporters are already far more successful at trading outside the EU on WTO terms than with the EU — in every major sector of UK exports without exception.

  • Third; that the root cause of poor export growth to EU is not the slow growth of EU economies, but a combination of consumer taste, competitive disadvantage and low EU demand for UK-made goods.

  • Fourth; that if UK stays inside the Customs Union and adopts Single Market rules, EU-based producers will continue to capture or retain dominance over UK markets without UK making reciprocal gains.

  • Fifth; that the increasing dominance of some UK markets by EU producers, especially in food products and agricultural produce is harmful to UK consumers.

  • Sixth; that even though UK financial services are successful in EU trade, their size and surplus mean it is not in UK’s interest to directly trade access for goods against access for services

  • Seventh, and most important; that for UK at least, the Customs Union has not evolved as a free trade area should. Consequently, it is wrong to treat is as one.

A comprehensive analysis

All the data used in this analysis are taken from two spreadsheets, which contain over 200 additional graphs and calculations. Both are available on, and the data is attributed to official sources, principally ONS. ‘UK Trade_Goods & Services’, directly compares UK trade in goods and services since 1998. The source data for this analysis was published by ONS in November 2017 and March 2018.

The second analysis, ‘UK's Top 10 Sectors’, identifies the dominating role played by manufactured products in UK goods exports — which currently stands at 89%. The spreadsheet tracks the performance of each of the UK’s top ten manufacturing sectors since 1998, inside outside the EU. The source data for this section was published by ONS in March 2018. Both are available on the website.

The remainder of this analysis is divided into two parts. Section 1 will compare UK trade in goods and services since 1998, noting where the Customs Union and Single Market have an impact. Section 2 will analyse each of UK’s top 10 sectors since 1998, inside and outside the EU. This analysis will also assess the general impact on that sector if the UK were to withdraw from the EU without a deal, and instead either adopt free trade, or trade with the EU on WTO terms.

Note, this analysis does not directly address the issue of the continued legality of trade in products and services post-Brexit, since those issues are not directly related to the commercial aspects of trade. If either the EU or the UK threatens to not licence goods that currently meet market standards in the immediate-post Brexit world, and does not act spontaneously to address mutual recognition, that is coercion. If the EU seeks to withhold regulatory approval for Derby-built Rolls-Royce aero-engines, but not identical Singapore-built Rolls-Royce aero-engines, then it is using the Brexit process to coerce UK into accepting long-term, sub-optimal terms of trade.

The ultimate Brexit trap

This analysis should provide a timely warning. If UK perpetuates membership of the Single Market and Customs Union, or signs a Brexit trade deal with the EU that mimics the current terms of trade, then trends that are long-established will continue. If nothing changes, the UK’s trade deficit with the EU will most likely deteriorate by £40‒£50 billion per decade, as exports continue to stagnate and imports continue grow by approximately 3.2%. Investment in UK industries will continue to drift to continental Europe — most lethally at the premium end of the UK’s motor-vehicle industry – creating ever bigger deficits across UK industry.

Neither will a trade agreement create jobs. Since 1998, the rate of growth of goods exports to EU is a fraction of UK’s productivity growth rate: 0.22% versus 1.19%, according to ONS data. This means it is statistically impossible for there to be more people making goods for exports to EU today than in 1998. What’s more, a goods deficit that has expanded from -£5.6 billion in 1998 to -£95 billion today implies that the jobs which have been created by UK‒EU trade are, net, elsewhere in the EU.

Meanwhile, UK will incur an opportunity cost if it fails to quickly liberalise trade in its fastest-growing export markets, which are all outside the EU. This opportunity cost will be greatests in motor-vehicles (where exports are growing at a staggering 7.9% per year), basic metals (7.1% per year), food products (3.5% per year) and beverages (4.3% per year). Nor will UK be able to take unilateral action to protect industries that are suffering unfair competition, for example in UK’s steel industry, or negotiate an exit from unwanted trade wars.

Based on the last 20 years of UK trade, this analysis suggests that UK’s safest Brexit course would be to trade with EU on WTO terms from March 31st, 2019, regardless of the short-term disruption. Alternatively, the UK could unilaterally declare free trade in some, most or all trade sectors. This would remove the preference UK gives to EU producers from which UK gains reciprocal advantage only in a portion of one sector — financial services. Unilateral free trade would remove bargaining strength in future trade negotiations, but it would also reduce consumer costs, especially in food.

But what the UK should not do is pay money and compromise its post-Brexit freedoms merely to entrench a goods-trade relationship that is already bad, and results in well-paid jobs moving across the Channel. If there is an optimal time for UK to negotiate trade with the EU, it will be when EU wants to liberalise non-financial services, including insurance, travel and transport — or alternatively, when UK economists have figured out precisely what went wrong with UK‒EU trade in the two decades since 1998.

Note on data. All data is sourced from ONS publications from November 2017 or September 2018 unless otherwise indicated. This data is regularly revised by ONS, and the updated spreadsheets are correct for November 2018. Where estimates of growth rates are used then values are revised to take account of inflation, using differential ONS import/export deflators based on 2015 prices, plus three-year averages at the start and end of the time-period. These averages are necessary to accommodate the atypical spurt in export growth that occurred in 2017, after the mid-2016 drop in the sterling exchange rate.Trade in services data extends back to 1999, so the time-period for CAGR calculations is 19 years as opposed to 20 years for goods. In addition, sectoral data for UK services is for 2016, rather than 2017, as the relevant ONS publication consolidates services from multiple sources and surveys. All calculations are available on the accompanying spreadsheets. Readers are encouraged to peruse the data while reading this paper.

Section 1: Trade — The Big Picture

So far as trade is concerned, Brexit directly impacts approximately one-quarter of UK exports. This is most, but not all, of the £164 billion of goods that UK exports to the EU, because some sectors – in transport equipment and pharmaceuticals – gain no tariff advantage through UK’s membership of the Customs Union.[5] Negotiations will also impact a small portion of the UK’s £108 billion services exports, which benefit from regulated access to the Single Market. This is almost entirely limited to a portion of UK’s financial services, which generate just over one-quarter (£27 bn) of UK services exports to EU

With the new ONS data, analysts can place the value of UK services exports in proper proportion, and hence balance the interests involved. For example, the value of UK services exports to countries outside the EU (£162 billion) ‒ which cannot be impacted by Brexit in any way ‒ is already almost equal to the value of UK’s goods exports to EU (£164 billion). If UK exits the EU without a deal, approximately three-quarters of UK trade will carry on regardless — without impact.

Putting UK’s £279 bn services trade in perspective

Critically, UK trade in services is already far more globalised that UK’s trade in goods. Exports to non-EU countries took an average of 60.3% of UK exports in 2015‒2017. Also, this trade is vastly more profitable, generating a surplus of £78 billion in 2017 (as opposed to a surplus of £36 billion on UK’s EU services trade). Partly this reflects the types of services that UK trades with EU: for example, UK’s £15.6 bn deficit in trade in travel services with EU in 2016 (see below) reflects the fact that UK citizens like holidays in Europe. Also, UK sells relatively few insurance services to EU.

But analysts should note that the most profitable and fastest-growing element in UK trade ‒ services trade with non-EU countries ‒ will not be impacted however UK leaves the EU. It will also be the most valuable element of UK within the next two to three years, regardless of the arrangements UK agrees with the EU.

The one services sector that has campaigned for negotiated access is financial services – but in the bigger picture of UK’s services trade, how important are these exports? Arranged in order of value, UK financial services to EU are only the third-biggest item in UK’s services export portfolio, taking just 11% of UK’s overall services exports. What’s more, UK trade in financial services is only partially governed by Single Market rules; much of the financial services industry is already governed by global standards, which UK has helped to frame.

Far more valuable to UK are what ONS class as ‘other business services’, which include multiple professional services such as accountancy, law and consultancy. These types of exports generate more income than financial services (£66 bn versus £61 bn), if you include non-EU trade. And this export sector is almost entirely un-impacted by Brexit because the Single Market has barely started on mutual recognition of professional services qualifications — nor, in some cases, would it have much impact if it did.[6]

Outside of financial services, the EU Single Market applies only patchily to services. Some commercial sectors have not been liberalised, which may explain why UK exports of insurance services to EU are negligible, whereas outside the EU they are worth £15.9 billion. Once you set UK services-sector exports to EU and non-EU markets side by side, it’s clear that this half of UK trade is almost entirely free of anything that Brexit can directly impact – or rather negatively impact. Only a portion of UK’s £27 bn financial services exports are affected, out of a total of £245.5 bn.

This is not the same thing as saying the sector cannot benefit from Brexit, however. For example, once UK is free to strike trade deals, the UK could negotiate greater access for UK financial services, or mutual recognition of professional qualifications, in return for access to UK goods markets. Inevitably, UK will trade working visas as part of trade agreements (for example, with the Indian IT industry), at which point, London’s financial services would gain increased access to global talent in the related fin-tech sector.

But the core point is to put Brexit in context. UK’s Brexit trade negotiations will only directly impact an ill-defined slice of 11% of UK services exports, and the greater part of UK’s £164 billion EU goods exports. Roughly speaking this is approximately one-quarter of UK exports. The rest will carry on regardless — whatever happens.

The 4 essential comparisons to asses UK‒EU trade: growth, size, surpluses and balances

To formulate UK’s strategic trade interests, it is vital to place all the elements and sectors of UK trade into proportion and place their success in perspective. The new data from ONS enables analysts to do this in four different ways, by making four separate sets of comparisons:

  • first, the speed at which the various sectors of UK trade ‒ goods & services, imports and exports ‒ have grown inside and outside the EU since 1998.

  • second, the relative size of UK’s principal trade sectors including comparisons of individual manufacturing sectors ‒ such as machinery or pharmaceuticals ‒ with various service sectors.

  • third, the relative surpluses and deficits achieved by UK’s principal trade sectors, including growth or contraction since 1998.

  • fourth, a comparison of how UK’s overall import‒export trade with EU and non-EU countries has evolved since 1998, which shows the accumulating result of giving preference to EU trade.

While it’s impossible to know how UK trade would have evolved since 1998 if UK had not remained a part of the Customs Union and Single Market, these four comparisons offer the best indication of what membership of both has achieved for UK industry.

1. Growth rates of UK trade with EU and non-EU countries

All UK trade is either imports or exports of goods or services with EU or non-EU countries. Once you place the growth rates of these eight principle sectors of UK trade next to each other, it’s clear there is something uniquely wrong with UK goods exports to the EU. Every element of UK trade has grown at between three and five percent per year since 1998 – with the sole exception of UK goods exports to the EU. Yet, this is precisely where UK is supposed to benefit from the Customs Union and Single Market.

In theory, UK membership of the Customs Union is supposed to facilitate UK goods exports by providing zero-tariff access to EU markets. It is the ultimate form of trade preference, endowing UK companies with a global advantage when trading within the EU. And, in theory, the Single Market is supposed to widen UK manufacturers’ exporting opportunities, by ensuring that all goods are made to a common set of standards and are thus pre-approved for all 28 EU markets.

But the practical effect for UK is the reverse of what’s intended — or assumed. Since 1998, goods exports have grown by just 0.22% per year, or 3.7% overall. This is a fraction of the long-term growth rate of EU economies, estimated by Trading Economics at 1.56% per year. It is also a fraction of UK's own productivity growth rate of 1.19%. (For both calculations, see UK Trade_Goods & Services, Tab 3, Section 9)

What this means is that trade conducted within the Customs Union under the terms of the Single Market has barely added any value to UK industry since 1998. And since the growth rate is slower than UK’s productivity growth rate, it is statistically impossible that the Customs Union and Single Market have added a single job to the UK economy in 20 years. If they ever have, it happened before 1998.

It’s tempting to off-set this low goods-export growth rate against the high, 5.2 % growth-rate achieved by UK services exports to EU. This is inappropriate for two reasons. First, UK imports of services from the EU are also perfectly healthy, growing at 3.0% p.a. So, the UK provides a far better market for EU services than the EU provides for UK goods, and imports of EU services will carry on growing regardless of anything agreed during Brexit negotiations. Second, as noted above, trade in services is carried on largely outside of any EU system of preference or regulation.

This means that so far as the UK is concerned, the EU does not operate as a grand, free-trade area in which UK gains in services-trade what it loses in goods-trade. If UK generated a £95 billion surplus in services instead of a £36 billion surplus, and if, say over 80% of that trade were attributable to the Single Market, instead of a fraction of 11%, then the consideration would be different. But what UK gains in EU trade in services it will almost entirely gain anyway, whatever form Brexit takes; what UK fails to gain in EU trade in goods occurs directly within the structure of the Single Market and the Customs Union.

One further point. Apart from 2017 – an exceptional year for all UK exports – what little growth UK companies have achieved in goods exports to the EU since 1998 occurred in the first half of this period, before the global financial crisis. Since then, exports to EU have fallen and then risen slowly, but have yet to regain the value achieved in 2006. This means that by some measures, UK exports to the EU are in decline. In 2015 prices and adjusting for inflation, UK exports of goods were worth a yearly average of £145.2 billion in 1998–2007, but just £143.0 billion in 2008–2017.

Consequently, the optimal term to describe UK goods exports to EU is ‘stagnant’. It is impossible to say what UK trade would be like without the Customs Union, but it is indisputable that UK’s export trade within the Customs Union is easily UK’s worst performing. And since the Single Market mostly covers trade in goods, and the Customs Union nothing else, then a dismal observation is inescapable: that in the one place where you would expect to see evidence of the Customs Union and Single Market delivering value to UK industry, it is strikingly ‒ breathtakingly ‒ absent.

2. The relative size of UK’s principal trading sectors

But does this matter? If the sectors where the Customs Union and Single Market negatively impact UK trade are either small or declining, then whether UK replicates them or doesn’t is unlikely to make a major, long-term difference. To this point, one curious feature of debate on UK trade since Brexit is an indifference to the relative value of the individual sectors concerned. But how else can UK prioritise its objectives – in terms of Brexit negotiations and the prosperity of specific communities within the UK?

The best way to do this is to compare the value of two-way trade in UK’s principal EU-traded sectors. One thing instantly stands out. UK’s trade with EU in motor vehicles is by far the UK’s most important. And, as will be examined in Section 2, it also generates UK’s biggest deficit: -£28 billion. UK’s trade in financial services is worth less than half as much. But what’s vitally important to UK is that UK’s trade in financial services is also worth less than UK's trade in other sectors, for example, machinery, chemicals and pharmaceuticals.

Incidentally, if you aggregate trade in food products (which count as manufacturing) with agricultural produce (which doesn’t), then trade in food is UK’s second-biggest EU traded sector, worth £8 billion more than trade in financial services. Like trade in motor vehicles, trade in food is heavily protected by tariffs by the EU, so the difference between being inside the Customs Union and outside will be fairly dramatic. Like trade in motor vehicles, this is also the sector where UK incurs a huge EU deficit.

What this means is that the overall interests of UK’s financial services are of approximately equal weight to four out of UK’s top five manufacturing export sectors, and only half as important as the UK’s trade in motor vehicles. The UK government’s Chequers proposal envisages accepting that UK financial services (which do generate a surplus) will not gain free access to EU markets post Brexit, whereas the EU will gain unfettered access to UK goods markets (where UK generates big deficits).

But should UK find itself in a stronger negotiating position, either pre- or post-Brexit, it is vital to recognise that UK’s financial services do less trade than each of the UK’s five-biggest goods-trade sectors. And while the total value of trade isn’t the whole comparative story (because these trade values hide huge surpluses and deficits) this comparison places financial services further down the pecking order of priority than is widely assumed — at No.7, to be precise.

3. Surpluses and deficits

And so, to the third comparison: surpluses and deficits. Using ONS data, it’s possible to compare the outcome of UK’s current trading arrangements – the surpluses and deficits in each of UK’s major trade sectors. These surpluses or deficits are not inherently good or bad. For example, for UK to show a surplus on trade in food would indicate a gross waste of national wealth. These surpluses and deficits do, however, faithfully reflect the difference in growth rates of imports and exports over 20 years. They show which UK industries are doing well or badly out of trade, as it is currently conducted.

The graph below shows all sectors where the UK incurs a surplus or deficit above £6 billion in 2016 (for services) and 2017 (for goods). Columns in red/pink with EU, all of which are impacted by the Customs Union or the Single Market or both. Columns in blue show trade with non-EU countries.

As previously observed, financial services is the only sector of UK trade with the EU that generates a significant surplus. However, the surplus it generates does not outweigh the accumulating deficits that UK incurs across its principal goods sectors. Most importantly, it fails to cover UK’s gigantic deficit in trade in motor-vehicles, which reached £28 billion in 2017. And, standing alone as it does, it cannot balance UK’s giant, goods-sector deficits in food, computers and electronics, pharmaceuticals and machinery.

As mentioned, it’s instructive to contrast these balances with the state of trade 1998. Except for motor vehicles (-£7.9 bn) and computers (a surplus of £6.9 bn), the sectors that now generate major deficits were close to balance at the start of the period analysed in this paper: food products (-£3 bn); pharmaceuticals (-£693 million); and machinery (a surplus, amazingly, of £459 million). All of which indicates that for UK, the experience of the Customs Union and Single Market over 20 years is to retard or arrest export growth while opening UK markets to EU manufacturers in all its biggest goods sectors.

This comparison also shows that whether UK financial services retains or loses or circumvents access to EU markets post-Brexit will make a marginal difference to UK’s overall trade balance with the EU. What will have an impact is the fortunes of UK’s principle goods sectors, which all exhibit chronic, deteriorating deficits.

The singularity of the success of UK’s financial services should simplify UK’s negotiating stance. Financial services is the only trading sector that unambiguously benefits from current trading arrangements. So, if UK cannot negotiate access for financial services, then UK has literally nothing to gain from replicating current trading arrangements. The UK may fear of loss of trade if it doesn’t reach an agreement. But the UK government should temper this fear with the realisation that UK’s goods- export trade is already stagnant, and that in so far as there are beneficiaries, they are almost exclusively located on the European continent.

4. The long-term balance of UK‒EU trade

Which leads naturally to the fourth comparison — of overall imports and exports with the EU over 20 years. From this graph it’s clear that since 1998, the Customs Union and Single Market have helped turn a balanced trading relationship into a massively unbalanced one. The trend was already clear before the global financial crisis, but whereas imports have grown strongly since 2009, exports have not. By 2017, UK exports to EU had still not regained the value achieved in 2006, when adjusted for inflation.

This implies that EU-based production appears to benefit from tariff-free trade and seamless customs processes in ways that escape UK manufacturers – including UK manufacturers that have proved highly competitive on world markets (see Section 2). The result is a steadily growing pile-up of deficits – in particular, in motor vehicles, machinery, pharmaceuticals and food. Put together, the deficits reached £95 billion in 2017, having doubled from ten years ago.

The fact that imports from the EU have grown while exports have not leads to a curious and unsettling trend in UK trade. As will be shown in Section 2, EU companies are retaining or capturing a predominant market share of UK imports in many sectors while EU markets themselves attract a fast-diminishing share of UK exports. Regardless of all other evidence, this implies that the Customs Union and Single Market works in ways that favour producers in EU over UK.

This trend is particularly advanced in UK’s two biggest EU-import sectors: motor vehicles and food. The EU’s share of UK exports of motor vehicles has plummeted from 73.5% in 1998 to 44.7% today, while EU’s share of UK imports has held rock-steady at 84–85%. Meanwhile, UK dependence on EU for imports of food products and agricultural products has grown from 62.1% in 1998 to 69.9% today, even though the EU-grown food is also the world’s most expensive.

To remove all doubt about what’s happened to UK trade, it’s worth comparing the UK trade with other EU countries. How does UK’s experience compare with Germany, France, Italy, and Spain? Sure enough, a brief excursion into official EU data (Eurostat) confirms that UK’s record of trade in goods with the EU is uniquely awful. According to Eurostat, the UK has easily the worst export/import ratio of any major EU economy, currently at 61% (See Section 2).

From these four comparisons, it’s possible to draw a series of conclusions that help place UK trade interests with EU into proper perspective:

  • That the one-quarter of UK trade which is subject to Brexit negotiations is easily the UK’s worst-performing over the past two decades.

  • That only one sector directly affected by withdrawal has clearly enjoyed success in EU and that is financial services.

  • That the scale of trade in financial services means that it is only of equivalent value to trade in machinery, chemicals or pharmaceuticals, and that the surplus it generates doesn’t cover UK’s deficit in motor vehicles and parts.

  • That the Single Market and Customs Union do not benefit EU members equally, and that UK’s poor performance within both is uniquely bad.

  • That despite the supposed barriers to trading on WTO terms, UK goods exporters have proved far more adept at expanding into markets outside the EU since 1998, than inside.

Thus, the UK’s current trade relationship with the EU is not an asset to be preserved. It is a problem to be resolved. Big, blunt questions arise. Why should UK commit to an exit payment of £39 billion, which will mostly be spent overseas, and submit to numerous disagreeable levels of control, only to preserve a trading partnership that principally benefits other EU countries? And if it’s advantageous to break away from this trade relationship, then what’s the opportunity cost of delaying?

The central importance of manufacturing

From the comparative analysis above, it should be clear that so far as Brexit trade negotiations are concerned, nothing should trump the interests of UK goods producers. This is the sector most impacted by the Customs Union and Single Market, the sector that has not benefited from it, and the sector that will likely incur ever-increasing deficits if current trade arrangements are replicated. But before proceeding, it would be helpful to know what’s meant by ‘goods’ exports.

Just over 89% of UK’s goods exports are manufactured products. The rest is predominantly oil- and minerals-related, as well as raw agricultural produce, and various arts and entertainment products. The proportion of manufacturing in UK goods exports has dropped by just over 2% since 1998. Thus, manufacturing still dominates UK goods trade, and therefore manufacturing interests should predominate when formulating UK’s Brexit trading arrangements.

What follows (Section 2) is a step-by-step analysis of the 20-year fortunes of UK’s top 10 manufacturing-export sectors. Taken together, these 10 sectors contribute 72% of all UK goods exports (or 80.7% of manufacturing exports). This analysis will track how each has fared since 1998. It will identify which sectors should have benefited commercially from UK membership of the Customs Union and whether Single Market regulation is operative. At each step this analysis will compare the performance of UK exporters inside and outside the Customs Union since 1998.

At the same time, this paper will identify the sectors that are growing in importance to UK. For example, the fastest-growing sector of UK goods exports is pharmaceuticals, which has grown from generating 4.1% of UK manufacturing exports in 1998 to 9.3% in 2017. Next comes transport equipment – almost entirely aircraft wings, engines, seats and other aerospace parts – which have grown from 7.7% of UK manufacturing exports in 1998 to 12% in 2017. Next comes motor vehicles and parts, which is UK’s most-valuable export category.

By comparing performance inside and outside the Customs Union, it’s possible to grasp the broad trends in UK trade. For example, while UK exports of motor vehicles to EU have stagnated since 1998, exports to countries outside the EU have almost quadrupled, generating a £15.3 billion surplus in 2017. This proves that some parts of UK motor manufacturing are highly competitive on world markets, in particular, premium marques and luxury vehicles, and despite widespread tariffs (except, for the moment, in the US). The steady growth, however, in UK’s deficit with the EU (now £28 billion) coupled with near-zero export growth, shows that, on balance, global car companies are switching investment from UK to car plants in continental Europe, a process now spreading to premium marques, including Mini and Jaguar-Land Rover.

Lastly, this analysis provides a warning. If UK trade experts do not understand why UK goods exports to EU have stagnated, then a new UK‒EU trade agreement has zero prospects of reversing long-established trends. The UK’s principal Brexit objective – a good trade deal – may only result in more investment drifting across the Channel along with high-value UK jobs, while UK remains, in multiple sectors, a captive market for EU-based industry. In a desperate effort to avoid causing any disruption to UK-EU trade, the UK government may end up preserving a trade relationship which has failed to add any value to UK manufacturing in 20 years.

... Part 2


[1] All trade data in this work is taken from the ONS UK Trade website unless otherwise stated. All calculations and graphs are included in the two accompanying spreadsheets: ‘UK Trade_ Goods & Services'' and ‘UK Top 10 Sectors’. All data is current and covers the 20-year period from 1998 to 2017, excepting only that long-term services data starts in 1999, and the sectoral breakdown for UK services data was published in November 2017, and therefore runs to 2016. This is a preferable data set since services data is heavily revised up to 12 months after publication.

[2] See Michael Burrage 'It's Quite OK to Walk Away', pp 86 to 88. Mr Burrage provides an excellent comparative analysis of compound annual growth rates for countries trading with the EU. He notes that existing EU bilateral trade arrangements cover just 6.1% of UK goods exports, and have had limited impact on growth. EFTA countries take a further 8.1% of UK global exports. Mr Burrage notes, however, that this 14.2% of UK goods exports - which are neither subject to WTO rules or the EU itself - comprises only a handful of major markets (in order, Switzerland, South Korea, Turkey and Norway), and many of them impose only trivial tariff rates on non-Agricultural imports). This implies that 37.4% of UK goods exports are already conducted on WTO terms, or 72.5% of all non-EU trade.

[3] Curiously, these revisions have not been mirrored in HMRC data. Although computed differently, customs data tracked ONS UK goods-export data fairly closely from 2012 to 2016, prior to these revisions.

[4] Jeremy Warner, writing for UK’s Daily Telegraph, recently estimated the proportion of UK financial services exports impacted by the Single Market and EU directives at between one-third and one-fifth. At the most generous end of his estimate, this would reduce the portion of UK services exports impacted by EU regulation to approximately 4 percent. See below.

[5] The impact of non-recognition of UK products that currently meet EU standards is a separate issue, not directly related trade. For example, the suggestion that EU will refuse to recognise the safety of UK aerospace products post-Brexit is a technical issue, related to agreements on regulatory oversight. Failure to agree recognition when the EU recognises the standards of products from countless other third-party countries, simply indicates that the EU wishes to use non-recognition as a source of leverage in negotiations.

[6] For example, a UK-trained barrister would be of little value acting as avocat in a French Tribunal.