Success or Failure 1998-2017? The UK & the Customs Union in 7 Simple Graphs

September 13, 2018

 

 

 

There’s a difference between what seamless trade with the EU is supposed to achieve in theory and what it's actually achieved in practice. Thanks to historical trade data published by the UK Office for National Statistics (ONS), we now know the difference is huge. By making multiple comparisons in UK, EU and non-EU trade since 1998, it’s possible to judge the UK's record inside Customs Union and Single Market over the past 20 years, and assess the real value of seamless, tariff-free trade with the EU.


All data, calculations, graphs and sources are set out in the accompanying spreadsheets: UK Trade: Goods & Services, and UK's Top 10 Sectors. Note: ONS revised its historic data in its September 2018 release. This analysis uses the revised data.

 


1.    Export Growth: 1998 to 2017
First, divide all UK exports into four parts: exports of goods to the EU (worth £164 billion in 2017); exports of services to the EU (£117 billion); exports of goods to non-EU countries (£175 billion); and exports of services to non-EU countries (£162 billion). Now, using the trade in services data just published by the ONS, calculate the average yearly growth rate for each of these four categories from 1998 (or 1999 for the services data) to 2017.

For supporters of the Customs Union and Single market, the results are maximally disagreeable. The UK’s slowest-growing export trade since 1998 is goods exports to the EU, which has grown by just 0.2% per year since 1998, or 3.7% over 20 years. Yet this is precisely the sector that is supposed to benefit from tariff-free trade within the Customs Union. Goods exporters are also the principal supposed beneficiaries of the Single Market, whose uniform regulations make all UK-made products readily exportable within the EU. And even 0.2% p.a. is misleading, since most growth occurred pre-2007. Adjusting for inflation, average annual exports in 2008‒2017 were lower than 1998‒2007[1].


Conversely, the UK’s fastest growing exports are services exports outside the EU. At 5.6% per year over 20 years, these exports have grown so fast they are now more valuable than UK's entire good exports inside the Customs Union. And yet this is the export sector that is least impacted by any aspect of EU membership. Next fastest is UK’s services exports to the EU, growing an impressive 5.2% per year. This sector is only marginally impacted by the Single Market: only a portion of financial services are impacted by EU regulation and financial services exports contribute just under one-third, or 30% of UK services exports to EU (See Graph 4 below). 

 

Meanwhile ‒ and trading mostly on World Trade Organisation (WTO) terms ‒ UK goods exports to non-EU countries have grown at a crisp 3.3% per year since 1998. This sector is heavily influenced by the Single Market, whose rules apply to most goods made in UK, but they are conducted outside the Customs Union, mostly on WTO terms. According to Michael Burrage, who has conducted by far the best comparative analysis on this topic (It's Quite OK to Walk Away), only 6.1% of UK's non-EFTA global exports were conducted under existing EU bilateral trade agreements in 2015, and only 1.8% of UK's services exports. This means approximately 73% of UK goods exports to non-EU countries are already conducted on WTO terms. Much of the rest is with countries who in any case impose near-negligeable tariffs on non-food imports (Burrage, page 86-88).

 

This 3.3% per year non-EU export growth rate, therefore demonstrates that UK businesses are highly adept at growing markets outside the Customs Union on WTO terms despite the supposed barriers. The data also demonstrates [2] that UK's most-valuable, global , goods exports – motor vehicles (worth £25.3 bn in non-EU exports) [3], aerospace parts (£22.3bn), machinery (£17.9 bn), pharmaceuticals (£14.8), basic metals (£8.9) and food products and drinks (£9.8 bn) – are highly competitive on world markets before UK has signed a single, independent trade deal. What’s more, for UK’s two fastest-growing export sectors – aerospace [4] and pharmaceuticals  – trade deals are commercially irrelevant, because products are already tariff-free under WTO rules.

 

So, the blunt assessment: since 1998, the success of UK trade, as measured by export growth, is directly and inversely proportional to how much of any particular sector is impacted by the Customs Union and Single Market. Or, to put it another way: that part of UK exports that is governed by the Customs Union and Single Market is easily UK's worst performing, and growth has essentially stagnated since 2007. 


2.    UK’s Trade Balance: EU versus Non-EU
Not so with EU imports, however. Back in 1998, UK’s EU goods trade was roughly in balance, (-£5.6 bn). Since then, imports from the EU have grown at a strapping 3.4% per year. The biggest EU import binges have been in motor vehicles (worth a staggering £47.7 bn in 2017), food products (£23.2 bn) and since 2011, pharmaceuticals (£22 bn). So, since 1998, the Customs Union and Single Market have taken a trade relationship that was trim and balanced and turned it into a raging £95 billion deficit.

Here again, the new services trade data helps because we can see to what extent UK’s talked-up services trade with the EU will ever balance this equation out. And the answer is, it won’t. 


Services exports to EU may be growing nicely (5.2% p.a.) but the £36 bn surplus it generates pays for just over one-third of UK’s deficit in trade in goods. And since the difference between UK’s goods export‒import growth rate (3%) is wider than the difference in the services export‒import growth rate (2.2%) it never will. If nothing changes in the way UK trades with the EU, then UK’s current deficit of £58.3 bn will carry on getting bigger, exactly as predicted by the veteran Free Trader, Professor Patrick Minford.


Outside the Customs Union and Single Market, the UK’s trade is a picture of good health. Goods imports and exports have grown at almost precisely the same rate – 3.4% and 3.3% respectively, per year, since 1998 – so the deficit isn’t growing. And the services exports surplus is now so big (£78 bn), it almost covers the goods deficit twice over. What's more, the deficit in manufactured goods is just £23.5 bn; the rest of UK's non-EU deficit is generated by £23.6 bn-worth of imports of crude oil and natural gas, and the course of that trade will be un-impacted by trade negotiations – with EU, WTO or anyone else.

 

So, outside the EU, UK's trading prospects are strategically very fair indeed. The UK's exports of services to countries outside the EU are growing so fast they will shortly become UK's single biggest area of trade. And UK manufacturing is highly competitive on world markets, even through 73% is conducted purely on WTO terms. But the obvious question still begs an answer: why is UK paying money to hang on to EU trading arrangements that deliver stagnation and giant deficits when the alternative model for conducting trade – on WTO terms – is a proven success for UK exporters and UK trade?

 


3.    UK’s car-smash trade in motor vehicles 
To see precisely what’s gone wrong, try opening the bonnet on UK’s biggest trading sector — motor vehicles and parts [6]. Worth £102.5 bn globally, the UK’s trade in motor vehicles is becoming more important to the UK economy. Back in 1998, motor exports made up 10.7% of UK manufacturing exports; now it’s 14.9%. 

 

The UK car industry has been vocal in calling for ‘frictionless’ trade to continue after Brexit. But what, precisely, has the Customs Union and Single Market achieved for the UK car industry since 1998? The answer is, roughly, nothing; except to turn UK into a captive market for continental car production.

 

Using a three-year average at the start and end of this period and adjusting for inflation, UK exports to EU grew just 0.4% per year, or 6.7% over the entire 20-year period. Worse, that growth is concentrated in the first half of the 20-year period, from 1998‒2007. Exports to EU in 2017 were still lower than they were in 2006, and average exports for 2008‒2017 were lower than 1998‒2007. This means by some measures, exports are falling. Zero tariffs; zero market barriers; zero growth.

 

But  here's the problem: that since 1998, imports from the EU have motored along very nicely, growing at 3.6% per year. The result is that UK now has a gigantic £28 billion deficit just in motor vehicles and parts — almost sufficient to write off UK’s entire surplus in its trade in services.

 

Meanwhile, in the non-frictionless, non-seamless, non-Customs Union world of non-EU trade, UK exports have leapt ahead by a staggering 7.9% per year. Virtually all of UK’s growth in motor-vehicle exports since 1998 is attributable to selling to countries outside the EU: principally China and the US, but also ultra-high-end luxury models to the Middle East. The result is that despite being worth just a third of EU exports in 1998, exports to non-EU countries overtook EU exports in 2012 and are now substantially higher — £25.3 bn to £19.6 bn in 2017. Thanks to the iron laws of mathematics, this difference is accelerating away. 


What this demonstrates is that for UK’s most valuable trading sector, the supposed advantages of the Customs Union and Single Market are all one-way. EU-based car-makers have retained a vice-like grip on the UK import market, with an 85.1% share in 1998 dropping only fractionally to 83.8% in 2017. Meanwhile, roaring success outside the EU, has seen the EU’s share of UK exports plummet from 73.5% to 44.7%. What's more, the prominence of North America and China as markets for UK's premium marques implies that the proportion of UK's global exports conducted on WTO terms comfortably exceeds the 73% average for UK goods [7].


Underneath these figures lies a sorry tail the industry prefers not to discuss. Since 1998, net investment has continually drifted from the UK to EU as global manufacturers divert investment from UK to continental plants and import freely back into the UK: the UK’s current £28 billion deficit in motor vehicles – up from £8.1 bn in 1998 ‒ is the living, haemorrhaging proof of it. What’s more the trend is extending even into UK’s premium manufacturing, with Mini and Jaguar‒Land Rover expanding into continental manufacturing, at Graz in Austria, and Nitra in Slovakia.


And the contours of this chart are repeated virtually unchanged in each of UK’s top-10 trading sectors, which together deliver 72% of UK goods exports. In many ‒ machinery, pharmaceuticals, computers & electronics, electrical goods  ‒ the same dynamic is at play: investment drifts across the Channel and deficits soar as global companies use the Customs Union and Single Market as a springboard to manufacture in continental Europe and import freely into UK. 


Which means ‒ distressingly ‒ that Remainers’ doom-laden prophesies have already come to pass. Industry started decamping to continental Europe well before Brexit broke onto Britain’s economic horizon and will continue to do so unless UK fundamentally re-casts its trading relationship with the EU. The only practical question is: does UK get anything back from the Customs Union or Single Market that compensates?


4.    The relative value of trade in Financial Services
This is usually the moment when UK’s financial services raises a glinting head. “Ah ha”, says the City, “What UK loses on the mechanical swings, we make up on the financial roundabout.” But do the numbers stack up? Do they stack up in terms of what the Single Market actually affects? [8]

Here again, new data from the ONS is helpful because we can put the value of UK services trade into proportion and perspective. In November 2017, the ONS published a terrific breakdown of UK trade in services that, unusually for ONS, combined banking and travel with all the other services which UK companies provide to overseas consumers, businesses and governments. After a little jigging it looks like this. Note, however: 2017 was a boom year for UK exports (the best since 2006) so these 2016 breakdowns fall noticeably short of the provisional totals for UK’s 2017 trade. 


Two things are instantly clear. First, UK trade in services is far more global than UK’s trade in goods. Second, UK’s most valuable services trade isn’t financial services at all, but what ONS calls ‘other business services’. This is chiefly professional services, such as law, accounting, advertising and consultancy, which in total brought in £66.1 bn of exports in 2016. In fact, UK’s financial services comprise just 25% of UK’s overall services exports, and the fastest growth in services trade is in the creative, media and IT services industries. Financial services to the EU account for just 11% of UK’s services exports, of which an indeterminate proportion up to one-half [9] are impacted by the Single Market.


To be fair, financial services generate an unusually juicy, £22.9 billion surplus with the EU. But consider: the Customs Union and Single Market apply to every aspect of UK’s trade in goods, whereas the Customs Union doesn’t apply to services, and the Single Market applies only patchily to financial activities. Outside financial services lie multiple activities ‒ some extremely new to trade ‒ that operate untroubled by EU regulation. So, the proportion of UK service trade actually impacted by Brexit is about one-third of the red section of the top line in the chart above. That’s it.


Which means there’s relatively little on the services side of the equation to trade off against the relentless deficits the UK stacks up inside the reaches of the Customs Union and Single Market — £18.7 billion in food products and agriculture; £11.4 billion in computers; £8.8 billion in pharmaceuticals, £7.2 billion in machinery — all chronic; all deteriorating. And as already noted, the one big surplus earned by UK services ‒ in financial services ‒ doesn't even cover the deficit incurred by motor vehicles (£28 billion).


This makes it extremely difficult for UK to negotiate any sort of equitable trade deal with the EU. Even if the EU were to accelerate access for UK financial services to the EU market, and, say, liberalise the EU insurance market, the UK would still be locking in a far bigger deficit in goods trade, from which only the EU draws any export-growth advantage. 


The lesson for now is clear, what little the UK gains from Single Market access for services pales beside what UK fails to gain through seamless trade in goods.


5.    Food for thought
Trade isn’t just exports, though. The equally vital role of trade is to secure for UK consumers the best quality goods at the lowest price. And if there’s one sector where this matters more than any other, it’s food. At 0.7% of GDP, the UK’s agricultural sector is easily the smallest per head of any major economy in Europe. The UK is, perforce, a massive importer of food — currently to the tune of £42.9 billion per year. And so, even for non-free-traders, this is one area of trade where the interests of UK consumers easily outstrip the interests of UK producers [10].

Consequently, the UK’s strategic interest is uncomplicated: to enable UK citizens to buy the cheapest and the best-quality food available on global markets. Yet this is precisely what the Customs Union prevents. By imposing ultra-high tariffs on non-EU food and quotas on imports, the EU forces UK consumers to purchase food from EU producers, who just happen to be the highest-cost food-producers on the planet.


But here’s the kicker: thanks to the Customs Union, the UK’s forced dependency on high-cost food is actually rising. Back in 1998, the EU supplied 67.8% of food products imported into UK; this has now risen to 76.3%. The balance moderates slightly if you include agricultural produce (e.g. cereal), but agricultural produce is just 23% of the food that UK imports. Add that to the mix and UK’s reliance on EU for imports of all food-stuffs is still increasing, and stands at a staggering 69.9%, totaling £30 billion in 2017. 


The result is that, crazily, food is now UK’s second-biggest category of imports from EU. Just like UK’s biggest (motor-vehicles) it’s a market that the EU corners for its own producers by erecting high tariffs against global producers. The direct consequence of which is to force UK consumers to purchase high-cost food from the EU or pay a gigantic tax on non-EU products.


To take but one example. Beef is currently protected by tariffs that in effect add over 60% to the cost of imported beef. So instead of eating cheap, high-quality beef from Brazil or Australia, UK households are forced to buy expensive EU-supplied beef instead — principally from the Irish Republic. Last year, UK households bought £2.2 billion of comparatively very expensive Irish beef.


When you reflect that the quest for cheap food spear-headed John Bright’s campaign for Free Trade in the 1840s and that the charge of ‘dear food’ helped delivered the Liberal landslide in 1906, it’s odd that food hasn’t figured more largely as UK regains control of its trade policy. Probably this is because households spend less of their income on food than 100 years ago. 


But according to the UK's Institute for Fiscal Studies the least-well-off 20 percent of UK consumers still spend more than 20 percent of their income on food. They are the ones who will pay if UK continues to give preferential market access to EU food producers post-Brexit, including if this achieved indirectly through enforced alignment with Single Market food regulations. 


What’s more, if UK agrees to follow EU food regulations post Brexit, it gives the EU an incentive to deliberately devise regulations to keep non-EU foodstuffs out of the UK. It will use regulation to keep the UK food market captive to EU producers, because it would be commercial madness to do anything else — and because the UK will be powerless to prevent it.


6.    What membership hasn’t achieved
Analysts can never say how UK’s EU trade would have evolved from 1998 to 2017 if the UK had been outside the Customs Union and Single Market … but a few deft comparisons reveal what membership hasn’t achieved. [11]

                               (*1995 to 2018)

 

First, jobs growth. It’s commonly asserted that UK needs to ‘stay close’ to the EU to preserve jobs. But observing that hundreds of thousands of jobs depend on trade with the EU is a quite different proposition to saying that membership of  the Customs Union and Single Market has created jobs that otherwise wouldn’t exist. The warning signs started flashing long ago. The UK’s annual goods export-growth rate to EU (0.22%) is a tenth of UK’s average 1998–2017 GDP growth rate (2%). This means – in economics language – that almost the entire cumulative effect of the Customs Union and Single Market is a ‘drag’ on UK growth. 


But UK goods-export growth is also far slower than UK’s productivity growth rate over the same period ‒ 1.19%  ‒ which is the rate at which UK companies and organisations become more efficient each year. This means it is statistically impossible for there to be more people engaged in EU goods-export activities in 2017 than in 1998. Which means, in turn, that the Customs Union and Single Market cannot – net – have added a single job to the UK economy since 1998. 


Of course, we can’t know if UK‒EU trade would have created jobs from 1998‒2017 if UK had not been a member of the Customs Union or Single Market. But we can see how other countries have fared. 


In terms of trade with the EU, the United States is UK’s nearest equivalent. Back in 1998, US goods exports to EU were fractionally lower than UK’s: £91.7 bn to UK’s £99.9 bn at the prevailing exchange rate. But since then (or more precisely, since 2008) US goods exports have grown far more quickly, and at an average rate of 2.11% per year over the entire, two-decade period [12].

 

The result: after 20 years of NOT having a trade agreement with the EU, or participating in Single Market rules, the US has comprehensively outstripped UK as a goods exporter to EU, with exports worth £219.8 bn in 2017, as opposed to UK’s £164 bn. So, from near parity in 1998, the US now exports goods to the EU that are 35% more valuable than UK does. As far as any analysis ever can, this dramatic divergence in export performance proves that seamless, tariff-free trade with the EU is absolutely not vital to exporters.


Lastly, it’s sometimes said that the reason for slow UK goods-export growth to EU is the EU’s own slow growth rate. And to be fair, the EU is not the most energetic performer on the world economic stage. But as the chart above shows, UK’s exports to EU have grown at less than one-quarter the rate of Eurozone economies. So, low EU growth cannot be the cause of slow UK exports. More painfully, US goods exports have grown significantly faster than Eurozone economies (2.1% p.a., as opposed to 1.6% p.a.), which implies the assertion is technically dubious anyway.


So, to debunk a few assertions: 

 

  • The Customs Union and Single Market may have preserved UK jobs since 1998, but they haven’t created any either; 

  • Other comparable countries have proved far more successful at exporting to EU since 1998, even though they have traded on WTO terms over that period, and do not share a common rule book;

  • And, whatever the true cause of UK’s stagnant exports to EU, it definitely isn’t the EU’s own nearly stagnant economies. Other things are going on. 

 

7. UK’s EU deficit in perspective
The UK’s current trading performance with the EU may be awful, but is it sufficiently bad to risk walking away from any attempt to preserve current arrangements? In the global scale of good and bad trade relationships, does UK’s big, deteriorating deficit really matter? 


The most logical comparison is, again, with the United States. That country, too, runs huge trade deficits in goods, which are partly redressed by surpluses in services. It’s biggest is the U.S. $337 billion trade deficit with China. Highlighting this deficit helped propel Mr Trump onto the White House lawn. Correcting it is one of the Presidency’s strategic objectives. 
 
So how does UK’s deficit with the EU stack up with the US deficit with China? Are they of equal importance, which is another way of saying: ‘should the UK at least be concerned?’

If you convert UK’s overall 2017 EU deficit into US dollars (goods plus services) at an exchange rate of $1.35 to £1, the resulting UK-EU deficit is $78.7 billion. But then the US economy is approximately 6‒7 times larger than the UK economy. Taking that into account, the UK has a deficit in comparative terms approximately 47% bigger than the US [13].


More generously, you can translate the dollar trade deficit into a deficit per head of population, which gives a UK‒EU deficit of $1,216 per head, as opposed to a US‒China deficit of $1,050 per head. Which means the UK has a headache that is 16% more painful than the one that got Trump elected; one he is hell bent on correcting.


Sadly, the UK’s deficit with the EU is still exceptionally bad if you restrict comparison to this side of the Atlantic. Eurostat, the EU’s own statistics agency, shows the UK's export/import ratio plummeting from 82% in 2006 to 61% in 2015 [14]. This gives UK easily the worst goods-trade performance of any major economy within the EU (Germany sits nicely at 112% ‒ and that country's ability to retain or expand market share across the EU in the EU's principal trade sectors is both astonishing and arguably the most influential dynamic at work in the EU today).


If trade ‒ through some hidden political hand ‒ influences attitudes to the EU, then it won’t surprise future economic historians that UK became the EU’s most Eurosceptic nation, and the first to attempt to break away. The UK’s experience over the last 20 years of trade within the Customs Union and Single Market is uniquely awful, by any international comparison. 


Summary
So: if the Customs Union and Single Market have gently throttled UK export growth over 20 years; if they deliver crushing deficits that UK’s non-EU trade then has to pay for; if their quality of seamlessness lies principally in helping investment slide overseas; if they force-feed UK households on the most expensive food on earth while offering no reciprocal advantage to any sector of UK trade except financial services, and then only in a limited way; if the reason for stagnant exports can’t easily be attributed to anything other than the Customs Union and Single Market themselves; and if the end result is a deficit 16% worse than the one that helped gain the Presidency for Mr Trump, then UK’s strategic interest should be crystal clear. 


Whatever theoretical benefits the Customs Union and Single Market possess, in practice they have failed to enhance UK exports over the past 20 years by any logical measure or reasonable comparison. The resulting question is a practical one: does the UK Parliament have the courage to fundamentally change that trading relationship, or will it allow UK’s long-term trading policy to be determined by fear of change? 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

[1] £144.7 bn as opposed to £145.6 bn in 2015 prices. See Tab 3 in ‘UK Trade: Goods vs Services’, Section 2, line 77. (Spreadsheet link on Homepage)

[2] Tabs 1-10, 'UK's Top 10 Sectors'. Data for each sector is presented in turn, in order of the total value of UK exports. Together, these top ten sectors contribute 80.9% of UK manufacturing exports, or 71.1% of UK goods exports. 

[3] Most exports of motor vehicles to non-EU countries are luxury or premium vehicles. This contrasts with exports to EU countries, in which mass-market models make up a high proportion.

[4] Tab 2 (Transport) 'UK's Top 10 Sectors. What ONS terms ‘Other Transport Equipment’ is 92% aerospace related. This sector has grown from contributing 7.8% of UK manufacturing exports in 1998, to 12.7% in 2017. Pharmaceutical have grown from a much smaller base, from 4.1% of UK manufacturing exports in 1998 to 9.1% in 2017.  

[5] To track the emergence of UK’s goods deficit, see Tab 3 , 'All Trade_Goods and Services'

[6] Tab 1 (Motor Vehicles), 'UK's Top 10 Sectors'

[7]  Based on Burrage's calculations the proportion of UK exports conducted under EU-negotiated bilateral trade agreements in 2015 was 6.1%, exclusive of EFTA markets (a further 8.1%). Using three year averages, this implies that 73% of UK's current non-EU trade is conducted according to WTO rules. However, the proportion for the automotive sector will be far higher, given the prominence of China, North America, and the Middle East in export markets for UK's premium brands. Incidentally, if UK rolls-over existing EU trade agreements, South Africa will shortly enjoy preferential access to UK markets, which may present UK with a conundrum since all three, big German car manufacturers build right-hand drive vehicles for export in the Eastern Cape and KwaZulu-Natal.

[8] Tab 2, 'UK Trade: Goods vs Services'

[9] Jeremy Warner, assistant editor for the UK Daily Telegraph, estimates the proportion at one-third to one-fifth. Michael Burrage estimates it at 45% of EU-related financial services of the City of London, which is necessarily higher since it omits non-London financial services exports. 

[10] Tab 8 (Food), 'UK's Top 10 Sectors'

[11] Tab 3 (Trade in Goods), 'UK Trade: Goods vs Services', calculations and sources, Sections 9 and 10 (Line 254 onwards), including data and sources on UK and EU growth rates, and productivity calculations.

[12] Tab 3 (Trade in Goods), 'UK Trade: Goods vs Services', Section 10

[13] Tab 3 (Trade in Goods), 'UK Trade: Goods vs Services', Section 8

[14] Tab 3 (Trade in Goods), 'UK Trade: Goods vs Services', Section 5

 

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