Sunday, April 14, 2019
The trade deficit soars, in a terrible time to be an exporter
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Now that the Brexit process is guaranteed to stretch on for many more months, if not years, there is a limit, which may be close to being reached, on how much new there is to say. I shall bear that very much in mind in my choice of topics. We may be neither properly in, nor out, for a very long time, and most probably beyond October 31, the latest departure date.

Business is relieved that a no-deal Brexit has been avoided, and will continue to be avoided. But it is alarmed that the limbo could go on fo0r a very long time. Make UK, which represents Britain’s manufacturers, describes as a “heavy blow” the fact that firms will have to maintain “stockpiles of parts and materials at great cost” to cover all eventualities. Perhaps eventually, if this drags on long enough, firms will decide that Brexit is never going to happen and they can just carry on as before. But we are not there yet.

In the meantime, the false alarms and Brexit deadlines are having an impact on
the economic data, good and bad. The latest monthly gross domestic product (GDP) figures for February surprised on the upside, rising by 0.2% against expectations of no change on the month. These figures are still bedding in, as are analysts’ predictions for them. Nobody expected a sharp fall in GDP in December, initially reported as a 0.4% drop, although nobody thought either that it signalled that the economy was falling off a cliff.

The 0.2% rise, it seems, owed something to pre-Brexit stockpiling, with the Office for National Statistics (ONS) noting evidence that “some manufacturing businesses have changed the timing of their activity as we approached the original planned departure from the European Union”. There will be a degree of swings and roundabouts in this; there is only so much stockpiling that firms can do and this month’s production shutdowns in the motor industry, originally timed for Brexit, may drag down industrial output. But for now the GDP numbers have been helped.

A stockpiling effect can be observed when it comes to trade, and it is here in which the hope has to be that temporary factors are indeed at work. New figures show that in the latest the latest three months, December-February. The trade deficit in goods was £41.4bn, a record, and £6.5bn up on the previous three months.

Over the latest 12 months, Britain was in the red on trade in goods by a whopping £146.4bn, another record, and too close to £150bn for comfort. Even taking into account services, in which the UK runs a surplus, the deficit widened sharply in the latest three months and was just under £39bn over the latest three months.
That £146.4bn, by the way, compared with an annual goods trade deficit of £138bn for the whole of 2018 and £118bn in 2015. Until 2012, the deficit had never been above £100bn; 20 years ago it was comfortably below £30bn

How much of the latest deterioration was due to pre-Brexit stockpiling? Samuel Tombs of Pantheon Macroeconomics highlights a surge in trade with the EU; exports as well as imports were higher in February. But, given that we import more from the EU than we export, the net effect is to widen the deficit.

Beyond these temporary factors, however, there is an uncomfortable truth for a trading nation like ours. This is a terrible time to be an exporter. After a temporary fillip in 2017, thanks to a stronger global economy and sterling’s referendum fall, the volume of exports of goods fell last year and is falling now, with a sharper fall in non-EU than in EU exports. Both are down on a year ago, even with the stockpiling factor.

We have a protectionist in the White House, as my colleague Irwin Stelzer discusses today, and a slowdown in the global economy which is partly the result. The International Monetary Fund once thought this would be a year in which the world economy got back to its pre-crisis growth norm of around 4% growth; now it has revised its forecast for this year down to 3.3%. And, of course, there is Brexit.

A paper to be presented at the Royal Economic Society’s annual conference at Warwick University this week, Renegotiation of Trade Agreements and Firm Exporting Decisions, by Meredith Crowley, Oliver Exton and Lu Han, finds that in the period after the referendum there was a significant negative effect on the willingness of firms to export.

In particular, according to the research, based on what the authors call “trade policy uncertainty”, more than 5,300 firms which had intended to start exporting to the EU decided against doing so, while more than 5,400 businesses stopped selling into the EU market. The Brexit vote provided a “natural experiment” in introducing uncertainty over future tariffs and other trade restrictions into a situation in which there was not uncertainty before.

Though the authors stress that smaller firms are most likely to be affected, one of the challenges for the government over many years has been in trying to get more smaller firms to export. Brexit has had the reverse effect.

We do not know, of course, where we will end up, and when the uncertainty will lift. Lord Macpherson, Treasury permanent secretary until 2016, its top civil servant, says there is now no chance of a trade agreement with the EU by the time of the next election, due in 2022 (but watch this space), and probably not by the one after that (2027).

We do not know, either, when the protectionist threat from America will lift. The IMF has taken an axe to its forecast for world trade growth for this year but is predicting a pick-up next year. That may be optimistic.

Exporting matters. “Export or die” used to be the theme of public information films, encouraging the British public to forego their purchases of luxury goods, so that they could earn valuable foreign currency in export markets. There was a time when you had to go on a long waiting list for a British-made car because of the preference for exporting.

More recently, George Osborne, when chancellor, made great play of reviving Britain’s great exporting tradition, with his pledge in the 2012 budget to double exports to £1 trillion a year by 2020. That is next year and, looking at where we are today, that target looks set be missed by around £350bn. He would no doubt say that the target, which was always very ambitious, was thrown off course by Brexit. The challenge now is not to double exports but to achieve any growth at all.