Sunday, October 17, 2021
Global Britain badly needs to improve its export game
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. Not to be reproduced without permission.

Trade is in the news again. Felixstowe has been clogged up with tens of thousands of uncollected containers and big ships have been diverted elsewhere to ports within the EU. There are said to be similar strains at other ports, caused in part by a shortage of HGV drivers. Global Britain’s window on the world has not closed but it is barely ajar.

There have been faint rumblings of a trade war between the EU and the UK over the Northern Ireland protocol, adding to the restrictions put in place by the government’s thin trade deal, though those rumblings have faded in recent days.

There is a wider issue about trade that I wanted to discuss today, however, and it has long-term relevance for the government’s global Britain ambitions. The latest figures for the economy as a whole – the monthly gross domestic product figures – suggested that a return to pre-pandemic levels, those prevailing in February 2020, is getting closer.

The official statisticians suggest monthly GDP is now only 0.8 per cent below where it was in February 2020. I have mentioned before that there is a slightly tougher test, based on quarterly GDP data, but progress is being made there. The number of employees on payrolls is above pre-pandemic levels, though the number of self-employed people is not. There is a pattern here.

It is not, though, a pattern that applies to trade. The trade figures tell the story. In the three months to August, UK exports of goods, at £80.3 billion, were more than 13 per cent lower than in the corresponding period of 2019, before the pandemic. Adjusted for inflation, the fall was even bigger, 14 per cent.

There was an even bigger fall in exports of services, the dominant sector of the UK economy, which dropped by 14 per cent in cash terms and more than 20 per cent in real terms.

This is, on the face of it, very odd. This is a year of strong recovery in world trade, with the International Monetary Fund a few days ago predicting a rise of 9.7 per cent in global trade volumes this year, more than making up for the 8.2 per cent fall last year.

The weakness in exports of services is, for now, best kept in the pending tray. There was an even bigger slump in UK imports of services, roughly 30 per cent. Coronavirus restrictions have severely impacted trade in services. Travel and transport are important components of trade in services and are only slowly returning to normal. The absence of foreign tourists in Britain, and British tourists travelling abroad, helps explain the data.

There are also some temporary factors in trade in goods. When a shortage of microchips means fewer cars are rolling off production lines, for example. Exports of machinery and transport equipment in the latest three months were down by 17 per cent on two years’ earlier, while imports showed a fall of 15 per cent.

Caveats aside, however, there is still something rather worrying about the UK’s trade performance. The trade deficit in goods, £163 billion over the past 12 months, looks set to break new records this year. The biggest annual deficit on record was £142 billion in 2018. And, while exports of goods have slumped compared with two years ago, imports are down by a mere 1 per cent.

As with so many things happening at present, a combination of Brexit and Covid is at work, and it is difficult to disentangle the two. Indeed, the figures suggest that this combination is throwing up some odd effects.

Exporters are finding it tougher to sell into the EU but you would not necessarily know it from the figures. In the latest three months, exports of goods to the EU, £40.2 billion, accounted for just over half of all goods exports, £80.3 billion. The share of exports going to the EU, indeed, is higher now that it was when we were a member, even though such exports are down by a couple of billion on a quarterly basis on where they were two years ago.

The rise in the EU export share reflects a slump in exports to the rest of the world. Non-EU exports are down by a huge 21 per cent compared with two years ago. These are the markets that, according to the government, we left the EU to exploit.

Where there has been a shift, curiously, is in where we source imports from. Many importers report difficulties in getting imports from the EU, while some EU firms no longer see the UK market as a priority, and the figures bear this out. Imports from the EU are down by 13 per cent in cash terms over the past two years. Imports from the rest of the world, in contrast, are up by 13 per cent. It has been hard, unsurprisingly, to detect any benefits of Brexit. If there are some, it appears they may be accruing to non-EU exporters wanting to sell into Britain. I don’t remember that on the side of the bus.

The statistics will evolve as we return to normal. But the question, as with so many aspects of the current government’s policy, is whether it has a strategy. A new report from the Resolution Foundation, in collaboration with the Centre for Economic Performance at the London School of Economics, published a few days ago, suggested that it does not.

With a lot of talk around at the moment about our “national economic model”, the report, Trading Places, notes that the model was fundamentally altered by entry into the European Economic Community nearly half a century ago. Membership resulted in faster trade growth with EEC/EU countries than with the rest of the world. By making the UK a magnet for foreign direct investment (FDI), this country was able to reduce the productivity gap relative to France and Germany.

Increased openness within the EU was good for services, with service exports growing twice as fast as the OECD average, but bad for industry, with the decline in manufacturing employment bigger than in comparable economies.
Britain’s exit from the EU is likely to result in similarly big changes, the report says.

“Brexit represents one of the most significant shifts to international trade and investment policy across the world,” it says. “It is also highly unusual in that Brexit will increase barriers to trade with the UK’s largest trading partner.”

The government, is says, has been “fixated on the nuts and bolts of the individual trade deals that may be possible after Brexit”. But most of those deals, the majority of which rolled over existing EU deals, have been done, and there is little prospect for the foreseeable future of a deal with America.

A future UK trade policy has to recognise the reality of a world that is dominated by America, China and the EU. Throwing our lot in with America, and allowing trade relations with the EU and China to deteriorate does not make a lot of sense in this world.

“It is important to recognise that the UK will not be setting its policy in isolation, rather it must set its post-Brexit course in the emerging new era of global geopolitics,” the report says. “The UK is leaving the EU during an era of trade defined by the actions of three highly connected but increasingly competitive superpowers – the EU, the US and China.”

Another big question in what happens to productivity when one of the drivers of it, economic openness, is reduced. “A less open economy means that the strategy of driving increases in productivity and prosperity through EU competition and FDI inflows will no longer be available to the same extent,” it says. That is very true. Global Britain cannot turn into a low-productivity closed shop.