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David Smith is Wrong on Brexit

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Written by Catherine McBride

Catherine McBride rebuts David Smith’s lazy opinion piece, written with out-of-date data from a Think Tank, that he didn’t bother to check because it reinforced his view of Brexit. If the UK wants to increase its trade and improve its economy, it is important to analyse the intricacies of UK trade data not just make assumptions from the headline figures.

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I was surprised to read David Smith’s opinion piece in The Times yesterday regarding UK post-Brexit trade. Besides quoting a Think Tank report that was already two months out of date, the ONS published trade figures up to November 2023 last week, Smith seems to know little about the details of UK trade.

He started by claiming that the ‘UK left the EU with a thin and unsatisfactory trade deal’ when in fact, the UK has a completely tariff-free and quota-free trade deal with the EU and is the only developed country outside of the EU/EEA to have such a deal.

Smith seemed surprised that the UK is still trading with the EU and claims that this is because the UK is close to the EU geographically. Also not true. Only the EU has been gifted complete access to the UK’s food market, so they still supply about a quarter of UK food and many UK and EU companies still have intertwined supply chains which inflated the UK-EU trade figures.

For example, when the Anglo-Dutch company, Shell, exports crude oil from the North Sea to its refineries in the Netherlands, this is measured as a UK export, and when the refined oil is sent back to Shell outlets in the UK, it is counted again as a UK import. This makes UK trade with the Netherlands look much greater than Dutch consumer demand for UK goods, and vice versa. Similarly, when Air India orders 250 new Airbus planes, UK companies will provide the engines, the wings and the seats, but these goods will be recorded as exports to the EU where the planes will be assembled, not exports to non-EU India, the actual buyer of the planes. Similarly, the export of UK made engines and wings for Turkish Airlines’ latest order for 220 new Airbus planes, will also be recorded as exports to the EU and not to non-EU Turkey, the actual buyer.

I would also add that if the UK only traded with countries because of their proximity, no one would be worried about the terrorists blocking the Bab-el-Mandeb Strait. But we are, because China is still the UK’s largest single import supplier. According to Comtrade, China provided 12.6% of UK imports by value in 2022, the US provided 12.0%  (inflated by LNG prices) and Germany 8.7%.

UK Imports

Smith’s point about the EU’s high share of the UK’s ‘total trade’ in Q3 2023 is misleading. Looking at the latest ONS monthly CMV trade figures, the EU’s ‘high share’ is predominantly goods imports, which increased from 53% of total UK imports in Jan 2023 to 58% in November 2023. This was caused by the composition of goods the UK imports from EU countries and from non-EU countries.

The drop in UK fuel imports and precious metal imports in 2023, as commodity markets stabilised after the Ukraine invasion and the UK was no longer acting as a land bridge to get US LNG to Germany, lowered the UK’s proportion of non-EU imports as both commodities are primarily imported from non-EU countries. While the value of UK car imports, predominantly supplied (tariff-free) by EU countries, increased as the key component bottlenecks created by China’s continued Covid lockdowns in 2022, were overcome, and pent-up UK import orders were filled.

UK Exports

However, the EU’s share of UK exports was less eventful. The EU accounted for 49% of UK total goods exports in January 2023 and also for 49% in November 2023. While for UK service exports in Q2 2023 (the latest figures), only 38% went to the EU. The same proportion as in Q2 2019, before Brexit.

Obviously, this isn’t much of a story for a journalist. So instead Smith compared total exports in Q3 2023, that is goods and services for both EU and non-EU countries, with total exports in the last quarter of 2019, and claimed they were ‘nearly 5 per cent lower.’ The ONS would beg to differ, CVM total exports to all destinations were up by 1% between Q4 2019 and Q3 2023.

While this doesn’t sound particularly positive, Q4 2019 trade figures were inflated by pre-Brexit stockpiling while many of the UK’s export partners have been in a recession during 2023 depressing UK exports. Instead of explaining this, Smith implies the entire change is due to the UK economy being ‘less open’ after Brexit. Smith defines openness as the combined share of imports and exports to GDP.  This is nonsense. The proportion of imports and exports to GDP means very little – the US’s trade openness is only 25%, China’s is 38%, while Malta’s trade openness is 318%. Does Smith really believe that Malta’s economy is stronger than the US or China’s? Malta is a tiny island that must import everything it needs. Great for trade openness statistics but not great for anything else.

If Smith measured trade openness by say the number of trade agreements a country has, then the UK has at least two more than the EU. Or if he measured trade openness by the omissions and restrictions in a country’s trade agreements, then the UK is in the process of reviewing its continuity (roll-over) trade agreements inherited from the EU. One thing is for sure, UK trade is not less open than it was as a member of the EU – the EU is literally a CUSTOMS UNION. It was formed to force its members to predominately import goods from other members – the antithesis of trade openness.

New Trade Deals

Smith goes on to claim that the new trade deals are ‘not providing their worth’. But does he know that the Australian and New Zealand FTAs only started in June 2023 and the food that both countries could export to the UK, will be severely restricted by small quotas for another 15 years, apparently to protect UK (and EU) farmers? Australia also exports coal and iron ore, but with the imminent closure of the UK’s last two blast furnaces, we won’t be importing much of either commodity in the future. The CPTPP is still being debated in the House of Lords and is unlikely to be in force before June 2024. So, it should be no surprise to Smith, or anyone else, that there has been little increase in trade with these countries, yet.

Smith is correct that UK trade with India is presently not very large: India limits trade with tariffs on almost everything, while the UK has very high tariffs on food, and medium tariffs on most finished goods, although parts and raw materials are generally imported from India tariff-free.

If the UK and India do achieve a trade deal, this could be a massive boost to both UK exporters and UK consumers. But we must first overcome continuity Remainers like Smith, who would prefer the UK continue to import overpriced EU goods, than buy tariff-free Indian goods, even though many EU goods are assembled or finished in the EU with chemicals, parts or semi-finished goods imported from India.

Smith is also correct that the UK does not have a trade deal with the US, but he doesn’t mention that the US is already the UK’s largest individual export market for both goods and services. However, an FTA where the UK eliminated its 10% import tariff on US-made cars and its 12% tariff on US-made clothing would help rebalance UK imports away from the EU – something I am sure Smith would welcome. While a trade deal doesn’t seem to be necessary for UK service exports to the US which were over 4 times larger than the UK’s next largest customer – Ireland –  in 2022. A common language, legal system and financial regulations seem to be the more important factors for services. Factors that we don’t share with the EU, hence the smaller amount of service trade with the EU.

Smith also fears that the UK will place the same border controls on EU trade as they presently place on non-EU trade – ironically creating an actual level playing field, the EU’s favourite demand of other countries. It is hard not to laugh.

Comparing economic growth

However, Smith does make the valid point that UK, German and French GDP per capita are all well below the US whether measured from 2016 or 2019. But he doesn’t mention the US’s relatively lower energy costs. The US has the cheapest industrial electricity of any of the developed countries monitored by the International Energy Agency. (see chart below).

David Smith is Wrong on Brexit

Nor does Smith mention that the US is the world’s largest oil and gas exporter and this period coincided with rising oil and gas prices. The West Texas Intermediate oil price ranged from $52 to $61 in the last quarter of 2019 but was between $70 and $90 in the last quarter of 2023. US liquid natural gas exports were even more profitable for the US over this period. In mid-2022 the UK and EU gas buyers were paying more than 7 times the US Henry Hub natural gas price. If the UK wants its economy to grow like the US economy, maybe it should reexamine its energy policy, not blame Brexit.

There is much consternation today about the closure of the UK’s last two blast furnaces. Many commentators are complaining that this will make the UK reliant on imported virgin steel, still a preferable input for many UK manufacturers. But as the UK imports the required iron ore, UK virgin steel production is already reliant on imports. The main steel ingredient supplied by the UK is coal. But if our steel is to be made with electricity, produced with either imported gas or imported wind turbines, then even our recycled steel will be dependent on imports. Better to have multiple import suppliers, including suppliers outside of the EU, than kid ourselves that we are a self-sufficient steel producer.

Smith’s article is a classic case of someone with a fixed view, cherry-picking data, even somewhat out-of-date data, to reinforce his view. If the UK wants to increase its trade and improve its economy, it is important to analyse the intricacies of UK trade data not just make assumptions from the headline figures.

 

Catherine McBride OBE, is an economist and member of the Trade and Agriculture Commission, tasked with scrutinising the UK’s new trade deals for the Government.  

She writes here in a personal capacity.  

 

 

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Catherine McBride