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If the UK wants to export goods, they are going to need cheaper energy.

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Written by Catherine McBride

With the hoo-ha last week about whether Kemi Badenoch used deflated prices in her speech, no one bothered to ask what type of goods the UK exports and why these exports are or aren’t growing. Aggregated trade figures hide the excellent with the poor (or the constrained) and give a false impression to policymakers about what’s working, what isn’t and how to fix it.

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Last week Kemi Badenoch gave a very good speech in the House of Commons extolling the performance of UK trade. She also rebutted the many accusations thrown at her by members of the opposition parties. And graciously accepted the compliments paid to her by members of her own party.

However, a storm soon blew up on Twitter, when the economics editor of SKY News, Ed Conway, complained that her speech had not used inflation-adjusted figures, although it had, then he went on to suggest that UK trade was ‘artificially inflated’ by gold and precious metals.

In case Conway tuned in a bit late, here is the 3rd paragraph of Badenoch’s speech, from Hansard: (my emphasis)

According to the latest UN statistics, the UK, outside the EU, became the world’s fourth biggest exporter in 2022, overtaking Japan, the Netherlands and France. The value of UK exports was £862 billion in the 12 months to February 2024. That builds on progress we have made in growing our exports outside the confines of the EU. Exports are now 2% above 2018 when adjusted for inflation. Services exports are at an all-time high. A summary of these figures, along with the most recent business and labour statistics, were published on gov.uk in April. Together, they definitively disprove the claims of those who prophesied a catastrophic economic collapse when we left the EU to become a sovereign nation.

Conway’s critique of Badenoch’s speech like so many commentators, concentrated on goods exports. He gave a slight hat-tip to the UK’s massive and growing service exports. But completely ignored imports even though the majority of the population only benefits from trade by being able to import cheaper, or better quality goods or goods unavailable domestically.

Exports have a much less direct impact on most of the population. Income from exports mainly goes to companies, sometimes it enables them to employ more workers in the UK, but if you aren’t employed in an export sector – exports won’t help you directly. But imported goods will.

Despite not listening very carefully to the Minister’s speech, Conway never asked the most important question about UK exports: Why have exports only grown by 2% above 2018 when adjusted for inflation?  (Although I make it up by 2.7% since 2018 for total trade).

We can see from Graph 1 below, that goods exports to the EU have really been flattish since 2010, while non-EU exports reached a high point in 2018 but have fallen since then primarily because our exports of Fuels to non-EU countries have more than halved since 2018. (All figures are using Chained Volume Measures (CVM) to account for inflation.)

Graph 1.

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What Goods does the UK export?

It is impossible to discuss UK exports without understanding what goods the UK exports, and why exports of those products may be increasing or decreasing.

From Graph 2. below, using ONS CVM figures to account for inflation, it is very clear that the UK’s main goods export sector is SITC 7 Machinery & transport equipment. If Machinery & transport equipment exports fall, as they did in 2020/21/22 due to Covid-related key component shortages and international travel bans, then total UK exports will be lower.

We can also see a steady decline in SITC 5 Chemical exports since 2015, which may be related to the decline in SITC 3 Fuel exports and both are probably caused by lower UK oil and gas production due to the Climate Change Act, the Net Zero targets and the UK’s incredibly high windfall taxes on oil and gas production. Chemical exports include plastics and pharmaceuticals. Plastics are mostly a derivative of oil refining and as this business closes in the UK, (the Grangemouth oil refinery in Scotland, which produces about 13% of UK fuel production, is due to close next year), we should expect to see exports of chemical and plastics also fall. While pharmaceutical production started to move out of the UK in 2010 to countries with cheaper production (Slovenia, Italy, China) or lower taxes (Ireland).

SITC 8 Miscellaneous manufacturers include clothing and footwear exports, and this sector took a sudden dive after the UK left the EU, but more on that later.

Finally, the graph also makes it obvious, despite the massive amount of media attention it receives, SITC 0 Food & live animals is not a large UK export sector. But after some stockpiling of manufactured foods before Brexit, it is now back to more traditional export levels.

Graph 2.

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The key determinants of strong exports

  1. Price quantity trade-off

Export amounts are determined by your customers, and the cost of those exports will affect the quantity sold.

We may be unhappy that UK exports have been flat since 2010, but there is little Kemi Badenoch can do about it if the foreign companies and consumers who buy UK goods can’t afford them and/or have other suppliers who are cheaper.

We cannot ignore price when examining exports, it is always a determinant of the quantity sold. And importers have to pay current prices, not deflated CVM prices. UK inflation in 2022 and 2023 not only inflated our current price export figures, but it is probably one of the reasons why our deflated goods exports, excluding precious metals, are back to 2013 levels. This is very simple price/quantity economics.

  1. Internationally competitive products

Trade agreements will not increase exports if UK company’s goods aren’t competitive on both price and quality. UK manufactured goods need to be high quality and innovative as in general they are more expensive to produce than similar goods made in many other countries due to our high employment costs, energy costs, regulatory costs, DEI, ESG, carbon taxes and tariffs on some imported raw materials.  For these reasons, the UK’s most competitive goods exports are high-end high-tech machinery: such as jet engines, luxury cars, gas turbines, precision equipment and pharmaceuticals.

Our most valuable unrefined commodity export is crude oil although the Treasury is doing its best to drive this export industry out of the UK and with it will go UK exports made from oil derivatives such as chemicals and plastics. As Badenoch correctly pointed out in her response to a question from the opposition after her speech: the whole House of Commons voted for Net Zero by 2050 target. So both Conway and MPs shouldn’t be surprised to see lower oil-related goods exports in the future.

  1. Your trading partner’s economic health determines your export volumes

The other point we can’t ignore when discussing exports is the economic health of our trading partners. The UK is still very dependent on exports to the EU and many EU economies have been stagnant since 2019 first due to Covid factory closures and now the replacement of cheap Russian gas with more expensive LNG.

Luckily the UK’s largest trading partner for both goods and services is the US whose economy is still buoyant thanks to its oil and gas production, cheap commercial electricity and its massive fiscal stimulus from the Inflation Reduction Act.

However, if the UK continues to rely on the EU markets for about 47% of its goods exports, then UK goods exports will probably fall every time the EU gets into economic difficulty. The only way to avoid this is to diversify our trade away from the EU. Hopefully, our new trade agreement with the CPTPP will do this when it comes into force.

Low EU economic growth can be self-sustaining as most EU countries rely on other EU countries as markets for more than half of their goods exports, and their trade is predominately goods rather than services. Eleven EU countries export more than two-thirds of their goods to other EU countries while only four EU countries export more goods to non-EU countries than to EU countries: Cyprus, Ireland, Denmark and Malta.

According to the OCED, EU GDP growth was flat in 2023 while Eurozone GDP growth was slightly negative, so we shouldn’t be surprised if our EU trading partners have less money to spend on UK goods.

  1. Export supply and production problems

This should be obvious, but exports require surplus production. If UK production volumes fall, UK goods exports will most likely follow, for example in 2022 there was a shortage of Chinese computer chips used by car manufacturers, and this shortage hit both the UK and many EU car manufacturers. However as over 80% of the cars produced in the UK are exported, lower UK car production also reduced UK car exports.

Similarly, during Covid, many international airlines were grounded and did not order new aircraft, so UK exports of aircraft parts were also lower. In 2023 aircraft orders rebounded, exports resumed and the UK companies that make jet engines, aircraft wings and aircraft seats all have healthy order books.

Machinery and Transport is by far the UK’s largest goods export sector, our total exports will be lower if this sector has a problem as it did in 2020/21 which can be seen in Graph 3 below.

Graph 3.

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  1. Trade statistics and the rules of origin

The UK has also seen a statistical reduction in trade with the EU due to the rules of origin of the UK EU Trade and Cooperation Agreement (TCA) although not necessarily a reduction in actual trade. UK and EU-branded clothing and footwear made outside Europe can no longer be counted as UK or EU exports under the TCA. Instead, they is now recorded as an export of the country where they were manufactured.  In graph 2. The sudden drop in SITC 8. Miscellaneous Manufactures after 2019 reflect this change in export goods recorded origin. However, although this may look bad from a country level, the European clothing companies involved have been producing their goods outside Europe since the 1990s because it is financially more profitable for them to do so.

What could the Trade Minister do to increase UK exports?

Negotiating trade deals with potential markets is one solution, although this is something that the Department of Business and Trade has been particularly good at, having rolled over the trade agreements we had when we were members of the EU, signed new trade agreements with the EU, Australia, New Zealand, the CPTPP, Ukraine and the Eastern and Southern African countries, improved the continuity agreement with Japan, signed a digital agreement with Singapore, and they are currently negotiating with South Korea, Switzerland, India, Israel, Canada, Mexico, and the Gulf Cooperation Council.

Ensuring UK exports are competitive in global markets is just as important as signing trade deals. Wearing her Business Minister hat, Kemi Badenoch should reduce unnecessary regulations that force companies to employ additional compliance staff which increases their costs and reduces their competitiveness.

However, the UK’s high corporation tax also makes UK companies less competitive. The UK’s high proportion of intermittent electricity in its electricity Grid has increased the electricity network costs borne by UK companies. While the UK’s excessive windfall tax on the oil and gas companies makes UK energy producers uncompetitive.

Reducing taxes and energy costs is in the hands of the Chancellor and to some extent the Energy Minister. Unfortunately, these costs are unlikely to change even if the government changes later this year because as Badenoch reminded the opposition MPs: ‘the whole House voted for the Net Zero by 2050 target.’ And I would add, that they did this with little concern about UK manufacturing competitiveness or UK exports.

Without reductions in the cost of energy, it is hard to see how UK manufacturers could make more internationally competitive goods nor how UK goods exports could increase. Luckily UK services are internationally competitive, and exports have been increasing. In 2023 services made up over 55% of the UK’s total exports (excluding precious metals). But even services need energy, and two new industries where the UK could potentially excel, data storage, robotics and artificial intelligence, need a lot of energy.

If the UK doesn’t find a source of clean cheap energy quickly, we should probably get used to seeing stagnant or falling UK goods exports.

Post Script: I should probably also address Conway’s concern about UK gold trade.

The London Bullion Market Association sets the international price for physical gold and silver metal bars. It also monitors refining standards and ownership documentation. The industry in the UK includes refiners, fabricators, traders and secure storage and carriers. Conway may not like this, but it is no different from the Aalsmeer international flower market, based in the Netherlands – is he also demanding the Netherlands remove cut flowers from their trade figures?

Using COMTrade figures, measured by weight, 80% of UK gold imports came from countries with large gold mines: Kazakhstan, the US, Canada, Uzbekistan, South Africa, Australia, Spain, Mexico and the Philippines in 2023. While 90% of UK gold exports by weight went to countries where the population prefers to hold gold as a store of wealth: Switzerland, China, Hong Kong and India.

Conway may not like it, but UK trade statistics are produced following the IMF’s Balance of Payments Manual, version 6, to ensure comparability between countries. Non-monetary precious metals are included provided they are not owned by the Central Bank and there is a change in economic ownership between a UK resident and a non-UK resident. The location of the metal is irrelevant although HMRC does also keep figures on the physical movement of gold across borders.

Conway’s video added to his Twitter thread attacking Badenoch’s speech showed footage of the late Queen inspecting gold in the vaults of the Bank of England, however as stated above, international trade figures only include non-monetary gold. Conway also claimed gold was primarily imported into the UK from Switzerland – however, according to COMTrade, Switzerland exported only 49 tonnes of gold to the UK in 2023 but imported 470 tonnes of gold from the UK.

The main reason UK trade figures are published with and without precious metals is because the ONS smooths precious metal trade flows over several months to reduce volatility and for security reasons.

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About the author

Catherine McBride