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Myth #3: The UK has walked away from its largest trading partner

Brexit trade 1030x579
Written by Catherine McBride

In the third in this series of puncturing Remainer claims about the impact of Brexit, Catherine McBride deals with the oft-made (if silly) claim that in leaving the EU the UK has walked away from its largest external market.

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There are many variations of this myth, but they are not true.

Firstly, the UK and the EU have a trade agreement, the Trade and Cooperation Agreement (TCA), that granted immediate tariff-free and quota-free access to each other’s markets. This is the only EU trade deal that does this. At best, typical EU agreements lower tariffs, or increase tariff-free quotas, gradually over many years, but many EU trade agreements never grant full quota-free access to their trading partners, especially for agricultural goods.

Proof, if it were needed, that the UK has not stopped trading with the EU, can be seen in the UK’s trade figures. If Brexit trade friction had lowered trade with the EU, we would expect to see a decline in UK goods exports to the EU but not in exports to non-EU countries. However, this hasn’t happened, instead UK goods exports to both EU and non-EU countries have moved in tandem. (see graph below, using chained volume measures to account for inflation).

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Nor have UK goods imports from the EU fallen due to Brexit. In fact, they have done better than imports from non-EU countries. (see graph below) It is hard to claim that the UK has cut itself off from its largest trading partner if trade with that partner has remained relatively unchanged while our imports from non-EU countries have dropped dramatically.

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Secondly, the continued strength of UK and EU trade is even more impressive when you consider that goods manufactured outside the UK or EU, or made using too many imported components, are no longer counted as UK or EU exports under the Rules of Origin in the TCA.

All trade agreements have Rules of Origin, which are designed to prevent countries not party to the trade agreement benefiting from its trade liberation. In the case of the TCA, clothing and footwear must be wholly manufactured in the UK or the EU, to be counted as UK or EU goods although the materials can be imported. This caused UK exports of clothing to the EU to fall by 60% and footwear to fall by 70% after Brexit, as many of the UK’s high-street fashion brands manufacture their goods in Asia. At the same time, UK imports of clothing and footwear from the EU both dropped by about 25%.

This doesn’t mean UK or EU consumers no longer purchase these items, just that they are no longer counted in UK or EU trade statistics as UK or EU exports, but are now recorded as an import from the country of their manufacture: China, Vietnam, Turkey, Bangladesh, Morocco etc. The UK clothing and footwear companies still make money from these sales and the bulk of the revenue in this business is still earned in the UK by designers, advertisers, brand managers, marketing companies, wholesalers, retailers and distribution companies.

Other products no longer counted as UK exports due to the TCA’s Rules of Origin are tropical fruits and nuts that were landed in the UK and then re-exported to the EU. Similarly, orange juice from Brazil and pineapple juice from Costa Rica are no longer counted as UK imports from Belgium and the Netherlands.

This misattribution of trade to the EU port where goods were landed was known as the Rotterdam effect. It massively distorts EU trade statistics as well as the opinions of UK policymakers who mistakenly believed the UK relied on the EU for food that was simply distributed from Dutch and Belgian ports. An unexpected benefit of Brexit is we now have real trade statistics.

Thirdly, some UK exports have been falling for years due to UK government policy, most noticeably the UK’s exports of oil and gas and their derivative products such as plastics and chemicals made with hydrocarbons. This has nothing to do with Brexit, although that doesn’t mean that Remainers haven’t tried to blame it on Brexit by starting their analysis in 2016 without reviewing how UK trade was changing before the referendum.

Whoever takes the profits should pay the trading costs

Admittedly, UK companies that export to or import from the EU must now fill in customs forms and this will have some cost to them, but previously those costs were borne by UK and EU taxpayers. Being a member of the EU was never free.

Although many companies resent paying their own costs when they trade with the EU, they don’t share their trading profits with UK taxpayers, so why should we pay their costs? These companies happily pay their own trading costs with non-EU countries without complaint.

Meanwhile, UK consumers have not only been paying for these companies’ EU trading costs for years but they were also forced to buy more expensive EU products because cheaper non-EU goods were made uncompetitive by the addition of EU tariffs or restricted completely by tiny EU tariff-free quotas.

Very few UK companies trade with the EU, yet all UK companies had to obey EU regulations when we were members. The regulatory straight jacket, which helped make the UK a captive market for EU producers, was even harder to justify when you consider that most UK exports are done by large companies, more than capable of competing in international markets and filling in export and import paperwork.

For example, ONS data for Manufactured food products shows that 66% of UK exports by value in 2021 were by large companies (over 250 employees), 27% by medium-sized companies (50 to 249 employees), 5% by small companies (10 – 49 employees) and only 2%  by micro companies with less than 9 employees. Rather than tie the whole country into EU regulations, it would be more sensible to help micro-companies complete their trade paperwork. The fact that the Remainers have not suggested doing this should make everyone very suspicious. 

UK goods exports are dominated by Machinery and transport equipment.

Despite Remainers’ attempts to blame everything bad on Brexit, the massive fall in UK trade in 2020 happened during the Transition Period when the UK continued to trade with the EU as an EU member, so Brexit was not the cause of this fall.

The real culprit was the Covid lockdowns of non-essential production in the UK and in many of our component suppliers. The UK’s largest goods export sector – Machinery and Transport equipment – suffered key component shortages in 2020, 2021 and 2022  due to Covid supply chain disruption.

The UK is the world’s largest exporter of aircraft parts such as jet engines, wings, landing gear and seats. However, the international travel bans during Covid meant most airlines could not afford to order new planes.

These two problems were responsible for much of the fall in UK exports to both EU and non-EU destinations in 2020 and 2021. As this is the UK’s largest goods export sector by far and almost three times the size of the UK’s next largest goods export sector, it was obviously the cause of the fall in total UK goods exports in 2020 – not Brexit.

But Covid is behind us now and exports of machinery and transport equipment to the EU hit a new high in 2023, after accounting for inflation, while, exports to non-EU countries have yet to reach their 2018 peak. So much for Brexit trade friction. (see graph below)

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For Remain-supporting economists, newspapers and institutions to try to blindly blame the fall in UK exports in 2020 on Brexit, despite the transition period, is unforgivable. An open mind and a small amount of investigation leads quickly to the correct explanation.

Finally, even without a trade agreement countries still trade with each other. The UK’s largest individual export market for both goods and services is the US but the UK doesn’t have a trade agreement with the US, instead, we trade on WTO terms and this seems to suit both countries.

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About the author

Catherine McBride