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Trade with EU doing fine

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Written by Catherine McBride

Seven years after the vote to Leave the EU, UK trade is mostly unchanged. Possibly because EU membership didn’t really help the UK export to the EU, but also because the Department for Business and Trade has embraced the freedoms offered by Brexit and rolled over, improved or negotiated from scratch over 80 trade agreements. Incredibly, it is domestic trade between Northern Ireland and Great Britain that has become more difficult since Brexit, not trade with the EU.

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Getting back to international business

On the seventh anniversary of the Brexit referendum on 23rd June, the usual suspects claimed that Brexit has destroyed UK trade, put up trade barriers with our biggest trading partner and that the UK has swapped trading with the EU in order to trade with Australia or with other CPTPP countries. Nothing could be further from the truth. UK trade is doing just fine. For the most part it is business as usual since Brexit.

An analysis of UK trade by industry comparing exports to EU and non-EU destinations showed little variation between the two. In some industries, trade with the EU has actually done better since 2019 than with non-EU countries despite Covid lockdowns, factory closures, component shortages, international travel bans, Russia’s invasion of Ukraine, Germany’s recession and, of course, Brexit. Only products that do not have enough of their content manufactured in the UK or the EU have seen a fall in trade statistics, although not in the actual trade. The exports are now allocated to the countries that made them. The trade continues, but is recorded more accurately. Harry Western’s paper also showed that there had been no serious Brexit effect on UK trade.

No ‘free’ trade in the Single Market

Many people mistakenly believed that membership of the EU offered the UK ‘free trade’. It did no such thing. UK taxpayers had to pay for Single Market access in EU budget contributions. British consumers also had to pay hefty tariffs on imported non-EU goods to protect EU producers in other member states. And let’s not forget the back-office cost to all UK businesses of dealing with the regulatory overload from Brussels.

The UK’s net contributions to the EU increased rapidly after 2008 and equated to between 5% and 9% of the value of the UK’s total exports to the EU. Considering that the UK gained little benefit from the EU’s Regional Funds or Cohesion Funds this made the UK’s access to the single market considerably more expensive that normal trade cost estimates of around 1%.

Since Brexit, only companies which actually export goods to the EU must pay compliance costs for their trade with the EU. But this is no different than complying with SPS regulations, product standards or rules of origin measurements when companies trade with non-EU countries. It is purely a commercial decision as to whether such compliance is worthwhile.

This may be a new expense for some small companies that have only ever traded with the EU. However, the large companies which are responsible for the bulk of UK trade have always had departments to deal with trade compliance, and have always exported finished goods to, and imported components from, countries outside the EU. They will have seen little increase in their total administration costs, while companies which trade solely within the UK should – if the government delivers on its promise to deregulate – see the cost of doing business fall.

Making exporters pay for their own compliance costs is fair, since only about 10% of UK companies export their goods. Yet everyone had to pay for EU membership. This was very expensive for UK consumers. Not only did they have to pay to give EU suppliers preferential access to UK markets, but membership of the EU Customs Union forced the UK to add tariffs or quotas to cheaper non-EU goods which often made them uncompetitive, forcing them out of the UK market completely.

Cheaper imports reduce the cost of living

An effective trade policy should always consider the needs of the final consumer. A country benefits most from trade if it can import goods it cannot produce itself or goods which are produced more efficiently in other countries. Some people object to free trade, claiming that the cost of living benefits to consumers do not compensate for the jobs lost by less competitive domestic workers. This is certainly true if imports are limited to a protected group of countries which may not be efficient producers relative to the rest of the world.

The EU’s Customs Union and Single Market allowed many EU producers to undercut UK rivals and seize UK market share; being heavily protected from non-EU competition, they didn’t have to be particularly cheap, they just had to be cheaper than UK goods. While other UK jobs were lost to  subsidy-induced offshoring which began well before Brexit. In 2010 the Financial Times investigated EU regional development loans given to UK companies to move their manufacturing to eastern EU countries. For example, the re-launched Land Rover Defenders are now made in Nitra, Slovakia partially thanks to the Slovak Government providing €125 million for the move using regional development grants.

So, the UK got the worse of both worlds: much of its domestic production and jobs were lost to EU imports (even imports from offshored British companies), but without its consumers benefiting from dramatically lower prices.

Alternative suppliers and EU membership

Many of the UK’s pre-EU trading partners were Commonwealth countries who supplied the UK with agricultural products and raw materials and bought UK manufactured goods in return. Joining the EU ended this Commonwealth Preference trading system. However, while the UK was forced by EU tariffs on Commonwealth goods to switch to buying more expensive ‘tariff free’ EU agricultural products, the EU – unlike the Commonwealth – did not need to buy most of the UK’s manufactured goods, since all its members made similar goods.

The realities of UK-EU trade

Many supporters of the UK’s EU membership mistakenly believe that countries trade only with their near neighbours. Neither the historical record nor current trade data supports this hypothesis. Even in Victoria’s reign we imported much of our meat from Argentina, wheat from Canada, and wool from Australia, and one of our biggest export markets was India. Today the UK’s largest export market is the US, and its largest import supplier is China. This shouldn’t be surprising: neighbouring countries often have the same climate, soil type, mineral resources and industrial capacities, and so they usually produce the same goods and foodstuffs in the same season.

My point is that the world has changed, in the 1970’s there were few countries outside North America, Europe and the Commonwealth that were considered to be reliable trading partners: able to guarantee certainty of supply of high standard products, coupled with low political and currency risks. Now most of the world falls into this category.  When you consider that UK exports were 48% services in 2022, distance to markets matters even less. If you want more evidence of this, then Gudgin, Coutts, Gibson, and Buchanan have written a paper proving that the Gravity model tends to over predict UK goods exports to the EU.

From 2009 to 20019, before the recent increase in US exports of oil and gas and covid related pharmaceuticals to the EU, US exports to the EU were remarkably similar in value to UK exports to the EU even though the UK was obviously not only closer but also either a full member of the EU or had a free trade agreement with the EU, unlike the US.

The purpose of trade is to allow people to buy what they need, when they want it, and at the most competitive price, including freight and insurance. Since the dramatic drop in ocean transport costs, the most competitive supplier is rarely a near neighbour.

As a member of the EU, the UK did not produce many of the things that other EU countries needed or wanted, because EU countries either had a competitive domestic supply or there were other more competitive suppliers within the EU. A Customs Union with similarly industrial countries was always likely to end, as British economist David Ricardo predicted in 1817, with the most competitive EU producers taking the lion’s share of the market.

Consequently, UK goods exports to the EU had stagnated long before the UK voted to Leave. According to Eurostat, between 2011 and 2021 the highest average annual growth rate of EU imports were from China (6.3%) and Turkey (6.2%),  while the largest decreases for EU imports were seen for the United Kingdom (-2.5%) and Russia (-1.9%).

If being a member of the EU was so critical for UK trade, how could three non-EU countries – China, Turkey and Russia – exceed the UK’s export performance into the EU? It was not caused by UK manufacturing being uncompetitive, because UK goods exports to non-EU markets grew over the same period. The failure of economic commentators to mention this is baffling. The flatlining of UK goods exports to the EU in the decade before the Brexit referendum, while the EU expanded eastward adding over 100 million people, is the most under-reported aspect of UK-EU trade relations.

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Recovering the UK’s trade mojo

Since the referendum in 2016, the Department of International Trade, now the Department for Business and Trade (DBT), has been the only Government department to welcome and embrace the freedoms offered by Brexit. Under the leadership of Liam Fox, then Liz Truss, then Anne-Marie Trevelyan and now Kemi Badenoch, the department has rolled over 68 EU trade agreements, improved the agreements with Japan, Norway, Iceland and Liechtenstein in line with UK trade objectives, signed a digital economy agreement with Singapore, completed two entirely new agreements with Australia and New Zealand, and agreed (but not yet ratified) deals with Ukraine and with Eastern and Southern African countries. It has introduced a simplified trading scheme and cut tariffs for 65 developing nations. The department is also working on improving the UK’s trade  agreements with Switzerland, Canada, and Mexico, is close to singing the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP), and is deep in negotiations with India, Israel and the Gulf Cooperation Council. It has even found time to start negotiations with South Korea and with the Maldives. This is a major achievement.

It is all the more impressive when you consider the strength of resistance in Westminster and the mainstream media to leaving the EU and to forging – or rebooting – trade links with global partners. The Trade Department ignored the  prophets of doom and simply got on with the job. They didn’t appear to share Westminster’s irrational fear of leaving the EU. Maybe because they have greater experience of the world outside the EU.

And let’s not forget the UK’s Trade and Cooperation Agreement (TCA) with the EU, which gives UK goods tariff free and quota free access to the EU – something which Remainers claimed would be impossible to negotiate at all. EU supporters often try to claim that the global trade deals listed above cannot compensate for leaving the EU (despite the statistical evidence of business as usual), but none of these trade agreements are mutually exclusive. The UK has free trade with the EU as well as with the countries listed above. This is very unusual – most EU trade deals with third countries still have quotas limiting the amount of goods that can be imported tariff free, especially for agricultural goods.

Many Leave supporters think that the UK gave too much away to get a free trade deal with the EU. They believe that the UK was too generous in granting continued access to its fishing waters and should not have agreed to level playing field provisions and regulations on state aid. However, a quarter of the EU’s fisheries quota will transfer back to the UK in 2025, while the whole TCA agreement will be reviewed in 2026 and every five years after that. It is therefore a dynamic agreement, and the DBT can build on the deals it has achieved with the rest of the world to make sure the TCA works as well as possible for the UK in the future, since it is no longer negotiating in isolation from other important trade partners.

The fly in the ointment

The one area of trade that is clearly not working is unfortunately outside the DBT’s control – which is internal UK trade between Great Britain and Northern Ireland. In a botched attempt to avoid a hard border between Northern Ireland (NI) and the Republic of Ireland (RoI), the UK has put a border within its own territory. This was an insane decision considering that NI and RoI already had a working border for VAT and excise, and we now have a tariff and quota free trade agreement with the EU. The TCA contains non-regression clauses to protect the EU’s Single Market and all UK producers have to comply with EU standards for their EU exports. The Northern Ireland Protocol goes far beyond what is necessary to avoid a hard border in Ireland.

Putting a border in the Irish sea is especially damaging to trade within the UK when you consider  that according to the Northern Ireland Statistics and Research Agency, of the £77bn of goods manufactured in Northern Ireland each year, only £8bn (10%) are exported to anywhere in the EU, including the Irish Republic, while a massive £65bn (84%) are sold within the United Kingdom’s internal market. Yet, EU law continues to apply to the manufacture of all goods in Northern Ireland regardless of where they’re likely to be sold.

In 2021, over 1 million customs declarations were completed for trade between two parts of the United Kingdom – Great Britain and Northern Ireland. This affected over 10,000 businesses and cost £12.4 billion. Additionally, approximately £350m has been spent by UK taxpayers for trader support schemes to mitigate these needless and prohibitive trade barriers within our own country. All because the EU and Westminster thought it was acceptable to impose the same draconian controls between two parts of the United Kingdom that they believed would have been unacceptable if placed between two completely different countries.

Economically, the corrosive impact of the Protocol has been undeniable, even with grace periods in place. The current Taoiseach of the Irish Republic has also stated that this represented significant overreach by the EU. It has caused a clear and ongoing diversion of trade from Great Britain to the Republic of Ireland. The Central Statistics Office in the Irish Republic recorded that the value of exports to Northern Ireland were around €2.5 billion in 2019 and 2020 but increased to €3.7 billion in 2021 under the Protocol arrangements. And yet trade diversion was something that the Protocol  was meant to avoid.

Alternatively, we could follow the Centre for Brexit Policies excellent suggestion and remove the customs border inside the UK and instead implement Mutual Enforcement between Northern Ireland and the Republic of Ireland. The EU has a Mutual Recognition Agreement with New Zealand even though in 2022 New Zealand Exports to the EU were €2.2 billion Euros in 2019 and €2.8 billion in 2022, not dissimilar to the value of exports from the RoI to NI quoted above.

It might be a good idea to allow the trade professionals at the DBT to continue their excellent work by removing the internal trade barriers created by the Protocol when they renegotiate the TCA. As the carve-out of Northern Ireland from the UK’s internal market has made it more difficult for the UK to benefit in other ways from Brexit, focus should be on removing inappropriate EU regulations and replacing them with rules that suit the whole UK economy.

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About the author

Catherine McBride