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The OBR is holding on to its expectation that Brexit will ‘reduce the overall trade intensity of the UK economy by 15 per cent in the long term’ (paragraph 2.54 of https://obr.uk/economic-and-fiscal-outlooks/#chapter-2). This is despite the last UK trade figures showing total trade from 2019 to 2024 up 2.9% excluding precious metals and after accounting for inflation, i.e. only a little below the growth in real GDP (3.6%).
Equally strangely, the OBR still wants us to believe that a lower Trade Intensity [i] is a bad thing. But being reliant on trade – ie having a high Trade Intensity – also means that your economy will suffer if your trading partners stop buying your goods or stop supplying you with goods as China did for key components in 2022/3, or if they decide to put 25% tariffs on your exports, as the Trump administration plans to do on Wednesday.
Germany has had a much higher trade intensity than the UK for many years, and it was 83% in 2023, according to World Bank data. Germany is disproportionately reliant on exports, which were equivalent to 43% of their GDP in 2023. But this has not been working out for them lately. While there are economic benefits to specialisation and mass production for export, being too reliant on export trade can make a country very vulnerable to any international economic turbulence, the economic woes of their trading partners and/or trade wars.
Germany benefited enormously from growing exports to China from 2008 to 2022, but China has been buying fewer goods from Germany since then. Most of Germany’s other large EU customers have also been cutting back, making Germany even more reliant on exports to the US, as seen in the graph below. For a long time, Germany has had a large trade surplus with the US. That is: it has exported more to the US than it has imported from the US. This was enabled by the EU’s high tariffs and many trade barriers, but also by the Euro, which has given Germany a weaker currency than it would have had had it retained the Deutsche Mark.
The US is Germany’s largest export market by some margin, but that will be a problem if the US adds 25% tariffs to German goods next Wednesday.
Suddenly, the OBR’s obsession with a high trade intensity isn’t looking so clever. The UK’s lower trade intensity, of only 62% according to World Bank data, may help it weather the coming tariff storm (as would a full-fat US-UK trade agreement, just saying).
The US’s very low trade intensity of only 25% will mean that they can increase tariffs without suffering as much as the UK will if our politicians decide to destroy the economy by further increasing UK tariffs on US imports in retaliation — something that Canada, China, and the EU have all, rather shortsightedly, decided to do.
US UK trade
The US currently supplies about 10% of the UK’s imports, and our US imports are growing in line with our increasing need for imported hydrocarbon-based fuels, especially Liquid Natural Gas (LNG), wood pellets for Biomass electricity production, and ethanol used as an additive for petrol. Adding tariffs on these imports would be economic suicide unless we drop our Net Zero policies and start to supply our own fuels.
That doesn’t mean that the UK won’t be affected by Trump’s new tariffs. The US is also the UK’s largest export market and, unlike the UK’s other large export markets, exports to the US have held up reasonably well since 2022. This is due to the strength of the US economy, but it also shows that tariffs might not be as effective as governments think.
Despite Brexit, the UK has retained EU tariff levels on most of its imports, only dropping tariffs below 2% that were seen as more of a nuisance than a revenue raiser by HMRC. The UK has even retained its tariffs on goods that it cannot produce, such as its 10% tariff on fresh oranges. When queried about this, some UK trade officials have claimed that this is to help negotiate trade deals.
Using tariffs as a negotiating tool is also one of Trump’s motivations, as well as improving national security, but that hasn’t stopped the outrage of some UK economic commentators who have been paying high EU levels of tariffs for so long that they have forgotten about them. Consequently, they are outraged at the idea of the US increasing its tariffs (to the same level as their own), claiming that it will be ruinous to the world economy, but the same commentators have never clamoured for the UK to lower its own tariffs (or its VAT) now that it has left the EU. Several of the most outraged are Remainers, who are desperate for the UK to return to the fold of the EU’s Customs Union and its high trade barriers and high tariffs, which apparently are not ruinous to the world economy nor even inflationary.
So how will the UK fare with the new US tariffs?
80% of cars manufactured in the UK are exported, and the US is the UK’s largest export market for cars measured by value. The UK exported cars worth just under £9 billion to the US in 2024. This was 27% of the total value of UK car exports. Some commentators are claiming that the US only buys 19% of UK car exports, but they are measuring exports by the number of cars rather than the value of those cars. Trade surpluses and deficits are measured in currency (value), not by volume.
The UK tends to export its cheaper cars to the EU, while the US buys most of the UK’s most valuable, larger, internal combustion engine (ICE) cars. For example, in 2024, a third of UK exported cars with ICE engines over 3 litres were sold to US buyers. These include top-of-the-range Aston Martins, Bentleys, Jaguars, Range Rovers, McLarens and Rolls-Royces. Such exports might survive Trump’s 25% tariffs as these cars are not sold on price but on quality and prestige.
However, some of Trump’s other Tariffs will hurt the UK. The 25% tariffs on steel and aluminium are not blanket tariffs but are specified by 8-digit and some 10-digit HS tariff codes. The UK’s small amount of primary steel and aluminium production has allowed it to escape the worst of these tariffs.
According to ITC data at the HS 8-digit level, UK exports to the US of steel products covered by the 25% tariffs were worth about $450 million in 2024. However, UK exports of the tariffed aluminium products were worth just over $3 billion in 2024. While the steel tariffs are spread over about 125 products, none of which are large UK exports, three-quarters of the Aluminium tariffs on UK exports would fall on one tariff code – Aircraft parts (HS 88073000). While this HS code covers planes, helicopters and drones, most of the UK’s exports will be parts for Rolls-Royce, BAE Systems, GKN Aerospace turbojet engines or parts for Airbus planes. Unfortunately for the UK, all of these companies have manufacturing operations in the US. If the tariffs persist, it won’t be long before UK companies currently exporting aircraft parts to the US simply move their manufacturing to the US and avoid the tariffs.
So, while car exports may be unscathed by the tariffs, but aircraft part manufacturing would be lost, Trump’s reciprocal tariffs on all exports could go either way. If the tariffs are truly reciprocal, then the US could increase its tariffs on imported UK food, agricultural products, cars, and ethanol, but would need to lower its tariffs on trucks and some types of clothing and footwear. So swings and roundabouts.
Unfortunately, Trump is threatening to include the UK’s Import Value Added Tax (VAT) in their reciprocal tariff calculations. The US doesn’t charge a Federal VAT or sales tax on imports. Although some US States do charge sales taxes on final retail sales, the highest is only 7.5%, and many states have no sales tax.
This lack of import VAT means that it can be cheaper to buy a British car in the US than in the UK. Coupled with the UK’s higher tariffs and its 20% import VAT on most manufactured goods, even on tariff-free goods, as well as other duties such as Climate Change Levy on fuels, Excise Duty on alcohol, and soon its Carbon Border Adjustment Mechanism (CBAM), it is understandable that the US is unhappy about the unfairness of trade with both the UK and the EU.
The OBR’s advice
The OBR agrees that retaliation by increasing our own tariffs on US imports would be disastrous. In their March Report, Box 2.2, they predicted that if the UK, along with all US trading partners, retaliated by adding their own reciprocal tariffs on imported US goods, this would lower the UK GDP by 1% below their present forecast for 2026/7 and 2027/8 but this GDP reduction would diminish to just 0.75% by 2029/30.
So just to reiterate in case you missed the slight of hand: the OBR is predicting that an all-out trade war with the US, by increasing our own tariffs to 25% on everything we import from the US which includes goods, such as LNG, wood pellets and ethanol, that we can’t substitute with EU supplies as well as losing some of our largest export manufacturers to the US, would only lower the UK’s GDP by 1% for a couple of years and then the effect would reduce. But the OBR is also sticking with its prediction in paragraph 2.54 that Brexit would ‘reduce overall trade intensity of the UK by 15 per cent in the long term’ even though the UK has a tariff-free and quota-free trade agreement with the EU, and so far, 4 years after the end of the transition period, UK trade has been unaffected?
So, Trade War with the US: 1% GDP reduction, and Trade Agreement with the EU: 4% GDP reduction. Did I miss something?
The OBR still backs up its 15% trade intensity reduction with its calculations and assumptions made before the UK EU Trade and Cooperation Agreement and it still assumes ‘that the resulting reduction in the trade intensity of GDP will lead to a 4 per cent reduction in the potential productivity of the UK economy (relative to remaining in the EU), with the full effect felt after 15 years.’ Here I am quoting directly from Box 2.4 in their March 2024 report, which is the reference for their March 2025 Report’s claim, because it is such gobbledygook. Does anyone still believe this?
The latest trade statistics from the ONS, UK Trade: goods and services publication, January 2025, shows UK total trade for all commodities: exports up 24% since 2019 and Imports up 23%. If we exclude precious metals, it is slightly higher, with exports up 25% and imports up 24%. If we account for inflation using the ONS’ CVM calculations, Exports are still up 2.3% since 2019 and imports are up 3.5%.
I admit that this is mainly due to the UK’s buoyant service trade, with service exports up by 22% and imports up by 15%. But we can’t export goods that we no longer make. The UK’s Net Zero policy and high energy costs are making UK goods uncompetitive internationally and driving some production out of the UK —organic chemical exports, for example, have dropped by a third since 2019. But I am sure the OBR knows that this is due to the UK’s Net Zero policy, not Brexit.
[i] Trade intensity is total trade (exports plus imports of goods and services) as a proportion of GDP. Adding exports and imports to get total trade is a strange idea. When I studied economics, we always subtracted imports from exports to calculate the trade balance, deficit or surplus. Total trade can disguise a trade imbalance, and this may be why the UK, as well as the US, have become large net importers without worrying.
The mathematically astute readers will also immediately understand that, as trade intensity is a fraction, it could fall due to a drop in the numerator or by an increase in the denominator. The OBR wants us to believe that any change could only be due to a change in the numerator – trade – although they also predict that the denominator – GDP – will be 4% lower as well. For both trade intensity to fall by 15% and GDP to fall by 4%, then total trade would have to fall by 18.4%. As only UK Trade with the EU would be affected by Brexit, and total trade with the EU was only 46% of total UK trade in 2023, then trade with the EU would have to fall by about 60% while trade with other countries remains the same for the OBR’s prediction to come true. Does anyone still believe this?
