Ex-Bank of England governor Mervyn (now Lord) King famously remarked that we should never read anything into the UK’s monthly trade figures due to statistical anomalies and the tendency for them to be revised dramatically over time. This warning is probably even more appropriate at the current juncture, given that trade figures have been affected over the last two years by the coronavirus pandemic and by the UK’s exit from the EU single market and customs union, which has created a new set of distortions to measurement of exports and imports.
Nevertheless, we think the data, even with its imperfections, can provide us with some useful information. Below, we look at three broad areas – the overall performance of UK exports, especially sales to the EU; exports to Ireland; and exports of services particularly financial services. The pattern that emerges is one of resilience – in sharp contrast to the ongoing, overblown claims of Remainers that Brexit has hugely damaged the UK’s trade performance.
Overall performance in exports of goods
Over the period 2016-2020, there were widespread claims by politicians, lobby groups and academics that UK exports to the EU would fall dramatically once the UK left the EU single market and customs union. Some modelling exercises claimed declines of up to 40% were likely, and in the early weeks of 2021, when UK exports to the EU did fall sharply, some Remainer commentators claimed these studies had been vindicated.
Source: ONS, CBI, author’s calculations
These claims soon turned out to be baseless. As we argued in March, trade at the start of the year was depressed due to late 2020 stockpiling, firms delaying moving goods due to fears of disruption and problems adjusting to new border processes (which firms had very little time to get used to given the last-minute nature of the UK-EU trade deal). Once these effects faded, UK exports to the EU rebounded quickly to broadly regain their previous levels.
Subsequently, Remainers have shifted their ground and now claim UK exports may not have collapsed but are still doing much worse than they might have done, had the UK stayed in the EU. But even this less dramatic claim is hard to stand up based on a careful reading of the data. In September, UK total exports of goods were about 15% lower than in the same month of 2019 (the best base of comparison given 2020 pandemic distortions). But it would be wrong to read too much of a ‘Brexit effect’ into this shortfall for several reasons:
- Survey evidence is much more upbeat. The CBI’s latest quarterly industrial survey shows export orders at their strongest level since 2018 (see Chart 1). Similarly, the Bank of England Agents’ surveys show exports of both goods and services growing at the fastest pace in three years. It may be the case that official trade data are understating recent export growth.
- The recorded drop in exports has been mainly to non-EU markets. Exports to the EU are 10% down on 2019 levels, but non-EU sales are down 20% and this is the main driver of the drop in total exports. The fall in sales to non-EU countries cannot be plausibly pinned on changes in trade relationships with the EU.
- Excluding erratic and pandemic–affected items, exports to the EU are holding up well. As we recently showed, exports to the EU in 2021 have been dragged down by three main items – lower oil exports, lower exports of ‘erratic’ items and lower exports of cars. None of these is primarily driven by changes in EU trade barriers. Instead, they are supply-side issues, including in the case of cars problems with global shortages of microchips, and statistical noise.
Source: ONS, Eurostat, US Census Bureau, author’s calculations
If we strip out the various distorted and erratic items, we can see that UK exports of goods to the EU have tracked EU demand fairly closely over recent months, with no evidence of a large effect from trade barriers. Total UK exports of goods ex-oil and erratics have underperformed US and eurozone exports of manufactures, but only modestly, by around 5% (versus 2019) and as noted above this is mainly due to weaker sales to non-EU countries (see Chart 2).
Faced with this data, which shows at worst a rather small underperformance of UK exports, Remainers are instead now referring to studies based on tortuously constructing supposed counterfactual paths for UK exports based on the trade data of other countries – often countries with very different economic structures and trade patterns and varied policy approaches. This approach is deeply dubious in our view. Among other issues, as others have noted, the way these supposed counterfactual paths for UK trade have been constructed has tended to shift significantly over time to obtain a ‘good’ fit.
Overall, then, after nine months it looks like underlying UK export performance has held up far better than many observers claimed it would after leaving the EU single market and customs union. We do not claim higher trade barriers have had no impact, but the impact looks to be moderate – this in turn implies that earlier very large estimates of the scale of EU trade barriers were overstated (as we consistently argued they were). Indeed, even where barriers are undoubtedly highest, in agri-food products, UK exports to the EU have held up remarkably well.
Exports of Goods to Ireland
Interpreting the figures for UK trade with Ireland since the start of this year is particularly difficult. This is because the combination of the partial creation of a trade border in the Irish sea between GB and NI (ameliorated via grace periods on important categories of goods), the creation of customs borders between Ireland and GB, and the NI protocol maintaining an open border in Ireland has led to massive re-routing of trade flows. Specifically –
- GB exporters to Ireland (including re-exporters) have shifted to routing their trade via NI rather than Dublin and other Irish ports,
- NI exporters to GB are shipping goods directly to GB rather than via Ireland,
- Irish exporters to GB are routing goods through NI instead of their own ports,
- Irish exporters to the EU are shifting to routing goods via ferries that bypass the UK,
- Some EU exporters to GB and NI are routing goods via Ireland instead of sending them straight to GB
Given the way that Irish trade statistics in particular are collected, these shifts in trade routes are creating major distortions in the measurement of cross-border trade. In particular, it is likely that a substantial chunk of the increase in sales from NI to the Republic reported by Irish statistics are actually goods that originated in GB – as we have previously argued. Port freight data are also now of limited use as a proxy for trade flows, especially between GB and NI.
Source: ONS, Irish CSO, author’s calculations
In the early part of 2021, a significant anomaly in the measurement of UK-Irish trade emerged, with UK data showing much stronger UK to Ireland flows (i.e. UK exports) than the Irish data did. We speculated at the time that this might be due to changes in the measurement of UK exports on the Irish side, specifically Irish data no longer counting goods coming from the UK whose origin was in the rest of the world (i.e. re-exports) as UK goods. Intriguingly, this anomaly has now disappeared. The latest figures from the Irish side now show total imports from the UK higher than the UK data suggest (Chart 3) and back at ‘normal’ levels.
But what has changed is the Northern Ireland share in the UK total of sales to Ireland – now at almost a quarter versus a historic level of 10-15%. It seems that UK exporters may have circumvented EU trade barriers at Dublin and other Irish ports by routing goods through NI.
If the flat trend in UK to Ireland exports over the last three years looks disappointing, it should not really be considered so. UK sales to Ireland have been growing very slowly for the last two decades – at just 0.4% per year, with a marked decoupling from the broader trend in total Irish imports since around 2014 – note this is a pre-Brexit date (Chart 4). Irish customers have been shifting from UK goods for some time, or UK exporters have been losing interest in the Irish market.
Source: Irish CSO, author’s calculations
UK services exports
A widespread concern in 2020 was that the EU-UK trade deal offered little to UK services exporters. We were never too worried about this as we consistently argued that UK services exports gained relatively little from EU membership. Proving our point is not straightforward, though, as the coronavirus pandemic has caused a major contraction in global services trade, which has continued into 2021 even as world trade in goods has recovered. Separating out the pandemic-related and EU-related influences on UK services exports is not straightforward.
One crude approach is to look at UK services exports excluding travel and transport, the two sectors worst affected by the pandemic. If we do this, we find that UK services exports to the EU (ex-travel and transport) have edged down slightly, by 3%, in the first half of 2021 versus the same period in 2020. They are about 6% lower than in the first half of 2019. Some of this will certainly be pandemic-related as excluding travel and transport does not capture all the pandemic effect. So, there is no sign here of a collapse in sales of services to the EU from leaving the EU single market.
We can also compare with UK services exports to non-EU economies. If we do this, we see that UK services exports to non-EU countries fell around 2% in the first half of 2021 versus the same period in 2020 – this is almost exactly the same as the trend in services exports to EU countries (see Chart 5). This is again not consistent with the idea that UK services exports to the EU have been strongly affected by the UK leaving the EU single market; it looks more like common, probably global, factors have affected exports to both sets of destinations.
Some observers have claimed a longer-term negative effect on UK exports of services to the EU dating back to the referendum in 2016. We dealt with that issue in another recent piece – like most such assertions, it is not backed up by the available evidence: in fact, UK services exports seem to have performed better since 2015 than those of key competitors such as the US or France.
Source: ONS, authors’ calculations
What about financial services exports? These were the subject of some of the most lurid pre-Brexit doom stories, with claims that the UK finance industry might shrink dramatically with a mass exodus of firms and workers to the EU. Some studies claimed hundreds of thousands of jobs would be lost and financial services exports might shrink by a quarter.
Source: ONS, author’s calculations
The claims on job losses have already proved laughably inaccurate, with industry estimates now suggesting just a few thousand roles have moved to the EU or been created there due to Brexit – a process that has already largely ended. London has also maintained, and even strengthened, its position as a global financial centre especially in areas like FX trading.
The available trade data largely back this picture up – financial services exports have been steady over recent quarters. However, there does seem to be something of a geographical shift going on. Sales to the EU have trended lower since 2019, but sales to non-EU destinations have picked up. As a result, the share of non-EU sales in total financial services exports has risen to 73% from 65% (see Chart 6).
It is possible that some of this shift is of the smoke and mirrors kind, with some business being routed through non-EU destinations even where EU entities are the final customer, but there is no hard evidence to this effect. In any case, what this shows is that the orientation of the important UK financial services sector is now overwhelmingly to non-EU markets. On this basis, any thought of shadowing EU financial regulations to preserve trade with the EU is quite redundant.