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UK’s trade trajectory is clear – it is away from the EU

uk trade with eu

In a recent article, Times columnist David Smith claimed that the UK is being pulled closer to Europe in trade terms, ‘despite Brexit’. This claim is entirely inaccurate and based on a misreading and over-emphasis of some trends during 2023. In reality, there are two clear long-term trends in UK trade – a declining share of the EU in UK goods exports and a growing share of services in total UK exports. Both are reducing the EU’s importance as a market for UK firms and this trend will continue in the coming decades.

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In a recent article in the Times, David Smith claimed that recent trade data showed that the UK was ‘being pulled closer to Europe despite Brexit’. This, he claimed was the result of the inexorable pull of economic ‘gravity’ with the subtext being that the UK should abandon efforts at an independent trade policy and instead seek closer trade arrangements with the EU.

Smith’s claims are another example of Remain-supporting authors seizing on small snippets of information and misinterpreting them to push an agenda. In reality, the long-term trajectory of UK trade has been away from the EU and this trend will continue in the coming decades.

There are two main elements in the long-term shift in the UK’s trade reorientation away from the EU:

The first is the falling share of the EU in UK goods exports, a trend that began in the early 2000s. In 2002, the EU took over 60% of UK goods exports but this had declined to 45% by 2022. This was the result of UK goods exports to the EU being broadly flat while exports to non-EU countries rose 90%.

The share of UK goods exports to the EU did tick up to 47% in 2023, but small year-to-year fluctuations are not unusual and in this case seem to have been driven by fluctuations in ‘erratic’ goods (exports of which fell £19 billion last year). Stripping oil and erratics out, the share of goods exports heading for the EU fell in 2023 (Chart 1).

Picture 1

Source: ONS

Importantly, this decline is likely to continue in the years ahead – ironically because the ‘gravity’ effects that Smith and others obsess about are steadily weakening. While distance is one, relatively invariant, part of the ‘gravity’ effect economic weight is the other and the EU’s relative economic weight in the world economy has declined steeply and will continue to do so.

In 1973, the EU amounted to around 28% of world GDP, but this share fell to 19% by 2012 and 17% by 2023. Based on OECD long-term forecasts for the various regions in the world economy, it is likely to decline further, to around 13%, in twenty years from now. This is the result of the EU growing much more slowly than the rest of the world. The EU’s long-term growth rate is likely to be just 1% per year versus around 2.5% per year for the rest of the world.

These trends will shrink the EU’s importance as an export market for the UK even further. Not only is the EU a slow-growing market, but every 1% rise in EU GDP only increases UK exports to the EU by around 0.6% while every 1% rise in GDP in the rest of the world increases UK exports to non-EU countries by around 0.9%. This magnifies the impact of the slow growth of the EU over time. Based on these ‘income elasticities’ and forecast long-term growth rates, the share of UK goods exports to the EU is likely to drop to around 39% in twenty years, the lowest share since the 1960s (Chart 2).

Picture 2

Sources: ONS, Bank of England  * UK exit from single market and customs union

In fact, the decline could be even larger than this because this calculation makes no allowance for changes in relative trade costs between EU and non-EU markets resulting from Brexit. Trade costs with the EU have increased (albeit by far less than some observers claim) while those for non-EU markets are in the process of being reduced via new trade deals.

This process is likely to take some years – perhaps a decade or more – to work itself out but it could mean the UK’s new natural or ‘equilibrium’ share of goods exports to the EU falls to as low as 33-35% in the long term (interestingly, the share of exports to Europe and North Africa was around 37% in 1914 when that region’s share in world GDP was much higher than now).

The second trend diminishing the EU’s share of UK exports over the long term is the growing share of services in total UK exports.

In 1997, services were 31% of UK exports but this rose to 54% in 2023. This large shift also reduces the EU’s share in total UK exports because services exports are heavily tilted towards non-EU countries. In 2023, the EU share of UK services exports was only 36%, and this has been declining too as it was 42%  in the early 2000s (Chart 3). The force of economic ‘gravity’ is weaker here – and seems to be weakening further.

Picture 3

Source: ONS

As a result of the two factors outlined above, in 2023 only 41% of total UK exports of goods and services went to the EU, down from 54% in 2002. Even this probably overstates the extent to which UK firms rely on final EU demand because a substantial share of UK goods exports to the EU takes the form of components going into final goods that will be sold to non-EU countries (aerospace being an example). Allowing for this effect the ‘real’ share of UK goods exports ultimately bound for EU consumers is probably several percentage points lower than the headline figures show.

If we look at the import side, the EU’s shares in UK trade are holding up better than for exports, while still being in long term decline especially for services. So what does this amount to for the UK’s overall trade structure? In 2023, 47% of total UK trade in goods and services (in current prices) was with the EU, the same as in 2019, and the long-term trend continues to be down notwithstanding the slight uptick in 2023: the three-year average share in 2023 was 45% (Chart 4).

Picture 4

Source: ONS

Moreover, as noted earlier, any uptick in 2023 looks on close inspection to be at least partly erratic. As well as huge fluctuations in UK exports of erratic goods (mostly gold), there are some odd-looking items on the import side in 2023 too such as a collapse in electronics imports from non-EU countries.

Given the long-term trends in EU and rest of the world growth noted above, the increased dominance of services in UK exports, and shifting relative trade costs, the EU’s importance as a source of demand for UK firms is set to dwindle further in the decades ahead, to 1/3 or so of total demand and possibly lower. Against this background, suggestions that the UK needs to intensify its existing trade relationships with the EU to give the economy a boost look curious, if not eccentric. The focus should obviously be on the wider world.

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Briefings For Britain