What the FT didn’t tell you about UK exports and the G7

As it was the G7’s 50th birthday on March 25th, it might be a good time to remind the FT why the G6/7/8/7 was formed. It was originally only six countries: The US, Japan, the UK, France, West Germany, and Italy. Their common trait was that they had relatively large populations, they were not communist, and they were not members of OPEC. Canada was a later addition to the original six, joining in 1976 and making it the G7. The EU started to attend meetings in 1981 although not formally added to the name. Russia was invited to join in 1998 making it the G8 but was expelled in 2014 after invading Ukraine. So, the group reverted to being the G7.

The G7 was originally formed to discuss international economic policy and the global economic downturn caused by OPEC’s oil price increase, the collapse of the world’s system of fixed currency exchange rates and their raging inflation problems. But in the 1980’s the Group became more concerned with foreign policy and security issues.

One thing that the G7 was not then, and is still not now, is a group of countries with similar economies. The US economy dwarfs all of the other G7 countries’ economies, while the two biggest G7 economies – the US and Japan – make up over two thirds of the total G7 GDP.  The G7 doesn’t even represent the world’s seven largest economies – they would have to include China and India and knock out Italy and Canada, to do that.

So, there is really no reason to compare G7 economies. Yet true to form, last week the Financial Times (FT), published an article entitled: UK’s goods exports lowest in G7 following Brexit, study finds.

As someone who spent a large part of my financial service career advising fund managers to invest in one country rather than another, I find these articles baffling – why does anyone think all G7 countries’ goods exports should be synchronised? They don’t even export the same type of goods.

In many respects, over the last fifty years their economies have developed to specialise in areas where they generally don’t compete, at least not too much. The US and the UK compete in financial services, Italy and France compete in luxury goods, the US and Canada compete in oil and gas, mineral and agricultural commodities but otherwise – the G7 is not about economic competition, it is about political cooperation.

But the FT doesn’t seem to understand this. Instead, they quote a trade economist from the Resolution Foundation who has apparently just noticed that UK goods exports are ‘at the bottom of the [G7] pack’. The fact that the FT also interviewed the Institute of Directors’ trade policy adviser, who merely described UK exports as ‘sluggish’ while the Resolution Foundation’s economist thinks they are ‘a disaster’ should have given the FT a hint that they ought to check whether an ‘independent think tank focused on improving the living standards for those on low to middle incomes’ is an unbiased source of information about G7 exports.

Information or misinformation.

The difference between information and misinformation is the parts that they leave out. That is, the missing information that would put the information into perspective and thus prevent it from misleading the reader. But of course, misleading the reader is the whole point of the FT’s article.

So what information did the FT leave out?

Let’s start with the title: The UK’s goods exports lowest in G7 following Brexit.

The FT proclaims this as if UK goods exports being the lowest in the G7 is unusual. But if you look at the chart below of G7 countries’ goods exports over the past 20 years, you will see that UK exports have always been near the ‘bottom of the pack’. This has nothing to do with Brexit. And I didn’t even bother to strip out precious metal exports which would have lowered UK goods exports further.

Since 2007, the UK and Canada have vied for the bottom position in the G7 for goods exports, measured in current US Dollars, but Canada moved ahead of the UK in 2022 because of its large oil, gas, potash, wheat and oil seed exports that had an unusually good year in 2022 thanks to sanctions on Russian exports of the same, forcing prices and Canadian exports higher.

This had nothing to do with UK exports, which also increased by the way, let alone Brexit. Although it could be blamed on successive UK government’s policies regarding new UK oil and gas exploration, excessive oil industry taxation, the UK’s legal net zero targets and overly funded green activists preventing permissioned wells from operating through court actions – but not Brexit.

Instead of exploiting our oil and gas reserves, the UK’s most valuable goods exports are cars, aircraft parts (engines and wings), precision machinery, electronics, and pharmaceuticals although the latter have been falling since 2012. The UK does still export some oil and gas, although total UK production has also been falling since 2012 according to DUKES. Although in 2022 the UK imported large amounts of Liquid Natural Gas (LNG) from the US, Qatar and even Australia to reexported to the EU who lacked the facilities to land and vaporise LNG. This pushed up the UK’s exports statistics as well as its import statistics – but the FT isn’t worried about imports.

But this brings us to the second piece of misdirection: why is the FT only interested in goods exports? The UK exports almost the same value of services as goods and is the second largest service exporter in the G7 after the US. According to the OECD, Goods exports make up over 80% of the total exports of G7 countries: Canada, Germany, Italy and Japan; over 70% of French and US exports but only 51.6% of UK exports. So, no surprise that the FT only wants to talk about UK goods exports.

If we look at total exports, that is goods and service exports, then the UK is firmly in the middle of the G7 pack. Accounting, consulting, legal, financial, insurance and pension services are areas where UK exports have flourished since the late 1990’s when consumer goods manufacturing moved out of the UK to countries with lower wages and cheaper energy. One would expect the FT to know this. So why not mention it?

A third piece of misdirection: Why is the FT article quoting quarterly trade figures for 2022 published by the ONS in March, when annual figures for 2022 have also been published by the ONS? Why would they only be giving their readers a quarter of the information available. Did they want to avoid using the very high Q3 2022 figures inflated by high gas re-exports to the EU, and instead compare lower Q4 2022 figures with the unusually high Q4 2019 trade figures inflated by pre-Brexit stockpiling?

The FT even claimed that quarterly figures published by the ONS in March showed that in the last three months of 2022, UK export volumes, excluding precious metals, were more than 9% below the 2O19 pre-pandemic averages. Unfortunately for the FT the link they included for this claim didn’t show this at all. It only mentioned export volumes once: ‘Export volumes decreased by 1.4% in the latest quarter, … This fall was driven by a decrease of 2.8% in exports of services volumes … Exports of goods volumes remained flat in Quarter 4 2022.’ (My emphasis in bold ) As the FT article didn’t mention UK service exports at all, it is surprising that they are using a decrease in service exports in Q4 2022 to attempt to prove that UK goods exports fell because of Brexit. Also, a 1.4% decrease is not a 9% decrease.

The FT seem to be unaware that the ONS has also published figures for UK goods exports to EU and to non-EU countries. All of the charts in the FT article show UK goods exports to all destinations not just exports to the EU. Despite this the FT is using these charts with the hope of convincing its readers that Brexit is the cause of any decrease in UK exports – including, it would appear, exports to non-EU countries.

The UK exports more goods to non-EU countries than to EU countries. If we compare exports to both EU and non-EU countries – for the most part they moved together and in several sectors exports to the EU performed better than to non-EU countries.

Which brings us to the question of why the FT published this misinformation. The FT desperately wants its readers to believe that the UK only exports goods, so it didn’t mention services; it wants its readers to believe that UK exports are the lowest in the G7 because of Brexit, not because Canada’s exports increased dramatically thanks to soaring commodity prices. The FT desperately wants its readers to believe that all UK goods exports went to the EU and thus implies that any decrease must be due to Brexit – but they didn’t and it wasn’t.

The FT article never questions whether the problems experienced by the UK’s exporters could be caused by other government policies besides Brexit, nor whether they could be due to key component shortages (car exports), lower international demand (aircraft engine exports), or lower UK investment in export industries due to everchanging UK corporate taxation policies (oil and gas and pharmaceuticals).

Unfortunately, this article appears to be another example of the FT’s Brexit derangement syndrome.

So what does the UK trade and was it hurt by Brexit.

Let’s start with how we count exports.

To be counted as an export of a country a good must be: wholly produced; or mostly manufactured by value; or go through a change of state from one tariff code to another, in that country. All trade agreements have rules for determining where a good was made. These rules ensure that only legitimate products of the signatory countries can benefit from the terms of the trade agreement. The UK-EU Trade and Cooperation Agreement (TCA) has strict limits on the proportion of an imported good’s value that can come from a country not party to the agreement. Generally, a good cannot have more than 50% of its value produced in a country outside the agreement. However, for some tariff lines in the TCA the limit is as low as 20%. For others the entire make-up must happen within the UK or EU, although the materials may be imported.

In my extensive review of UK goods exports to EU and non-EU destinations post Brexit, I found the biggest change to UK goods exports to the EU, that was clearly due to Brexit, was in clothing and footwear exports to the EU which fell by £4.3 billion between 2019 and 2021 and have not recovered in 2022. Nor will they, simply because of the TCA Rules of Origin. The goods no longer counted as UK exports have not been manufactured in the UK for decades. It is worth noting that a similar proportion of the UK’s imports of clothing and footwear from the EU decreased for the same reason, but the largest falls were from EU countries that are not members of the G7, such as Romania and the Netherlands, so not of concern to the FT.

For independent countries, trade is measured by customs declarations as the goods enter the country and any tariffs due are paid. So, trade statistics for independent countries in the G7 such as the US, Canada, Japan and now the UK should be reliable. The EU collects trade data from outside the EU in this way, but Germany, France and Italy sell over half their exports to other EU countries. This trade is measured by Intrastat Surveys. The FT suggests that the UK’s data has been complicated by discontinuing the EU system of collecting trade data and that the UK may have double counted some trade in the past. But it fails to question whether German, French or Italian data is similarly exaggerated.

Finally, it is customary for the ONS to remove precious metal exports from trade statistics measured by value, the Resolution Foundation’s trade economist claims this is because precious metal exports are of ‘little economic benefit’, while the FT suggests they are too volatile and justifies their removal by adding ‘other G7 countries are not large traders of precious metals.’ I am sure this will be news to the US and Canada (and COMEX traders). But are they comparing pared down UK exports with complete export figures for the other G7 countries? Should we strip out French champagne exports as well because the other G7 countries don’t export champagne? My point is the FT appears to be comparing the weight of G7 whole apples with UK peeled and cored apples.

For what it’s worth, there are several markets in London such as The London Metal Exchange, The Baltic Exchange, and the London Bullion Market, that the Resolution Foundation may perceive to be of ‘little economic benefit’ but that doesn’t mean they aren’t legitimate businesses. The London Bullion Market Association sets the price for physical gold and silver metal bars internationally. It also monitors refining standards and ownership documentation. The industry in the UK includes refiners, fabricators, traders and secure storage and carriers.

We know than some value is added to precious metals in the UK, because UK gold and silver exports to EU countries measured by weight have increased since Brexit. If no value were added in the UK, then under the TCA this trade would no longer be counted as a UK export. The Rules of Origin require at least some value to be added in the UK, this is most likely to be purification  of imported unwrought metals.

The evolution of UK trade and trade statistics

In the late 20^th century manufacturing consumer goods in the UK became too expensive and many UK companies moved their factories outside of the UK and as the developing world became richer, their international customer base also grew. Consequently, UK goods export statistics have been relatively steady since the turn of the millennium as many UK companies now manufacture a portion of their goods closer to their customers. For example, the UK based mining and excavation machinery company, JCB, has factories in the UK but also in the US, Brazil, India and China. So, orders from its customers in North America, South America, Asia or Oceania will most likely be supplied by one of JCB’s non-UK factories. This is good business for JCB, but it doesn’t add to the UK trade statistics. Similarly, the UK based car manufacturer, Jaguar Land Rover has a factory in Slovakia producing its new Land Rover Defenders, consequently this popular vehicle is now registered as a UK import if sold in the UK, but not registered in UK trade statistics at all, if sold outside the UK. And a lot of them are sold outside the UK.

Should we worry about this? Well, it would be a bit late now – that horse bolted many years ago. But this change in UK exports due to international manufacturing has nothing to do with Brexit. In some respects, it caused Brexit. The movement of UK manufacturing jobs to eastern EU countries, encouraged by generous EU regional development grants, caused many displaced UK workers to vote to leave the EU. Although the EU would argue that they were just preventing the jobs from moving to Asia. But either way, goods made by UK companies outside of the UK are not counted as UK exports in UK national trade statistics – and they haven’t been for decades.

So how does the UK compare to other G7 economies? Luckily the ONS publication cited by the FT, while not proving their case about UK exports, did include Real GDP growth for all G7 countries in 2021 and 2022. The UK had the highest Real GDP growth in the G7 in both years, 7.6% in 2021 and 4.1% in 2022, Italy was second with 7% and 3.7%, Japan was last with 2.1% and 1%.

But instead of mentioning the UK’s GDP growth, the FT did claim that ONS data shows that Japan and Italy had double digit rises in their exports. They didn’t give a citation for this, and they neatly didn’t specify the time period they were using, nor the currency. But if they were measuring Italian exports in Euros from 2021 to 2022 they were up 21%. This is because Italy is a major oil refiner and exporter, but the FT failed to mention that Italy imports all of the crude oil it refines so Italian imports were up 37%. 2022 oil exporters had a bumper year thanks to the high prices resulting from the sanctions placed on Russian oil and gas exports. Similarly with Japan: its exports were up 19% but its imports were up 40%, measured in Yen.

However, another thing the FT forgot to mention, was changes in relative currency values. Italy’s and Japan’s double digit goods export increases, disappear when measured in US dollars. It is ridiculous to compare the change in countries’ exports using different currencies and ignoring any relative devaluation of those currencies.

If we look at all G7 countries’ goods exports measured in US dollars, then the best performing country between 2021 and 2022 was Canada whose exports increased by 18.5%, then the US whose exports increased by 17.6%, then the UK up 11.8%, then Italy up 6.7%, then France up 6.1%, then Germany up only 1.5% but Japan’s exports fell by 1.3%. Looked at this way, the UK may not have as much to worry about as the FT would like us to believe.

Admittedly, the nominal value of UK goods exports, measured in US dollars, were still the lowest in the G7 in 2022 but this was primarily due to the UK no longer being a net oil and gas exporter, but an importer and re-exporter. So Canada, traditionally the only G7 country to export goods worth less than the UK, saw its exports increase from US$447 billion in 2019 to US$597 billion in 2022, while UK goods exports only increased from US$468 billion in 2019 to US$526 billion. Although this was a larger percentage increase than Germany, France or Japan, by keeping our oil and gas in the ground we have forgone our chance of increasing our goods exports.

Luckily Shell and BP are still UK headquartered companies despite successive UK Governments’ best efforts to drive them to a lower tax jurisdiction or to countries that view energy derived from hydrocarbons as an important export commodity, such as the US and Canada. However, while they remain headquartered in the UK, although oil and gas from their many international drilling sites will not be counted as a UK goods export, the profits derived from these sales could be remitted back to their UK headquarters, where it will pay the wages of many head office staff, as well as outside engineers, consultants, accountants and lawyers. It will also be taxed in the UK.

These financial remittances are very important for the UK economy.  It is strange that the FT is so focused on a relatively meaningless national export statistic but not on corporate profitability or even on the UK’s balance of payments. It is equally strange that the UK Government also seems to be taking these companies’ largesse for granted.