The piece hinges on a statement by junior trade minister Andrew Bowie suggesting the Government was set to miss its 2030 target for the value of UK exports to reach £1tn – an idea then echoed uncritically in other media outlets.
There is so much wrong with this analysis, it’s hard to know where to start:
The slipping forecast
Most importantly, the £1tn figure is a projection, not a fact, but the headline writers converted ‘could’ into ‘will’ and missed a key caveat in what Bowie actually said, which was:
‘Extrapolations of the Office for Budget Responsibility forecast suggest £1tn exports could be achieved by around 2035 without additional intervention.” (our emphasis)
Could is a word that always does a lot of heavy lifting in these articles, but anything admitting to being an extrapolation is also best read with a large pinch of salt, as the basic assumption of any extrapolation is that what happened yesterday will continue to happen tomorrow and no one will change their behaviour. Anyone who has lived through the last three years will know that isn’t true, especially when it comes to trade.
Predicting an absolute amount of exports without reference to the predicted size of the UK economy as a whole, or that of the UK’s trading partners, or their assumptions regarding UK government policies on tax, the environment or new trade agreements, amounts to little more than guesswork.
The article also fails to mention imports – would The Guardian be happy if exports reached £1tn but imports reached £2tn?
A question of stats
There are also some important statistical questions around this forecast. The article does not make clear whether the Government’s target (most recently set in 2021) was in current or constant prices. Any such target would normally be set in constant prices to remove the effects of future (and unknown) price inflation. However, the OBR forecasts referred to in the article are in current prices, even though the OBR assumes that there would be little price inflation over its forecast period of 2022-27. The Department for International Trade are said to have ‘extrapolated’ these OBR projections, but we do not know exactly what they did – and in particular whether they implicitly extended the assumption of little or no price inflation up to 2035. The whole argument is muddled and unclear.
Given that we have co-authored an extensive paper dissecting UK trade since leaving the EU, we know only too well that lumping all UK trade into one homogeneous blob and imagining that it increases and decreases together is a serious error.
The Covid effect
UK exports are heavily dependent on about a dozen industries: aircraft parts; car production; oil and gas; machinery; electrical machinery; precision machinery; pharmaceuticals; organic and inorganic chemicals; and plastics. But exports in several of these sectors were hit very hard by Covid lockdowns internationally, while others have been under siege from our own government for many years.
The Covid travel restrictions reduced UK exports of jet engines, aircraft wings, landing gear, and even aircraft seats. These products reduced UK exports between 2019 and 2020 by about £10bn and there was little recovery in 2021. Similarly for car production, where the lack of some key imported components such as computer chips due to international factory shutdowns caused UK car production to drop. That necessarily caused car exports to also drop – by about £10bn between 2019 and 2020.
Of course, not all falls in UK exports can be blamed on Covid. Exports in other sectors have been falling for years, most noticeably oil and gas, and pharmaceuticals. Oil and gas exports have been falling since 2004 – by 2021 production of all petroleum products was almost half its 2004 level. This has a lot to do with the Government’s environment policies, high taxes, discouragement of new investment, anti-energy legal obstacles and the tolerance of anti-oil protestors, who for the most part grew up in warm, well-lit houses without any comprehension of where energy comes from.
Admittedly, oil and gas production was also hit by Covid as people were restricted from driving, forced to work from home and home-school their children, all of which greatly reduced petrol usage in both the UK and in our export markets. According to DUKES, UK production of all petroleum products fell by 18.6% from 2019 to 2020, while, according to Comtrade, UK exports of all petroleum products measured in pounds fell by 35%.
The fall in UK pharmaceutical exports, once one of the UK’s leading export industries, seems to have been caused by government complacency about how competitive some of our European neighbours (Switzerland, Ireland, Denmark and Italy) and developing countries (India and China) have become, either thanks to lower production costs or considerably lower corporate taxes.
Ireland, for example, has both a lower headline corporate tax rate and higher claimable expenses, allowing companies to greatly reduce their tax bills. Irish exports of pharmaceutical products have more than doubled since 2015, while UK exports have fallen by almost 30%. The UK is still the preferred location for pharmaceutical research and development, generally a cost centre, but it receives less and less of the manufacturing and export revenues,
The crucial question is this: can we extrapolate from these export falls and predict trade levels in the future? Err, no.
The big export falls due to restricted air travel are reversing, but it will be a while before air travel returns to pre-Covid levels. For most people travel is discretionary spending and the high cost of energy, not just in the UK but for many of our traditional customers, has lowered demand. (Although energy costs are much lower than predicted in September 2022, which was another great example of a clumsy extrapolation amplified by the media.) Luckily, some of our non-traditional customers, the Chinese for example, are now allowed to travel again and that will help the aircraft/airline/tourist industry return to pre-Covid health.
China isn’t the only Asia-Pacific nation with a growing middle class with money to spend on travel, cars and other British products. In the longer term, joining the CPTPP and agreeing a trade deal with India would make UK goods more competitive in these markets.
And though undoubtedly tough for UK households, high EU energy demand and equally high energy prices have greatly benefited UK trade statistics. For instance, higher UK gas exports to Europe in 2022 have made up for lower energy exports in 2020 and 2021. Add to that UK imports of US and Qatari Liquid Natural Gas (LNG) – which is converted back to gas in the UK and re-exported to continental Europe – and 2022 UK energy trade figures will look exceptionally healthy.
However, this re-export trade adds little to the UK economy, unlike exporting more of our own gas, which would offer a huge benefit. Again, unfortunately, this is an area where the Government’s energy and environment policies, along with its anti-production windfall taxes, are hurting the UK balance of payments, hobbling the economy and adding to already high household energy costs. It really is a trifecta of bad policy.
Goods vs services
Another very important, but often overlooked point, is the relative importance of goods versus services exports.
Once upon a time, exports of goods were the only source of gaining foreign currency reserves, which were needed to pay for imports of raw materials or goods required to improve the population’s quality of life. But these days a company can earn much higher profits by manufacturing their products outside the UK, then delivering those goods directly to customers outside the UK, than they would by manufacturing their products in the UK or even warehousing them in the UK before exporting them.
The UK company will still design and market the products, organise manufacturing and delivery of the end products, keep the company accounts, raise the finances to run the company – as well as the myriad of other important processes that happen in a corporate head office. But none of this adds to UK trade statistics.
These UK based companies make a lot of money, employ a lot of people and pay a lot of tax, but they do not add to UK export statistics other than by their foreign currency remittances – i.e. transferring company profits back to the UK without an attached export good, known as ‘Invisibles’ in a country’s Trade Balance.
The UK also has a massive amount of service industry trade which now accounts for just under half of all UK exports.
The Rotterdam Effect
What’s more, now that the UK is out of the EU, some trade once counted as ‘exports to the EU’ is no longer counted as a UK export, even if it has a UK label and comes from a British warehouse. In years gone by, if a good was manufactured in south-east Asia but landed in Rotterdam or Felixstowe before being transported by road to other European destinations, it was often counted as a Dutch or British good – something know as the ‘Rotterdam Effect’. But under the Rules of Origin in the UK-EU Trade and Cooperation Agreement, this trade must now be counted as an import from the country where the majority, and in some sectors all, of its manufacture took place.
This change in recorded trading partner is very obvious in exports and imports of clothing and footwear: either UK consumer taste has changed dramatically, and Britons now hate shoes made in the Netherlands (incredibly the UK’s second biggest footwear supplier on paper in 2019), while suddenly finding shoes from China, Vietnam and Indonesia exceptionally fashionable, or we can finally remove the Rotterdam Effect from UK trade statistics.
Another example is UK exports of tropical fruit: you may be surprised to discover that the UK’s banana exports dropped from £19m in 2020 to only £1m in 2021 and UK citrus fruit exports dropped from £34m to £2.5m. Of course, no UK-based banana farmers or orange farmers went out of business, we just changed the way we measure trade.
Removing the Rotterdam Effect has definitely lowered both UK and EU trade statistics, pushing the £1tn target that so fixates The Guardian further away. But it will have little effect on the UK (or the Dutch) economy, given that clothing and footwear manufacturing moved out of most European countries in the 1990’s and, fairly obviously, the UK has never grown tropical fruit commercially.
Thankfully, the British fashion industry is still thriving because the bulk of fashion revenues are in the design, retail, wholesale, distribution and marketing sectors – all sectors where we excel. And our favourite imported fruits are still bananas and oranges.
Fodder for the rejoin movement
But these falls in export statistics will give ammunition to EU supporters, and officials such as Maroš Šefčovič, whom the Guardian article quotes with a link to another article claiming the UK’s trade with the EU declined by nearly 14% in 2021.
First, note the conflation: the linked article refers to total trade not just UK exports, which are the subject of the ‘£1tn target’ article. The UK has always imported considerably more from the EU than they exported to it, so a fall in EU imports might not be such a bad thing. Second, this decline in trade coincided with Covid shutdowns, travel restrictions and key component shortages, none of which were due to Brexit.
As the Centre for Brexit Policy’s upcoming Trade Report will show, the largest falls in exports to EU destinations were caused by key component shortages, and Covid travel restrictions hitting exports of both petrol and aircraft parts. Generally, this fall in exports to the EU was no larger than falls to non-EU destinations. Indeed, in some sectors exports to EU countries increased or were unchanged, while exports to non-EU countries decreased. And, as mentioned above, some falls were purely to do with changes to the way we count UK EU trade. Šefčovič ought to know this, and probably does, but that hasn’t stopped him making political mileage out of it.
The Guardian report also makes some political mileage by mentioning the biggest fall in UK exports to the EU in 20 years that occurred in January 2021, without mentioning that this was the first trading month after the Transition Period, or the large increase in export stockpiling that took place at the end of 2020 to avoid potential delays at the border due to unfamiliar customs forms. The monthly data for 2022 so far shows exporters and importers, now generally free of Covid bottlenecks and restrictions, seem to have overcome any border problems.
But we still need to talk about UK trade
Despite the silly numerical target and muddled statistics, the Guardian piece does raise an important question – can or should the Government do anything to increase UK trade? The answer is yes, they can and yes, they should – although they can’t help everyone.
If there is a global economic slowdown, the UK government can only do so much. If your customers can’t afford your products or have less discretionary income due to their own extraordinarily high energy costs, as in the EU, or their sudden increase in borrowing costs, as in the US, then exports to these destinations will be lower, even with government support for certain sectors.
It’s also worth noting that small businesses routinely have trouble exporting, simply because they are small and often cannot guarantee to supply the quantities needed by a larger importing country’s distributor. This even happens within the UK’s domestic market: small artisan UK cheese producers can’t even supply Sainsburys, let alone larger markets such as Germany, Japan or the US.
The Government did set up grants for export training programs in 2018 to help small and medium-sized enterprises meet any new EU export requirements and deal with any paperwork. We also have trade ambassadors to promote UK goods abroad. Meanwhile, enterprising people in the Netherlands and Belgium have set up distribution companies to help small UK businesses export to EU destinations.
The new trade deals with Japan, Australia and New Zealand – and potentially India and the CPTPP – will help UK producers export their goods, if they can produce them in the quantities required by importers. However, the FSB’s suggestion that a new fund to support small exporters, or that changes to UK-EU trading terms could help the UK meet its £1tn target, are ludicrous. Small companies may be the backbone of the British economy, but they are not generally the backbone of international trade.
So, while help for small companies is well-meaning, it can’t change the fact that UK exports depend heavily on a fairly small number of sectors – sectors dominated by large companies that have always exported their products internationally, and which tend to have much larger export revenues than domestic revenues.
The Government’s priority, therefore, must be to stop driving these companies out of the UK with uncompetitive corporate taxes, tax surcharges and windfall taxes, coupled with a green agenda that misunderstands what the UK actually exports: high value cars mostly with petrol engines; jet engines and aircraft parts that require hydrocarbon fuels; chemicals, plastics and even pharmaceuticals based on hydrocarbons; and, finally, actual hydrocarbons in the form of crude oil, refined oils and natural gas. Other than that, our other large exports are services: business, legal and accounting services; financial services; and insurance.
All of which means that over-taxing the banks and the oil and gas industry, encouraging more environmental lockdowns, ’15 Minute Cities’, Ultra-Low Emission Zone travel restrictions and limiting consumer travel might not be the smartest move – unless we can find something new to export.