18 May 2023

Blaming Brexit distracts from the real cause of Britain’s declining exports

By Phil Radford

First year medical students are taught one great diagnostic precept: ‘Coincidence is not causation. That simple mantra saves millions of lives. It could also save British exports. 

Data for 2021 showed that trade declined by 15-17% and Brexit got the blame. The Office for Budgetary Responsibility (OBR) said its forecasts on Brexit were confirmed by events. By November, the Financial Times proclaimed a ‘new consensus’ – Brexit was bad for trade.

Then the new data for 2022 arrived. Suddenly, matters weren’t quite so straightforward. Our exports to the EU are recovering faster than our exports to the rest of the world – even if you remove energy from the equation. More intriguing still, Centre for Brexit Policy analysis shows that our losses in exports are concentrated in just a few sectors. And – spoiler alert – these are not sectors where any analyst can blithely blame Brexit.

This sectoral approach is vital for one good reason. It highlights big, non-Brexit problems in several aspects of our trade, especially in cars, pharmaceuticals and aerospace. In short, there certainly are things to panic about in UK trade – it’s just that Brexit isn’t one of them.

So, where should analysts train their research? What are the biggest actionable challenges in UK trade?

The obvious start point is our motor vehicles industry. This is because it’s our biggest export industry and it’s been the hardest hit over the past two years. Compared to 2019, our exports to the EU were still down £4.9bn in 2022 and £5.8bn in non-EU markets. Nothing else in the trade data for 2022 even approaches that downturn.

The cause? According to industry sources, lower UK production is due to pandemic-related factory shutdowns, the shortage of microchips, and plant closures that executives said were not due to Brexit. Happily, the bounce-back has begun. Jaguar Land Rover (JLR) is now working through a 215,000 vehicle backlog. And commercial data for this year indicates that this £10.7bn underperformance will self-correct during 2023.

But that doesn’t mean the danger has passed. EU subsidies pose a serious, long-term threat to investment in UK car production. The UK-EU deficit in cars and auto parts careered through the £30bn barrier in 2022. This deficit has been growing inexorably for over 20 years as investment moved across the Channel in response to huge subsidies in EU countries.

Sceptical? Just ask your local JLR dealer where those fancy, boxy new Land Rover Defenders are made. It’s not Solihull.

These subsidies aren’t easy to counter. Car companies habitually demand taxpayer cash or threaten to invest offshore. We have some strong cards to play: a blast of clean energy is about to land on our east coast thanks to offshore wind farms. Also freeports might help with components for cars destined for non-EU markets. But if we don’t find an effective counter to subsidies in the car industry then our single biggest export industry is going to get hammered.

What else really matters? If sector falls are a guide, then aerospace has to be next on the list, with the second most severe export declines in 2021-2022 (down by -£8.2bn, in non-EU markets in 2021, or 36%). This is, in itself a vitally important insight. It shows how a nosedive in aerospace exports puts a crater in our aggregate export data. In this case, the downturn was triggered by a crisis in global civil aviation, and a recovery is underway. Defence aerospace helped see us through – in EU markets anyway.

But, that dependence on defence aerospace is a problem. UK trade data shows that aerospace exports have grown faster than any in other major sector over the past 20 years, by over 3% a year. But our defence aerospace is tied to huge, pricey manned fighter aircraft programs. And in those skies above Ukraine, drones have swarmed in where fighters fear to tread. In unmanned air vehicles, the UK is comparatively weak. This means a big portion of our best export sector is under direct, long-term threat.

Perhaps this sounds far-fetched. But who’d ever heard of Turkey’s Bayraktar drones before they started to blow up a load of assumptions over Ukraine last year?

Third on the critical list is pharmaceuticals. Exports were down £0.8bn in EU markets in 2022 (as compared to 2019), but what should frighten analysts is the continued £1.9bn drop in non-EU exports. This means that the long-standing decline in our EU exports is now spilling into our ultra-valuable global trade.

The sickness is in fact chronic. Industry analysis shows that our pharmaceuticals sector never really recovered from the injuries it sustained in 2010-2015. This was when global pharma companies shifted production to more tax efficient jurisdictions in the EU and our domestic gross value added halved. Not that anyone noticed at the time.

Still there is a treatment available: Make the UK the most tax efficient jurisdiction in Europe for pharma manufacturing. Yes, it is that straightforward. As a remedy, it’s been tested – just look at Ireland.

UK trade data will continue to improve in 2023, thanks mostly to a resurgence in our auto and aerospace sectors. But the blame-Brexit mentality blinds analysts from seeing the other deep-seated challenges that have already caused severe damage. This form of confirmation bias deflects from the real task of policy making: prioritising objectives, identifying challenges, addressing them, then making sure we win internationally. That’s how successful countries do trade policy.

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Phil Radford specialises in trade analysis and is author of ‘The Case for Low Corporate Taxation: Lessons from the Pharmaceutical Industry’.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.