The latest data on the UK’s international trade (published on Wednesday) offered something for everyone. For some, they are further proof of the lasting damage that Brexit will do to our trade with the EU and therefore, by extension, to the UK economy.
For others, the recovery in the UK’s exports to the EU confirms that businesses are adapting well to the new rules, while the persistent weakness of imports from the EU is either temporary, or even something to welcome.
At least almost everyone accepts that any increase in trade frictions is likely to reduce the amounts that the UK and the EU sell to each other: this is just ‘Economics 101’. But there is still plenty of room for disagreement about the size and duration of this hit – and Brexit was always about far more than just UK-EU trade.
So, what do the latest data tell us? After the rocky start in January, exports of goods to the EU rebounded in February and continued to recover in March, taking them back to roughly where they were before the end of the transition period. (1-0 to the Brexit optimists.)
This does not necessarily mean that the hit has been and gone. Perhaps UK exports should have done more than simply return to pre-Brexit levels, given the pick-up in global demand. Nonetheless, the gap between UK exports to the EU and those to the rest of the world has closed again. (2-0)
The story on imports is rather different – and more surprising. In contrast to the recovery in exports, imports from the EU have remained subdued. If you add together the value of exports and imports, it does seem that overall trade is still taking a sizeable hit from Brexit. (2-1)
Indeed, another good piece of analysis by John Springford at the Centre for European Reform (CER) has suggested that total UK trade was still about 11% lower in March than might have been expected, based on what is happening in similar economies, and that this was actually a bigger fall than in February. (2-2)
As it happens, I have some doubts about the CER modelling (time for VAR!). For a start, the results are sensitive to the choice of countries in the comparison group, which is not straightforward, and they have already been buffeted by data revisions.
There are good reasons as well to think that the relative weakness in UK imports will also prove to be temporary.
We know that many companies and individuals have struggled with increased paperwork when importing from the EU. But this problem should ease over time as they, and their suppliers, become more familiar with the new rules.
UK firms are also more likely to have stockpiled imported goods ahead of the end of the transition period than their counterparts in the EU, so there may be a bigger overhang to work through on the import side than the export side.
There are some non-Brexit factors at play too. The amount that the UK imports obviously depends on the strength of overall demand, as well as any new frictions to trade. The fallout from Covid meant that the UK economy was still relatively weak in the first quarter, especially compared to the US (which has a high weight in the CER model).
Similarly, it would be wrong to assume that any divergence between the UK’s trade with the EU and that with the rest of the world must be due to Brexit. Shifts in the pattern of demand, and Covid-related supply disruptions, are also significant.
For example, UK business investment slumped in the first quarter, led by a sharp fall in spending on motor vehicles. This was due to Covid, not Brexit. But it does help to explain the recent sluggishness of imports from the EU (where almost all the cars imported into the UK are made).
In the meantime, though, we shouldn’t be too quick to cheer the decline in UK imports from the EU, or to count this as a ‘benefit’ of Brexit.
On the plus side, the fact that imports have fallen by more than exports is the opposite of what the Office for Budget Responsibility assumed when it predicted that Brexit would knock 0.5% off UK GDP in the first quarter of the year. But it is still not obviously a ‘good thing’.
It is not quite as simple as saying that imports from the EU have been replaced by imports from the rest of the world. In fact, the latter have barely changed. The EU’s ‘market share’ of UK imports has only fallen because the pie is smaller.
Concerns about the large deficits in trade in goods that the UK has run with the EU are also overdone. Since trade is voluntary, it’s reasonable to assume that at least some UK consumers prefer German cars, French cheeses, or Italian wines, to those produced at home or further afield. Similarly, the UK runs a large deficit in tourism with Spain because Brits like to holiday in the sun.
Worrying about these bilateral deficits makes no more sense than me worrying about the persistent trade deficit I run with my local supermarket. Should I refuse to take my family holiday in Spain unless an equal number of Spaniards agree to take a summer break in the Surrey hills?
Of course, if some people are happier buying British, or boycotting EU goods and services, that’s fair enough. But artificial trade barriers that restrict everyone’s choices are harmful, even if deficits shrink as a result.
Fortunately, none of this should matter much longer. The UK economy is already bouncing back, and few will care if this is reflected in a rebound in imports from the EU. The Brexit uncertainty which has held back both investment and trade since the 2016 referendum is also lifting.
In summary, we will need ‘extra time’ to determine the true impact of Brexit on the UK’s overall trade, especially when recent data are still clouded by the pandemic. But I’m increasingly confident that any long-term hit, whether to exports or imports, will be much smaller than many feared.
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