Wednesday, 27 April 2022

The UK needs the EU more than they need us

The LSE have produced a puzzling report about UK-EU trade after the first year of operation of the TCA. It suggests Brexit has created a ’major disruption’ to UK trade, which is not altogether surprising since there have been any number of similar reports over the past few months. The FT cover it by saying "trade relationships tumble after Brexit." and that red tape, customs controls and taxes have caused many small businesses to stop trading with Europe. However, there are some odd things about it which are hard to reconcile. 

Here's the tweet from the FT's Peter Foster:

But here's the puzzle. The LSE report says:

"We estimate that the new TCA trade relationship led to a sudden and persistent 25% fall in relative UK imports from the EU. In contrast, we find a smaller and only temporary decline in relative UK exports to the EU, but nevertheless a large and sustained drop in the extensive margin of exports, driven by the exit of low-value relationships. The timing and asymmetry of Brexit effects on UK imports and exports is puzzling and provides evidence of important differences in adjustment to integration and disintegration shocks."

Let me say it's a technically complex paper to read with the title: Unravelling deep integration: UK trade in the wake of Brexit.  You're welcome to have a go at understanding it.

Apparently, it uses HMRC trade data which the FT seem to think gives it authenticity which I suppose is true, yet it finds our exports to the EU suffered only a "smaller and only temporary decline" while imports from the EU have taken a real hit, falling by a massive 25%.

This is odd given that a few days ago, the EU published its own assessment of the TCA which concluded the reverse:

"On trade in goods, Eurostat estimates, for 2021, EUR 146 billion of EU imports from the United Kingdom which is a marked decline both compared to 2020 (-13.6%) and to 2019 (-24.8%). EU exports to the United Kingdom are estimated at EUR 283 billion, up by 1.9% compared to 2020 but still 11.4% below the level registered in 2019."

Services are not covered in either paper so we are only talking about goods here. The EU say their exports to us (our imports) went UP 1.9% which is a bit different to the 25% drop seen by HMRC and the LSE report - to say the least.

Conversely, our exports to the EU (say Eurostat) - their imports from us - FELL 13.9% relative to 2020 and 24.8% relative to 2019 which again is a bit different to the LSE who think this was a smaller decline and only temporary.

What makes it difficult to understand is that last year there were essentially no tariff or non-tariff barriers on EU exports to the UK because we delayed imposing any checks and even now we aren’t carrying out any SPS checks which were due to start this coming July. The government is even contemplating another much longer delay to that date - back to 2025 possibly or even longer. In other words, things for EU exporters continues to look more or less the same as they always were when we were a member of the single market. Meanwhile our exporters have faced a mountain of red tape.

Yet it is these very EU exports (our imports) which are down by a quarter according to the LSE.

It makes no sense.

Other newspapers are struggling to present the report, The National in Scotland have an article : Brexit: UK trade with EU plummets in year since Boris Johnson's deal, which talks about 'trade' rather than exports. They talk of:

"The research, by the Centre for Economic Performance (CEP) at the London School of Economics and Political Science, found imports have fallen by 25% relative to those from elsewhere in the year since the agreement with the EU was finalised. 

"Exports to the bloc were not as badly affected, but there was a decline relative to the rest of the world, the analysis found."

Let me say, I know there are always differences between the way different countries calculate trade, quite often with two countries both claiming to have a trade surplus with each other, which is impossible but I'm not sure there is ever such a huge difference.

Who do I believe?  I'm not sure but I would lean towards Eurostat I think. 

Needless to say, The Daily Telegraph pick the statistic that best plays to its readers, with an article on the LSE data headlined: ‘No evidence’ of sustained hit to UK exports to EU since Brexit trade deal

Before we get too embroiled in the figures, I ought to explain that the LSE don't claim there are any benefits to Brexit - at all - and this paragraph should give you a flavour of what they think:

"Our work also adds to an active line of research on the multi-faceted impact of Brexit on the UK economy. Prior evidence indicates that the depreciation of the pound sterling after the UK voted to leave the EU increased import prices and the cost of living (Breinlich, Leromain, Novy and Sampson, 2022) and led to lower real wage growth (Costa, Dhingra and Machin, 2019). In addition, higher uncertainty and anticipation of future trade barrier increases led to an increase in outward foreign direct investment from the UK to the EU (Breinlich, Leromain, Novy and Sampson, 2020) and reduced domestic investment and productivity (Bloom et al., 2019; Hassan, Hollander, Lent and Tahoun, 2021), resulting in a slowdown in GDP growth (Born, M¨uller, Schularick and Sedl´aˇcek, 2019). Dhingra and Sampson (2022) review the literature on the economic effects of Brexit before the TCA came into effect."

I'll just summarise that so you get the full unequivocal picture. Brexit has caused:
  • Increased import prices
  • Increased cost of living
  • Lower real wage growth
  • More outward investment from the UK to the EU
  • Reduced domestic investment
  • Reduced productivity
  • Slowdown in GDP growth
And don't forget these are serious academics who write peer-reviewed papers not given to hyperbole and bluster.   Brexit as we know, is not just the government's flagship policy, it is the raison d'etre of the Tory party and the one they keep pointing to as evidence of competence and good faith. It is their pride and joy. Amazing, eh?

If the UK government is using the HMRC numbers showing a 25% fall in imports without any additional barriers to trade you can see why delaying or abandoning those non-tariff barriers looks attractive. 

In short, we need the EU more than the EU need us.  What a dilemma.

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