UK imports and exports will suffer from Brexit isolation

Cars are loaded on a train in the UK for export to mainland Europe. [BasPhoto/Shutterstock]

The United Kingdom is a net importer of goods, both from the EU and the rest of the world. While post-Brexit Britain will remain an important export market for the EU-27, its isolation in Europe and loss of preferential access to the bloc’s trading partners could have dramatic consequences.

In the first quarter of 2017 alone, Britain’s goods trade deficit with the EU fell just short of £25.3bn (€28.6bn). EU countries exported £65.6bn (€74.3bn) of goods to the UK, while the UK exported £40.3bn (€45.6bn) to the EU, according to official data compiled for by ReportLinker.

More than half (around 53%) of all the UK’s imports come from other EU countries.

The British government hopes its position as a major export market will weigh in their favour when negotiating post-Brexit access to EU markets. But many experts believe the opposite is true.

“The UK is a good market for EU exports, but it is only 10-15% of their total exports,” said Rodrik Abbot, a senior advisor on trade policy at the European Centre for Political Economy (ECIPE). “These can more easily be replaced by exports to other countries.”

UK/EU trade balance in goods. [ReportLinker]

Germany is the EU’s biggest net exporter to the UK, which absorbs more than 7% of all German exports. Vehicles, machinery and electronic equipment are the highest-value German products sold on the UK market.

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A powerful association of German manufacturing industries, the VDMA, has called for “fair” discussions over Britain’s departure from the EU but warned there should be “no unilateral concessions” in favour of the UK, saying the EU single market was more important to them.

Spain comes in second place. Again, vehicles and machinery are the highest-value exports to the UK market, followed by fruits, electronic equipment and vegetables.

If trade tariffs are imposed or standards diverge after the UK leaves the EU, British consumers are likely to be hit by higher prices for a wide range of products from fruits and vegetables to electronics and cars.

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As net contributors to the EU budget, the UK’s Brexiteers had hoped they would be better off after leaving the bloc. But the evidence suggests Britain stands to lose more through reduced market access than it could hope to claw back from Brussels.

Hurting British exports

The automobiles and machinery sectors are also vital Britain’s export economy, and tariffs and regulatory barriers would be particularly harmful here.

“The UK is intertwined with the EU market because of its supply chains in which commodities and goods cross UK and EU borders multiple times,” said Erik van der Marel and Philipp Lamprecht, senior economists at ECIPE.

Car parts manufactured in the UK, for example, can be sent for assembly in France before being used in cars built in Germany. According to the European Association of Automotive Suppliers, it is not uncommon for a single car part to cross 15 borders before it is built into a vehicle.

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“When increasing tariffs or putting in place diverging standards, these commodities and goods will become less efficient, rendering the UK economy less effective,” the economists added.

44% of UK exports currently go to the EU market but the total value of exports to the bloc is almost certain to fall. Abbot even hinted that loss of single market access for the UK after Brexit could wipe out 30-50% of goods exports to the EU. The effect on services may be even more severe, he added.

Global Britain?

At £11.6bn (€13.1bn) for the first three months of 2017, the UK’s trade deficit in goods with the rest of the world is smaller but still significant. During this period Britain imported £53.8bn (€61.1bn) of goods from non-EU trading partners and exported £42.2bn (€47.9bn) outside the EU.

UK/non-EU trade balance in goods.

Electronics from China, precious metals from Switzerland and fossil fuels from Norway are among the most valuable imports, while vehicles, machinery and pharmaceuticals are among the UK’s most important extra-EU exports.

As an EU member state, the UK currently benefits from preferential trade access to more than 50 countries, including Korea, Colombia, South Africa, Switzerland and the non-EU countries of the European Economic Area. Together with the EU itself, these markets account for one-third of global value.

If the bloc’s planned free trade agreements with the US and Japan come to fruition, EU countries will have preferential access to two-thirds of global markets by value.

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“There is no way the UK will keep the benefits of those deals” once it leaves the EU, said Abbot. “Britain’s exports to those countries will face a loss of preference while their main competitors in Europe will keep the benefits.”

The British government hopes to rectify this by striking replacement trade deals quickly. But many experts doubt the UK’s future deals will offer the same advantages as those negotiated by the EU. “Their market is much smaller than the EU’s and that counts in negotiations,” said van der Marel and Lamprecht.

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UK economic growth will slow sharply next year before Britain leaves the EU in 2019 without a trade deal, according to the Organisation for Economic Cooperation and Development.

Undermining inward investment and jobs

Britain’s trade deficit in goods is sustainable as long as trade barriers remain low and world trade is healthy. But the loss of European single market access would affect global value chains as goods passing through the UK run up against trade barriers on their way to and from the EU.

Experts predict that Britain’s attractiveness as an investment destination would likely fall as a result of losses to the UK’s export market, with knock-on consequences for jobs.

The UK is currently the world’s third-largest recipient of Foreign Direct Investment (FDI), after the US and China, receiving more than £1tr (€114tr) of inward investment in 2014. According to the UK parliament, FDI directly supports around 30,000 jobs in Britain.

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