5.2 Trade

Section contents

 

  • In 2021, UK trade (exports + imports) was £1.3 trillion with deficit of £29 billion:
    • Exports – £625 billion; imports – £654 billion; trade – £1,280 billion
    • Surplus on services – £127 billion; deficit on goods – £156 billion
    • Deficit with EU – £32 billion; surplus with non-EU – £3 billion 
  • Most EU trade is with other EU27 countries
    • 61% of EU27 exports went to other EU27 countries (2018)
    • Single Market, Customs Union, VAT area and customs cooperation create near-frictionless trade within EU
    • UK accounted for less than 6% of EU27 exports (2018)
  • The new EU-UK trade agreement is inferior to EU membership and creates new trade barriers
    • Brexit trade barriers reduce UK-EU trade volumes and profitability
    • Non-tariff barriers (such as rules of origin) have much bigger impact than tariffs
    • New red tape means extra costs for UK government and business
  • Small percentage drop in EU-related trade will cost UK £ billions. In 2019:
    • 47% of UK trade was with EU (exports £301 billion, imports £372 billion)
    • 66% of UK trade was with EU or countries with EU agreements – rising to 73% with current negotiations
    • 22% of UK trade was with US and China on WTO plus various bilateral EU agreements
  • UK aimed to replace existing EU agreements with 70 countries (accounting for £226.1 billion or 15.9% of trade) before end of transition. At 1 January 2021:
    • 64 of the 70 had been replaced, accounting for £221.2 billion or 15.6% of UK trade
    • 31 were fully ratified and 33 provisionally applied or with bridging arrangements
    • UK had signed Mutual Recognition Agreements with US, Australia and New Zealand
  • UK can negotiate trade deals with other countries but from a weaker position as a solo country

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UK trade


Overview

This section digs into UK trade data:

 

Trade balance

The UK’s trade surplus with non-EU countries has been growing relative to UK GDP since 2010 (see Figure 5.10). The UK’s trade deficit with the EU has been growing since 2011 relative to GDP, apart from a recent decline in 2020.

While the UK has had a trade deficit with the EU since 1999, the non-EU trade balance was roughly zero from 2003 to 2010 and has grown since 2011. The steady growth in non-EU trade up to 2020 demonstrated that EU membership did not stop the UK from growing non-EU trade.

As the section on UK-EU trade shows, the majority of UK trade was (and is) with the EU or non-EU countries that have free trade deals with the EU. This is despite the US and China trading with the EU through a patchwork of bilateral agreements, instead of a free trade deal.

Figure 5.10: UK balance of trade (goods and services) with EU and non-EU countries

Source: House of Commons Library, December 2021

 

Goods and services

In 2021, the UK’s overall trade was £1,280 billion, split 62% goods and 38% services (see Table 5.4). The EU was, by far, the UK’s biggest single trading partner. 43% of UK total trade was with the EU and 57% with the rest of the world.

The dominant role of goods in UK trade contrasts with manufacturing’s share of economic output where it accounts for 10% of GDP and services account for 80%. The UK’s manufacturing sector plays a critical role in overseas trade.

In 2021, a surplus of £127 billion in services trade partially offset a deficit of £156 billion in goods.

  • UK had a trade deficit of £32 billion with the EU and a trade surplus of £3 billion with non-EU countries
  • With the EU, services produced a £37 billion surplus and goods a £69 billion deficit
  • With non-EU countries, services produced an £90 billion surplus and goods an £87 billion deficit

Table 5.4: UK trade in 2021: EU and non-EU; goods and services

Note on trade statistics: the ONS updates and refines its estimates for trade flows, so the latest ONS figures may differ. The data on services trade, which can be difficult to measure, tends to be less certain than the data for goods trade. Alternative estimates for trade are available, such as those of Comtrade at the UN.

 

EU and non-EU export trends

For the trends of UK exports to EU and non-EU countries from 2006 to 2021, please see Figures 5.11 and 5.12:

  • In 2020 Covid-19 led to a sharp declines in exports
    • £50 billion in non-EU exports (from £406 billion to £356 billion)
    • £39 billion in EU exports (from £293 billion to £254 billion)
  • In 2021 there was a partial recovery
  • In 2021, 41.9% of UK exports in goods and services went to the EU, accounting for £262 billion of £625 billion exports.
    • EU share of exports has been flat at just under 42% between 2019-2021
    • Represents a drop of from around 44% in 2017 and 2018
  • Between 2012 and 2015, exports to the EU were relatively flat, while non-EU exports increased.
    • Reflects faster growth of non-EU economies and sustained impact of the 2007/8 financial crisis, which depressed UK and EU economic growth.
  • EU exports accelerated 2015 to 2018 matching growth to non-EU countries
  • EU exports stalled in 2019 while non-EU continued to grow

Figure 5.11: Trends in EU and non-EU exports of goods and services

Figure 5.12: Trends in EU and non-EU imports of goods and services

Sources:
ONS, UK total trade: all countries, non-seasonally adjusted, 28 April 2022
House of Commons Library, Statistics on UK-EU trade, December 2021

 

Gravity

Countries trade the most with their nearest neighbours. As a rule of thumb, the data shows that trade between economies of equal size halves with a doubling of distance.

Trade economists have developed ‘gravity models’ based on the relationship between trade, size of economy and distance to model likely volumes of trade between countries. The UK’s top ten trading partners are all neighbours in Europe except for the US and China (see Table 5.5).

There are trading opportunities for smaller economies with distant, larger economies that can mitigate the effect of distance (like the US and China). History, culture, legal systems and language can also facilitate trade with distant countries (such as between the UK and Australia or Canada).

Hover over the bubbles on the interactive chart at Figure 5.13, which maps UK exports and distance. You will find the UK’s exports are concentrated on nearest neighbours, with the notable exception of the US, because its economy is so much bigger than the UK’s. The ONS chart uses exports of goods and services for 2016.

Some Brexiters criticise gravity models, but trade specialists and academics assert that the predictive powers of gravity models show that they are robust. See, for example, ‘The gravity model’, PwC, 2017.

Figure 5.13: UK exports by distance

 

Top trading partners

Table 5.5 lists the UK’s top twenty trading partners for exports, imports and total trade in goods and services in 2021. The top twenty accounted for 78.4% of exports, 79.2% of imports and 77.4% of total trade.

Scroll down to the interactive tools to interrogate trade data in more detail.

The US (16.8% of total) and Germany (8.5%) are the UK’s largest individual trading partners. China is third overall and is an important source of imports (10.1%), ranking second but smaller in terms of exports, ranking sixth at 4.3%. Apart from the US and China, the only non-EU country in the top ten for overall trade is Switzerland (an EFTA member and member of Schengen).

Table 5.5: UK’s top trading partners

Source: ONS, UK total trade: all countries, non-seasonally adjusted, 28 April 2022

 

Top Commonwealth partners

By contrast, the UK’s trade with the Commonwealth accounts for £119.9 billion or 9.7% of UK trade (see Table 5.6), roughly equivalent to UK trade with Germany. The top five either already have an EU trade agreement in force (South Africa), pending (Canada, Singapore) or being negotiated (Australia and India).

The Commonwealth is a major trading partner of China (as expected, given China’s strong trading relationships with Africa, Asia and Australasia – see Figure 5.4). The Commonwealth Secretariat notes that between 2000 and 2016, China’s total trade with the Commonwealth grew 8.4 times from US$33 billion to $277 billion. Commonwealth trade with the rest of the world increased by only 1.1 times in the same period.

Table 5.6: UK’s top Commonwealth trading partners

Sources:  
Commonwealth Secretariat, Commonwealth Trade Review 2018, February 2018
ONS, UK total trade: all countries, non-seasonally adjusted, 28 April 2022

 

Top goods sectors

Machinery and transport equipment (£276.9 billion) , and chemicals (£114.8 billion) are the two most important export and import sectors for the UK. Imports and exports are often interlinked (e.g. exports often depend on imports of intermediate products).

Over two-thirds of UK goods and services exports are of intermediate components for overseas producers. As the Institute for Fiscal Studies observes, the increasingly interconnected nature of global trade means that a country’s imports and exports cannot be treated as independent quantities. The IFS estimates that over half of goods and services imports from the EU are inputs to the production of goods and services in the UK.

Scroll down to ‘Interactive tools’ to interrogate UK trade data by trade partner and by sector. The tools allow you to drill down into the categories.

Table 5.8 shows selected larger sub-sectors. Those that stand out in machinery and transport equipment are electrical machinery, cars, and power generation. The UK made a trade surplus on mechanical power generators and aircraft.

Table 5.7: UK goods trade by main sector

Table 5.8: UK goods trade by larger sub-sectors

Sources:
Institute of Fiscal Studies, Firms’ supply chains form an important part of UK-EU trade: what does this mean for future trade policy? 8 January 2018
ONS, Trade in goods, country-by-commodity exports, 13 July 2022
ONS, Trade in goods, country-by-commodity imports, 13 July 2022

 

Top services sectors

Unlike goods, several service sectors generate a trade surplus (see Table 5.10). Four sectors stand out as the most important contributors to the UK’s trade surplus in services of £127 billion in 2021: financial services (£45 billion), professional and management consulting services (£33 billion), telecoms, computer and information services (£19 billion), and insurance & pension services (£19 billion), which contributed £116 billion to the trade surplus.

The travel sector usually has the biggest service sector trade deficit (at around £15 billion in 2019) but nether travel nor transport services had recovered in 2021 from the effects of the pandemic. When they do, these deficits should increase. In 2021, the UK’s services trade balance was flattered by fewer Britons travelling abroad than normal.

Scroll down to ‘Interactive tools’ to interrogate UK trade data by trade partner and by sector.

Table 5.10: UK services trade by sector

Source:
ONS, UK trade in services: service type by partner country, non-seasonally adjusted, 28 April 2022

 

Interactive tools


 

Use these ONS interactive tools to understand UK trade in goods and services:

  • Trade in goods 2021
    • By country
    • By commodity
      • Exports
      • Imports
  • Trade in services 2018
    • Exports
    • Imports

 

Trade in goods 2021

Trade in services 2018

UK-EU trade


This section assesses UK-EU trade in depth – the UK’s most valuable trade relationship:

 

Importance of UK trade to EU (and vice versa)

EU27 exports to the UK are material but much less important to EU members, in aggregate, than exports to fellow member states (see Figure 5.14). By contrast, the EU is the UK’s largest export market:

For the EU:

  • Intra-EU exports – 60.6% or €7,273 billion
  • Extra-EU exports – 33.9% or €2,469 billion
  • UK exports – 5.5% or €400 billion

For the UK:

  • Exports to EU27 – 45.5% or €326 billion
  • Exports to non-EU countries – 55.5% or €407 billion

For some EU member states, such as Ireland, the UK is also a very important trade partner (see ‘UK trade with EU by country’ below).

Figure 5.14: Extra-EU, intra-EU and UK exports of goods and services (€ billion – 2018)

 

(Note that if the UK pie in Figure 5.13 was exactly to the same scale as the EU27 pie, it would be smaller.)
Sources:
For statistics on EU trade, both within the EU and with other countries, please see:
Eurostat statistics for trade in goods 
Eurostat statistics for trade in services 

 

UK-EU trade trends

Overall, the UK imports more goods and services from the EU than it exports to the EU. In 2021, just over two-thirds of the UK’s trade with the EU was in goods and just under one third was in services.

Despite its lower trade volume, services trade generated a trade surplus, whereas goods trade generated a larger deficit.

  • Goods (Figure 5.15): exports of £154 billion and imports of £223 billion (trade of £377 billion)
    • Goods trade deficit of £69 billion
  • Services (Figure 5.16): exports of £108 billion and imports of £71 billion (trade of £179 billion)
    • Services trade surplus of £37 billion

The trade deficit in goods remained fairly stable 2016 – 2019 and appears to have peaked at £99 billion in 2019. However, the trade surplus in services peaked in 2021 at £38 billion, flattered by a decline in travel imports due to the pandemic.

Figure 5.15: UK trade with EU – goods 

Figure 5.16: UK trade with EU – services 

Source: ONS, UK total trade: all countries, non-seasonally adjusted, 28 April 2022

 

Import and export linkages

Imports and exports are linked through intermediate products (components, assemblies etc.) in global value chains, which account for a large proportion of international trade.  The World Trade Organisation reported in 2019 that, in 2015, about 57% of trade in goods and services for developed and developing countries related to global value chains, as did over 41% of exports. However, Covid-19 is leading to an emphasis on domestic manufacture and some moves away from global supply chains.

To date, intermediate exports and imports have accounted for an increasing proportion of UK goods trade (see Figure 5.17 from the Institute for Government, who analysed trade trends).

  • Between 2000 and 2011, two-thirds of the growth in UK goods exports came from exporting parts, not finished articles.
  • Nearly a quarter of the value of UK goods exports comes from imports.
    • In the automotive sector, this figure is higher where 44% of its exports’ value is due to imports.
  • EU accounts for 60% of UK exports of intermediate goods.

Brexit puts the UK’s role in integrated supply chains is at risk through additional costs and delays caused by new non-tariff barriers on UK-EU trade. Tariffs may also be an issue due to rules of origin. This risk is not limited to EU trade in integrated supply chains. For example, many exports of UK goods to the US depend on UK imports of intermediate goods from the EU.

In addition, UK specialist manufacturers of intermediate goods for EU supply chains are likely to find it difficult to substitute lost EU trade with trade for non-EU countries.

Figure 5.17: Growth of UK imports and exports of final and intermediate products (2000-2011)

Source: Institute for Government, Frictionless trade? What Brexit means for cross-border trade in goods, August 2017 (based on OECD Trade in Value Added data).

 

UK trade with EU by sector

In 2021, goods accounted for £154 billion or 59% of UK exports to the EU and services £108 billion or 41%. For the industry-sector breakdown for goods and services, and exports and imports, see Figure 5.11.

The top four goods sectors for EU trade were machinery and transport equipment, chemicals, miscellaneous manufactures, and material manufactures, which provided:

  • 75% of EU goods exports
  • 77% of EU goods imports
  • £57 billion of the EU trade deficit of £69 billion. However:
    • EU imports of food and live animals contributed a deficit of £16 billion.
    • EU fuel exports contributed a surplus of £11 billion.

The similarity in goods and import sectors illustrates the integration of supply chains and how complementary local specialisms have developed.

For UK services trade with the EU:

  • 71% of EU services exports came from four top sectors: financial, professional and management consulting, technical and trade-related, and telecommunications, computer and information services.
  • 66% of EU imports came from four top sectors: technical and trade-related, transport, professional and management consulting, and travel.
  • £32 billion of the £37 billion trade surplus came from the top four export sectors.

Note that when UK citizens travel abroad, their overseas expenditure is treated as an import.

Table 5.11: UK trade with the EU by sector (2021)

UK trade with EU by country

Trade with the UK is particularly important for certain EU countries and industries relative to the size of their economies – seen by measuring UK trade as a percentage GDP (Figure 5.18).

  • Ireland because of its geographical proximity and close ties.
  • Smaller economies with historic UK ties like Cyprus and Malta.
  • In larger countries, UK trade is often important for certain sectors and regions. For example, in Germany, UK trade is important for manufacturing in the south west.
  • UK trade with Netherlands and Belgium may be inflated by goods in transit to other EU destinations (the ‘Rotterdam effect’).

Sector concentrations in goods vary by country, for example:

  • German goods exports to the UK are concentrated in road vehicles, other manufactures and chemicals.
  • Belgian and Dutch exports to the UK are concentrated in machinery and transport equipment, and chemicals.
  • Ireland is a notable exporter of food products to the UK, whereas its imports are highly diversified.
  • Malta also has diversified imports from the UK, whereas its exports of goods to the UK are relatively small.

Scroll up to “Interactive tools’ to explore the mix of trade with the UK for individual EU countries.

Figure 5.18: UK trade with the EU by country (as % of GDP – 2015)

Source:
ONS, UK total trade: all countries, non-seasonally adjusted, 28 April 2022
European Commission, An assessment of the economic impact of Brexit in the EU27, March 2017

 

EU deals with non-EU countries

 
Overview

The EU has multiple trade agreements with non-EU countries. These agreements resulted in about 87% of UK goods imports (by value, from all countries) being tariff-free or zero-rated (see Figure 5.19).

As an EU member, the UK benefited from EU preferential trade agreements with 102 non-EU countries (in November 2020, just before the UK signed its Brexit trade agreement with the EU):

  • 74 countries with trade agreements in force including:
    • 21 with Free Trade Agreements (including Canada, Chile, Colombia, Ecuador, Japan, Mexico, Norway, Peru, Singapore, South Korea, Switzerland)
    • 3 with Customs Unions (Turkey, Andorra and San Marino)
    • 14 with Association Agreements
    • 3 in a Deep and Comprehensive Free Trade Area (Georgia, Moldova and Ukraine, which also has an Association Agreement)
    • 33 with Economic Partnership Agreements
  • 25 countries with concluded agreements pending:
    • 5 with FTAs pending (Vietnam and Mercosur – Argentina, Brazil, Paraguay and Uruguay)
    • 20 with EPAs pending
  • 3 with Partnership and Cooperation Agreements (which do not affect tariffs) (Azerbaijan, Kazakhstan, Iraq)

Please see Appendix K for more details of these EU trade agreements.

In addition, there were 5 countries in live negotiations with the EU: 4 for FTAs – Australia, Indonesia, New Zealand, Philippines – and China for an investment partnership. There were a further 24 countries with suspended or paused negotiations including the TTIP with the US and FTAs with India, Malaysia, Thailand and the Gulf Cooperation Council states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).

The EU had been negotiating Trade in Services agreements (TISAs) with 23 WTO members, but the negotiations are currently suspended. The participating countries account for about 70% of world trade in services. Twenty-one negotiating rounds have taken place, but there is no agreed deadline for finishing the negotiations.

UK trade with non-EU Europe

UK trade with non-EU European countries benefited from EU agreements. These included Norway, Iceland and Liechtenstein which are in EFTA and the EEA, and Switzerland in EFTA. Turkey is another important UK trading partner with an agreement based on a Customs Union.

The UK also traded under EU agreements with: Albania, Andorra, Bosnia & Herzegovina, Faroe Islands, Georgia, Kosovo, Moldova, Monaco, Montenegro, San Marino, Serbia and Ukraine.

The Crown Dependencies (Jersey, Guernsey, Isle of Man) and Gibraltar are not part of the United Kingdom nor member states of the EU, but their trade is strongly influenced by agreements with the EU.

  • Crown Dependencies are part of the EU Customs Union and are in the Single Market for trade in goods and agricultural products (including fish), but are third countries in all other respects.
  • Gibraltar is a member of the Single Market.
  • They all often adopt EU law voluntarily.
 
Generalised Scheme of Preferences

In addition, the EU’s Generalised Scheme of Preferences  removed import duties from products from 70 vulnerable developing countries. The aim of GSP is to help developing countries alleviate poverty and create jobs respecting labour and human rights. About a dozen other countries have GSP mechanisms in place. The UK has created its own GSP framework to replicate the EU framework.

The EU’s GSP regime offers:

  • Standard GSP for low and lower-middle income countries. This means a partial or full removal of customs duties on about two-thirds of tariff lines – (14 countries, excluding Vietnam).
  • GSP+: the special incentive arrangement for sustainable development and good governance. It reduces the tariffs on these tariff lines to 0% for vulnerable low and lower-middle income countries that implement 27 international conventions related to human rights, labour rights, protection of the environment and good governance – (8 countries).
  • EBA (Everything but Arms): the special arrangement for least-developed countries, providing them with duty-free, quota-free access for all products except arms and ammunition – (48 countries).

 

UK trade under EU deals

Table 5.12 shows how UK trade in 2019 was linked to EU trade agreements.

  • At least 65.5% of UK trade in 2019 was either with the EU or countries with EU trade agreements (including those provisionally applied and pending).
  • A further 7.5% was with countries that were in live negotiations with the EU for agreements.
    • 1.9% for trade and 5.6% for investment
  • US was the UK”s top individual trade partner, accounting for 16.3% of UK trade but trades with the EU on WTO terms plus various bilateral agreements. Hong Kong trades on a similar basis and accounts for 1.7% of UK trade.
  • The 9% of UK trade that was with 98 other partners, included:
    • Trade with 24 countries that had suspended or paused negotiations with the EU (notably the US, India, Gulf Cooperation Council states, Malaysia and Thailand).
    • UK trade partners which benefited from the EU’s Generalised System of Preferences, granted to 70 countries (see above).

Table 5.12: UK trade partners and EU agreements – 2019 trade for goods and services in £bn

See Appendix H for a list of individual UK trade partners and the types of deal they have with the EU.

Sources:
European Commission, 2019 Report on Implementation of EU Free Trade Agreements 1 January 2018 – 31 December 2018
 
Effective tariff rate on UK imports

As a result of EU trade deals and GSP, 87% of UK goods imports by value were tariff-free (see Figure 5.19, based on detailed statistics from Eurostat). The UK Trade Policy Observatory separately provided a top-down estimate of 82%.

Thirty-two Commonwealth countries were covered by EU agreements with tariff-free access to UK markets (through EBA or GSP). A consequence of Brexit is that the UK can no longer champion Commonwealth access to the EU market.

Figure 5.19: Effective tariff rates on UK goods imports (2017, by value)

Sources:
UK Trade Policy Observatory, What should we make of the UK’s ‘No Deal’ tariffs?, March 2019
Tariff rate analysis is based on Eurostat data for 2017, chart from Eugene Lynch.

Brexit impact


This section describes the Brexit impact on trade:

UK-EU trade deal

The principal impact of Brexit is to raise trade barriers for trade with the EU, the UK’s largest trade partner. The new trading relationship between the UK and EU causes a permanent drag on trade which suppresses economic growth. As a result, the UK is poorer with Brexit than it would have been without it.

The Office for Budget Responsibility has maintained for some time that the impacts will be to:

  • reduce long-run productivity by 4% relative to remaining in the EU (and reduce long-run GDP by the same relative amount);
  • lower exports and imports by around 15% in the long run compared to whether the UK had remained in the EU; and,
  • gain new trade deals with non-EU countries that will have an immaterial and gradual impact. This is principally because the deals replicate (or ‘roll over’) deals that the UK already benefited from as an EU member state, or are new but do not have a material impact on trade or GDP.

Key features of the Trade and Cooperation agreement (TCA):

  • Eliminates tariffs for goods (including agriculture and fisheries).
  • Eliminates quotas for goods (not fisheries).
  • Creates NTBs for goods and services in UK-EU trade.
  • UK is not a member of the EU Customs Union.
  • UK can negotiate trade deals with non-EU countries.
  • A special customs arrangement for Northern Ireland and compliance with EU regulations on agri-food.
  • UK can negotiate to make contributions to participate in EU programmes such as Erasmus or Horizon.

For more details, please go to the section on the TCA.

How did we get here?

Hemmed in by its self-imposed red lines, in February 2020, the UK government said it would be pursuing a Canada-style trade agreement and, if it failed to get one, would adopt WTO terms i.e., ‘no deal’ apart from the provisions of the Withdrawal Agreement. On 30 December 2020, the UK and EU signed a basic FTA – the Trade and Cooperation Agreement – which applied from 1 January 2021. (For the differences between a basic FTA and ‘no deal’ please go to ‘No deal’.)

During the Withdrawal Agreement (WA) negotiations, a Northern Ireland backstop featured prominently to avoid a hard border on the island of Ireland. The final WA places Northern Ireland in the EU Customs Union and simultaneously in a distinct UK customs territory. The WA also commits Northern Ireland to following EU regulations. This creates a border ‘in the Irish Sea’ with checks between Great Britain and Northern Ireland.

The starting point for the negotiations for the UK-EU trade deal was the Political Declaration (PD) attached to the Withdrawal Agreement. The WA itself said nothing about the future UK-EU trading relationship, apart from Norther Ireland and the transition period. The PD set the direction and aspirations for the UK’s future relationship with the EU, but they were not binding.

The PD’s proposals:

  • recognised that frictionless UK-EU trade outside the Single Market and Customs Union is impossible:
  • were less attractive for UK-EU goods trade than the Chequers proposal (see Appendices for details) and introduce additional frictions;
  • provided limited proposals for services trade:
  • left open the extent to which the UK would diverge from EU regulations:
Sources:
Office for Budget Responsibility, Brexit analysis, 26 May 2022
For analysis of the Canada+ option, please see: What’s the Problem with Super Canada?, December 2018.

 

Replacing EU trade deals

EU trade agreements with other countries accounted for about a fifth of UK trade. The government had been rolling over existing EU agreements with 70 countries, accounting for £226 billion or 16% of trade (using 2019 figures). The new agreements are ‘cut and paste’ versions of existing EU agreements with some minor changes. However, Turkey is now an FTA rather than a customs union.

As at 1 January 2021:

  • 64 of 70 had been replaced
    • 31 were fully ratified (trade value: £110 billion)
    • 33 were provisionally applied or subject to bridging arrangements (trade value: £112 billion)
  • 6 to be negotiated and finalised (trade value: £5 billion)
  • The provisionally applied included (* = top 20 partner):
    • Norway* – £26 billion
    • Canada* – £22 billion (partially applied)
    • Turkey* – £18 billion
    • Singapore – £18 billion
    • Vietnam – £6 billion
    • Mexico – £5 billion (partially applied)
  • UK’s trade with many partners is small:
    • Trade in goods for 44 accounts for less than 0.05% of UK exports (i.e. each country’s trade is less than £0.6 billion and shows as 0.0% in government tables – see link for details).
  • UK has also signed MRAs that will replicate some EU bilateral arrangements with the US and Australia (and New Zealand).

For the larger partners, the new agreements may not be as good as the ones they replace, for example:

  • Swiss rollover is partial because of complications over Rules of Origin and Mutual Recognition Agreements (MRAs).
  • Norway relates only to goods, not services.
  • Agreements can be complex for goods imported into the UK from a non-EU country and then exported to the EU. Please see an excellent short explanatory video on the topic from the UK Trade Policy Observatory at Sussex University.

See Appendix H for a list of all individual UK trade partners, which includes for each one the status of roll over of EU agreements as it was at 1 January 2021.

At 1 August 2022 the UK had:

  • finalised agreements with Albania, Ghana and Serbia; and
  • still to finalise agreements with Algeria, Bosnia and Herzegovina, and Montenegro.
Sources:
House of Commons Library, UK progress in rolling over EU trade agreements, December 2019
Department for International Trade, Existing UK trade agreements with non-EU countries, as at 29 June 2020
The UK’s Continuity Trade Agreements: Is the roll-over complete?, UK Trade Policy Observatory, March 2019
Chatham House, Bracing ourselves for Brexit, April 2017

 

Other UK trade deals

The UK has so far signed two agreements – with Australia on 16 December 2021 and New Zealand on 28 February 2022 – which are not rollovers of EU trade agreements. Neither agreement is yet in force. Negotiations continue with India, although they have stalled with the US.

The EU secured its own trade agreement with New Zealand on 30 June 2022 and is negotiating one with Australia.

The UK is progressing its accession to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), but it already has trade agreements with all but two of the 11 current CPTPP members: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The UK has FTAs with all the CPTPP members except Brunei and Malaysia.

The attractiveness of an overseas market depends on many factors such as size of economy, proximity, comparability of legal system, language, culture and, of course, historic ties. Using these factors, the FT analysed 2050 country potential (supported by a specialist trade consultancy, Ciuriak Consulting, and PwC economic forecasts). The FT concluded:

  • EU, US, China, India and Canada are the most attractive markets for the UK today and remain so in 2050.
  • Top five risers, which are expected to be more attractive in 2050, are Russia, Nigeria, Turkey, Pakistan and Malaysia.
  • Top five fallers, which are expected to be less attractive in 2050, are Saudi Arabia, Japan, Australia, Brazil and South Korea.

The UK will succeed in other markets only if it overcomes trade barriers and is competitive.

  • Even as an EU member, the UK was losing market share in India to Germany and France. In China, Germany does 4-5 times the UK’s trade.
  • UK may become less attractive post-Brexit to other partners which may force the UK to make undesirable concessions to secure deals.
Sources:
FT, The post-Brexit trade deals that Britain needs to prioritise, 3 January 2018
Ciuriak, Dan and Siauw-Soegiarto, Fanny and Sun, Sharon Zhengyang, Quantifying the UK’s Post-Brexit Export Potential: A Gravity Model Analysis (April 22, 2017). Available at SSRN.
PwC, The World in 2050, February 2017
EU Exit Analysis, Cross-Whitehall Briefing, January 2018 (published  March 2018)

 

UK Global Tariff

The UK’s new tariff regime, UK Global Tariff’ (UKGT), applied from 1 January 2021 to imports from countries that have no trade deal with the UK.  The US and China are in this category. It provides a baseline for negotiations for FTAs with the US and other countries. Goods imported from developing countries continue to attract no tariffs, because the UK has replicated the EU’s Generalised Scheme of Preferences.

Applied tariffs are generally lower than the bound tariffs but cannot exceed them. However, the UK may raise its applied tariffs at short notice up to the bound level. The applied tariff tariff is also called the MFN tariff.

The UKGT is broadly similar to the EU’s Common External Tariff (CET) but with some differences:

  • UKGT is simpler than the CET
  • UKGT tariffs are slightly lower than CET, which creates complications:
    • For Rules of Origin (RoO) monitoring and reporting. The government ignored this issue in its response to the consultation;
    • For Northern Ireland into the Republic, it is more likely that more goods will be deemed ‘at risk’;
    • Increases the need for border / customs controls, and will have an impact on Northern Ireland.
  • Average UKGT MFN tariff is slightly lower than the CET average (5.7% vs 7.2% per tariff line or 1.5% vs 2.1% by weighted value)
  • UK bound tariff is more liberal than the CET (60% by value are tariff free, compared to 50%).
Sources:
UK Trade Policy Observatory, Recommendations on the UK Government’s Global Tariff proposals, Briefing Paper 39, March 2020
UK Trade Policy Observatory, New tariff on the block: What is in the UK’s Global Tariff?, May 2020
UK Trade Policy Observatory, The UK’s ‘No Deal’ Tariffs: An Update, October 2019

 

Likelihood of US-UK trade deal

The US is the UK’s main trading partner outside the EU. However a trade deal with the US seems unlikely and the economic benefits to the UK small. In May 2018, an authoritative study published in association with Harvard Business School explained why. Table 5.13, reproduced from the study, summarises the principal issues. The study concluded:

“We discuss the key potential upsides, possible risks and principal negotiating issues from both US and UK perspectives. We conclude that it is highly unlikely that a free trade deal between the US and the UK will be secured in the near term and that the likely potential benefits for British businesses are less than often suggested.”

Four years later in 2022, the prospects of a UK-US trade deal have faded even further because of unresolved issues around the Northern Ireland Protocol, which is a major concern in Congress (which approves all US trade deals).

Table 5.13: Issues determining the prospects and benefits of UK-US FTA

Source:
On the Rebound: Prospects for a US-UK Free Trade Agreement, Peter Sands, Ed Balls, Mehek Sethi, Eleanor Hallam, Sebastian Leape, Nyasha Weinberg, May 2018

 

Leaving EU VAT area

VAT accounts for 18% of UK tax receipts – the third largest source of tax revenue after income tax (25%) and national insurance (19%). So, any press reports that VAT could be abolished with Brexit were fanciful. The government said that it aimed to minimise changes to VAT processes after Brexit.

VAT chargeable at the border

A big change after Brexit is how VAT is charged on trade with EU member states. A UK importer has to pay import VAT at the border. This means payments occur earlier leading to potential cash flow consequences.

British companies trading across the EU in services need to become VAT-registered in each member state where they operate.

Import declarations

British importers have to make import declarations for the first time – a change that affects around 130,000 businesses. The European Commission warned of other potential complications for those engaging in cross-border trade. For example, the need to employ a VAT representative in the country to which exporters are sending goods.

Border infrastructure

Brexit  has required new infrastructure to impose VAT at the UK border, including with Ireland. New controls check packages coming into the UK from the EU (in the same way that packages from non-EU countries are inspected). The alternative would be to accept a loss of control of VAT revenue and an increase in fraud.

Some UK officials said that infrastructure can be avoided if the EU lets the UK remain in the current information exchange system. The system ensures governments know which goods have crossed EU frontiers. UK officials are seeking this access without being subject to European courts or common VAT rules. They argue that if the UK aligns its product standards with the EU, information sharing is only a small extra step to keep the cross-border trade flowing freely.

Damage to small businesses

British businesses feared that leaving the EU VAT area would damage EU-UK trade.  If the UK left the EU VAT regime with no other agreement in place, companies could suddenly be required to pay VAT upfront on goods imported from the EU (and vice versa). For around 130,000 British companies, mostly small and medium-sized enterprises, it would be their first time to pay upfront import VAT.

This creates both cash-flow and time burdens, which are particularly costly for small businesses. HMRC needs increased staff and resources. Goods need to be held at the border until VAT is paid. This is also inconveniences consumers buying products from the EU over internet marketplaces.

Sources:
What Brexit means for VAT, Prospect Magazine, April 2018
VAT: Brexit’s hidden border dilemma, Chris Giles, Financial Times, 30 May 2018

 

Trade infrastructure

Government

The UK’s Department of International Trade (DIT) has been building a team with specialist skills to negotiate trade agreements, and has logged some successes such as rolling over the Japan-EU FTA. However, it has focused on replacing existing agreements rather than negotiating new ones.

Resources are also needed to monitor and maintain agreements. To indicate the scale of resources needed, as of 1 October 2017 DG Trade at the European Commission had 697 staff members (many with deep trade experience). This department not only negotiates but also maintains and monitors trade deals for the EU.  (Source: DG Trade and Europe Direct, October 2017). Coincidentally, the Secretariat at the WTO comprises about 650 staff.

The DIT faces a challenge in building up expertise given the large volume of trade and other agreements to be negotiated, many simultaneously. The DIT’s annual report for 2019-20 notes:

  • In March 2020, the DIT had 4,300 staff in total (covering a wide range of activities in the UK and overseas, such as Trade Remedies).
    •  
  • Average staff comprised just under 2,000 permanent UK-based civil servants for 2019-20.
  • DIT Trade Agreements Continuity Programme had concluded and signed trade agreements with 48 countries.

HMRC is responsible for collecting tariffs, duties and VAT on imports to the UK. Brexit requires additional resources, systems changes and increases in processing capacity. For details on preparation and readiness, please see the section on ‘No deal/end of transition’.

Source: Department of International Trade, Annual Report and Accounts 2019-20, published July 2020

 

Private sector

The UK needs to design and implement new public and private sector infrastructure to maintain and monitor compliance with trade agreements. This includes new customs checks at UK borders with the EU and extensive certification of the origin of goods. Go to  No deal//end of transition for details on UK readiness for 1 January 2021.

UK-based businesses will need to create their own trade infrastructure. This involves recruiting trade specialists and building new capabilities to deal with the complexities of trade outside membership of the EU.

While the UK was a member of the EU, UK-based small and medium-sized businesses (SMEs) benefited from the administrative ease of operating cross-border in the EU. An exporter (for goods or services) needed very little documentation to export from one EU country to another. However it is quite a different story for third countries – as it will be for the UK, after Brexit.

Brexit is likely to be a serious burden for many SME exporters as they do not have, and many probably cannot afford, the expertise to deal with the new administrative burden of import duties; transit documentation; additional VAT considerations etc. They will also face the problem that EU-based business customers and suppliers will find UK SMEs less attractive to deal with than they are now.

The government has not helped by being slow to reach an agreement with the EU, to implement its own system changes and provide details of new rules to the private sector.

Post-Brexit trade trends

By the end of 2021, global goods trade had largely recovered from the effects of the pandemic in 2020.

  • UK goods exports are growing in 2022 in current USD prices, but lagging those of their peers (see Figure 5.14):
    • Q1 2022, UK was 6% below 2018 levels (pre-pandemic and pre-Brexit), China was +44%; EU 27 was +16% and G7 (including UK) was +7%
    • UK export growth seems to stall and flatten after the end of the transition period
  • Adjusted for inflation (Figure 5.15), neither UK goods nor services exports had reached pre-pandemic levels by Q1 2022

CEF has produced a useful paper that looks at export trends in more detail. UK goods exports reached a record monthly level at current market prices in May 2022 but this masked underperformance compared to peers and in real prices.

Note that 2018 is used as the reference year as recommended by ONS. In 2019, UK trade figures were affected by fears of ‘no deal’ and, in 2020, the pandemic caused major disruption in the first six months.

Figure 5.14: UK goods exports at current prices (USD)

Figure 5.15: UK goods and services exports adjusted for inflation (GBP)

Source:
OECD International trade statistics for Figure 5.14
ONS, Quarterly National Accounts, Q1 2022 for Figure 5.15
Conservative European Forum, Global Britain in focus: the UK’s export performance, 22 July 2022
Last updated on 6th August 2022 by Richard Barfield