5.2 Trade

Section contents

 

  • In 2019, UK trade was £1.4 trillion with deficit of £24 billion:
    • Exports £700 billion; imports £724 billion; trade £1,425 billion
    • Surplus on services – £105 billion; deficit on goods – £129 billion
    • Deficit with EU27 of £72 billion; surplus with non-EU of £48 billion 
    • 87% of UK goods imports had no tariff because of EU membership
  • Most EU trade is with other EU27 countries
    • 61% of EU27 exports go to other EU27 countries
    • Single Market, Customs Union, VAT area and customs cooperation create near-frictionless trade within EU
    • UK accounts for less than 6% of EU27 exports
  • 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
    • Impact of tariffs on goods trade should be small
    • Non-tariff barriers (such as rules of origin) have much bigger impact than tariffs
    • New infrastructure will take time to implement – extra trade admin and costs for 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 will negotiate trade deals with other countries but:
    • UK negotiating position is weaker as a solo country
    • UK needs to replace about 1,000 other EU agreements with third countries (i.e. not just trade)

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UK trade


Overview

This section analyses UK trade in several ways:

  • Trade balance
  • Goods and services
  • EU and non-EU export trends
  • Gravity
  • Top trading partners
  • Top Commonwealth partners

 

Trade balance

The UK’s trade surplus with non-EU countries has been growing as a percentage of UK GDP since 2010 (see Figure 5.8). The UK’s trade deficit with the EU as a percent of GDP has been growing since 2011, apart from a recent slight decline. There has been a trade deficit with the EU in every year since 1999. By contrast, the UK has had a surplus with non-EU countries since 2011.

The growth in non-EU trade demonstrates that EU membership has not constrained the UK. As we see in the section on UK-EU trade, the majority of UK trade is with the EU or non-EU countries with free trade deals with the EU. The US and China are the two main exceptions which trade with the EU on WTO terms plus several bilateral agreements.

Figure 5.8: UK balance of trade (goods and services) with EU and non-EU countries

Source: House of Commons Library, July 2020

Goods and services

The EU is, by far, the UK’s biggest single trading partner. In 2019, the UK’s overall trade was £1,425 billion, split 61% goods and 39% services (see Table 5.2). 47% of UK total trade was with the EU and 53% with the rest of the world.

The dominant role of goods in UK trade contrasts with its role in the economy where manufacturing accounts for 10% of GDP and services for 80%. Although the manufacturing sector is a relatively small part of the UK economy, it plays a much bigger role in overseas trade.

In 2019, a surplus of £105 billion in services trade partially offset a deficit of £129 billion on goods.

  • UK had a trade deficit of £72 billion with the EU27 and a trade surplus of £48 billion with non-EU countries
  • With the EU27, services produced a £24 billion surplus and goods a £95 billion deficit
  • With non-EU countries, services produced an £82 billion surplus and goods a £34 billion deficit

Table 5.4: UK trade in 2019: 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 for 2019 may differ from these. This is also why there may be differences between the latest figures and those reported by the House of Commons Library at a particular point in time. The data on services trade, which can be difficult to measure, tends to be less certain than the data for goods trade. In addition, as ONS points out, alternative estimates for trade are available, such as 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 2019, please see Figures 5.9 and 5.10:

  • Non-EU countries include European countries such as Norway, Switzerland and Turkey, the UK Overseas Territory of Gibraltar and the Crown Dependencies.
  • Growth in UK exports to non-EU countries benefited from a growing number of trade agreements with the EU (such as South Korea and Canada).
  • In 2019, 42.9% of UK exports in goods and services went to the EU27, accounting for £301 billion of £701 billion total exports.
  • Over the period 2006-2016, EU27 share of UK exports declined gradually from a high point of 53.9% in 2006 to a low point of 42.4% in 2015.
    • The trend reversed in 2017 and 2018 with the proportion increasing to 45.2% by 2018, before dropping to 42.9% in 2019.
  • Exports to the EU27 were relatively flat between 2012 and 2015, while UK exports to other countries increased more quickly.
    • Reflects faster growth, relative to the EU, of non-EU economies and the sustained impact of the 2007/8 financial crisis, which depressed EU economic growth.
  • Between 2006 and 2015, exports to non-EU countries grew faster than exports to the EU.
    • From 2015 to 2018, EU exports grew faster.
    • In 2019, non-EU exports accelerated.

 

Sources:
ONS, UK total trade: all countries, non-seasonally adjusted, 23 July 2020
House of Commons Library, Statistics on UK-EU trade, July 2020

 

Gravity

Trade analysts and 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 neighbours in Europe except for the US and China (see Table 5.5 below).

Countries trade the most with their nearest neighbours. As a rule of thumb, trade between economies of equal size halves with a doubling of distance (see the dynamic chart of UK exports below). There are trading opportunities for smaller economies (like the UK) 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 UK trade with distant countries (like Australia).

Hover over the bubbles on the interactive chart from ONS at Figure 5.11, which maps UK exports and distance. It shows a concentration of exports with the UK’s nearest neighbours, with the notable exception of the US, principally because its economy is much bigger than the UK economy. The chart uses a set of ONS figures for exports of goods and services for 2016.

Some Brexiters have criticised gravity models, but trade specialists and academics point out that the models’ strong predictive power (the true test of any model) shows that they are robust. See, for example, ‘The gravity model’, PwC, 2017.

Figure 5.11: UK exports by distance (hover for export value)

Top trading partners

Table 5.5 lists the UK’s top twenty trading partners based on exports, imports and total trade in goods and services with individual countries in 2019. The top twenty in each category accounted for 78.1% of exports, 78.7% of imports and 78.4% of total trade.

See Appendix H for trade statistics for all individual trade partners or scroll down to the interactive tools to interrogate trade data.

The US (16.3%) and Germany (9.6%) are the UK’s larger individual trading partners, accounting together for 25.9% of total trade. China is an important source of imports (6.8%), ranking fourth but smaller in terms of exports, ranking sixth at 4.4%. 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).

 

Top Commonwealth partners

By contrast, the UK’s top ten trading partners with the Commonwealth account for £113.6 billion or 8.0% of UK trade (see Table 5.6). The top five either already have an EU trade agreement in force (South Africa), pending (Canada and 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 5.3). 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.

Sources:  
Commonwealth Secretariat, Commonwealth Trade Review 2018, February 2018
ONS, UK total trade: all countries, non-seasonally adjusted, 23 July 2020

 

 

Top goods sectors

For goods, more than half of UK exports and trade relates to finished manufactured goods (see Table 5.7). Food, oil, and semi-manufactured goods are all key components. All these categories have a net trade deficit and contribute to the overall goods deficit, which was £131 billion in 2019.

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

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.

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, Pink Book 2020, Chapter 2, 30 October 2020
Department for International Trade, Trade and Investment Core Statistics Book, 19 August 2020

 

Top services sectors

Goods and services depend on each other. For example, restaurants, hotels and supermarkets, depend on food manufacturing. The income gained by manufacturers and in servicing advanced products like aircraft and medical diagnostic machinery is often about half the total value of a contract.

Service sectors are also interlinked, for example financial services and professional services depend on each other. Technology services are pervasive in all sectors of the economy.

For services, many sectors generate a trade surplus (see Table 5.8). Three sectors stand out as the most important contributors to the UK’s trade surplus in services of £100 billion in 2019: financial services (£41 billion), professional and management consulting services (£24 billion) and, insurance & pension services (£17 billion), which together add up to r £72 billion of the services trade surplus.

The travel sector has the biggest service sector trade deficit at £15 billion.

Scroll down to ‘Interactive tools’ to interrogate UK trade data by trade partner and by sector. The latest available services data in this format is for 2018.

Note: There are differences between the Pink Book ONS figures for services trade published in October (in figure 5.8) and those published in July (in figure 5.2), which reported exports of £328 billion and imports of £222 billion, trade of £550 billion and a balance of £105 billion).

Source:
ONS, Pink Book 2020, Chapter 3, 30 October 2020

 

Interactive tools


 

Use these ONS interactive tools to understand UK trade in goods and services. Most figures are for 2019 apart from the detail on services, for which the latest interactive data is 2018.

  • Use the maps to get a better understanding of what goods or services the UK traded with a particular country.
  • Select a country by hovering over it or using the drop-down menu.
  • Scroll down to select a commodity or service type from the drop-down menus for goods and services exports/imports
  • Click through the levels to explore the data.

The ONS tools below cover:

  • Trade balances 2019
  • Trade in goods 2019
    • Goods exports 2019
    • Goods imports 2019
  • Trade in services 2018
    • Services exports 2018
    • Services imports 2018

 

Trade balances 2019

Trade in goods 2019

Trade in services 2018

UK-EU trade


This sub-section looks at UK-EU trade from various angles:

  • Importance of UK trade to EU (and vice versa)
  • UK-EU trade trend
    • Import and export linkages
  • Exports to EU by sector
    • Trade with EU countries
    • Top EU trading partners
  • EU deals with non-EU countries
    • Overview
    • Generalised System of Preferences
    • Effective tariff rate on UK imports
  • UK trade and EU trade deals
    • UK trade with non-EU Europe

 

Importance of UK trade to EU (and vice versa)

EU27 exports to the UK are material for the EU27 but much less important than exports to other member states. See Figure 5.13 for 2018 exports of goods and services.

  • Excluding the UK, intra-EU exports accounted for 60.6% of EU27 total exports of €7,273 billion.
  • UK imported €400 billion from the EU27, which was only 5.5% of EU27 total exports.
  • UK exports to EU27 countries were €326 billion or 45.5% of UK exports.
  • UK’s exports were €733 billion, one tenth the size of the EU27’s exports.

(Note that if the UK pie in Figure 5.13 was exactly to the same scale as the EU27 pie, it would be a bit smaller.)

 

Source: Eurostat

 

UK-EU trade trends

Overall, the UK imports more goods and services from the EU than it exports to the EU. In 2019, just under two-thirds of the UK’s trade with the EU was in goods and just over one third was in services. The UK:

  • Exported £170 billion in goods and £131 billion in services (trade of £436 billion in goods)
  • Imported £265 billion in goods and £107 billion in services (trade of £238 billion in services)
  • Created a trade deficit in goods of £95 billion and a surplus in services of £24 billion

The trade deficit in goods appears to have peaked at £96 billion in 2016 and has remained stable 2017-2019. However, the trade surplus in services peaked in 2017 at £30 billion and has gradually declined since then to £24 billion in 2019.

Figure 5.14: UK trade with EU – goods and services (2010 to 2019, €billion)

Sources:
ONS, UK total trade: all countries, non-seasonally adjusted, 23 July 2020
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 

 

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. The Institute for Government reported on trade between 2003 and 2016.

  • While the EU accounts for less than half of the UK’s total exports, it accounts for 60% of UK exports of intermediate goods.
  • Between 2000 and 2011, two-thirds of the growth in UK goods exports came from exporting parts, not finished articles (see Figure 5.15).
  • Nearly a quarter of the value of UK exports comes from imports. In the automotive sector, this figure is much higher where 44% of its exports’ value is due to imports.

The UK’s role in integrated supply chains will be at risk when Brexit introduces additional costs through non-tariff barriers on UK-EU trade and, potentially, new tariffs. This risk is not limited to EU trade. 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 will find it difficult to substitute lost EU trade with trade for non-EU countries.

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).

 

Exports to EU by sector

Goods account for 52% of UK exports to the EU and services 48%. For the industry-sector breakdown see Figures 5.15a and 5.15b. The charts provide a roll call of the sectors most at risk because of Brexit. Finished cars make up 13% of UK goods exports to the EU. While major firms like Nissan grab the headlines, they support jobs in the supply chain, often in small firms. Nissan estimates that its 6,000 workers support 70,000 in its supply chain.

Small businesses play an important role in but are often poorly equipped to handle the stringent demands of the customs processes that Brexit brings. There are over 140,000 smaller firms which export and employ over 2 million people (HMRC). They account for about 30% of goods exports.

Figure 15a: UK goods exports to the EU (2019)

Figure 15b: UK services exports to the EU (2019)

Trade with EU countries

Trade with the UK is particularly important for certain EU countries and industries. For countries, this can be seen by measuring UK trade as a percentage of member state GDP – see Figure 5.16. Points to note include:

  • UK trade is important for Ireland and for smaller countries with historic UK ties like Cyprus and Malta.
  • In larger countries, UK trade may be important for certain sectors and regions. For example, although Germany ranks 8th, UK trade is important for manufacturing in south-western Germany.
  • The larger EU economies have greater diversity and resilience to absorb the potential trade shock of Brexit.
  • UK trade with Netherlands and Belgium may be inflated by goods in transit to other EU destinations.

The European Commission addresses sectors in its assessment of the economic impact of Brexit on the EU (using 2015 data). The EU27’s goods exports to the UK are diversified, with these leading sectors:

  • Machinery and transport equipment (€127 billion), of which road vehicles (€59 billion)
  • Other manufactured goods (€70 billion), chemicals (€51 billion)
  • Food products (€32 billion)
  • Mineral fuels (€11 billion)

Interestingly, the UK’s split of it goods exports to the EU is similar. This illustrates the integration of supply chains and how complementary member state specialisms have developed.

Sector concentrations 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 interrogate the mix of trade with the UK for individual EU countries.

Source: European Commission, An assessment of the economic impact of Brexit in the EU27, March 2017

 

Top EU trading partners

Drilling down to the partner level, the UK’s top 20 trading partners account for 78% of UK trade (see Table 5.5, reproduced here for convenience). Although the US is the largest individual country accounting for 16.3% of trade, the EU is critical. Fourteen of the UK’s top 20 trading partners are either in the EU (9) or have EU preferential trade agreements (5). These 14 account for 50% of UK trade.

EU deals with non-EU countries

Overview

The UK’s membership of the EU has facilitated UK trade with non-EU countries that have preferential trade agreements. The effects of EU membership, trade agreements and the EU’s Generalised Scheme of Preferences (see below) result in about 87% of UK goods imports (by value) being tariff-free or zero-rated (see Figure 5.17).

In early November 2020, the EU had preferential trade agreements with 100 non-EU countries, as follows:

  • 72 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
    • 31 with Economic Partnership Agreements
    • 3 in a Deep and Comprehensive Free Trade Area (Georgia, Moldova and Ukraine, which also has an Association Agreement)
  • 3 with Partnership and Cooperation Agreements (which do not affect tariffs)
  • 25 countries with concluded agreements pending:
    • 5 with FTAs pending: Vietnam and Mercosur (Argentina, Brazil, Paraguay and Uruguay
    • 20 with EPAs pending

Please see Appendix K for details of EU trade agreements and those for which the UK has negotiated replacements.

Also, there are 5 countries in live negotiations with the EU: 4 for FTAs – Australia, Indonesia, New Zealand, Philippines – and China for an investment partnership. There are 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).

Generalised Scheme of Preferences

In addition to the deals discussed above, the EU’s Generalised Scheme of Preferences  removes import duties from products coming into the EU market from vulnerable developing countries. This helps developing countries to alleviate poverty and create jobs based on international values and principles, including labour and human rights. About a dozen other countries have GSP mechanisms in place (now, including the UK). The UK has created its own GSP framework to replicate the EU framework, which is good news for developing countries that export to the UK.

The EU’s GSP regime benefits 70 countries and 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).
Effective tariff rate on UK imports

As a result of EU trade deals and GSP, 87% of UK goods imports by value are tariff-free (see Figure 5.17, based on detailed statistics from Eurostat). (The UK Trade Policy Observatory separately provided a top-down estimate of 82%.)

Incidentally, 32 Commonwealth countries are covered by EU agreements or have tariff-free access to UK markets (through EBA or GSP). As a result of Brexit, the UK risks having worse trading terms with these Commonwealth countries than the EU does. An inevitable consequence of Brexit is that the UK will no longer be able to champion Commonwealth access to the EU market.

 

Source: 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.

 

UK trade and EU deals

Table 5.9 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 that have EU trade agreements (including those provisionally applied and pending).
  • A further 7.5% was with countries that are in live negotiations with the EU for agreements.
    • 1.9% for trade and 5.6% for investment
  • US is the top individual UK 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 is with 98 other partners, includes:
    • Trade with 24 countries that have 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 below).

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.

Table 5.9: 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
Trade with non-EU Europe

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

The UK also trades under EU agreements with these European countries: 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. The

  • Accounted for £14.9 billion of trade with the UK in 2019.
  • 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.

 

Brexit impact


Overview

This section describes the Brexit impact under five headings:

All Brexit trade options are damaging for UK-EU trade because they raise new trade barriers. The barriers cause 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 WTO option would have raised the highest barriers and the EEA option the lowest.

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. WTO in this context meant ‘no deal’ apart from the provisions of the Withdrawal Agreement. Since then, the UK and the EU have agreed a basic FTA. For the important differences between a basic FTA and ‘no deal’ please go to ‘No deal’.

During the negotiation of the Withdrawal Agreement, a Northern Ireland backstop featured prominently. It was necessary to prevent a future hard border on the island of Ireland. The final Withdrawal Agreement avoids a hard border by placing Northern Ireland permanently in the EU Customs Union and simultaneously in a distinct UK customs territory. The WA also commits Northern Ireland to following EU regulations. This avoids a hard border on the island of Ireland, but creates a border ‘in the Irish Sea’ with checks between Great Britain and Northern Ireland.

Political Declaration

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

The PD’s proposals:

  • recognise that frictionless UK-EU trade outside the Single Market and Customs Union is impossible:
    • EU is likely to restrict the operation of UK service providers (such as law firms and banks) in the EU.
    • some non-tariff trade barriers will apply to goods.
  • are less attractive for UK-EU goods trade than the Chequers proposal (see Appendices for details) and introduce additional frictions;
  • provide limited proposals for services trade:
    • weaker than Single Market membership. For example, the PD proposes replacing freedom for UK nationals (such as consultants and musicians) to travel to the EU to supply services with a vague provision for “temporary entry and stay” in “defined areas”.
  • leave open the extent to which the UK will diverge from EU regulations:
    • the rules for future UK-EU trade in goods will only be “as close as possible”;
    • the greater the regulatory divergence is, the greater the trade frictions and associated cost will be.

Go to ‘What happens next? for details on the the current negotiations.

UK-EU trade options

Red lines

The UK government’s self-imposed ‘red lines’ restricted the UK’s future trading relationship with the EU. The red lines, which the May government defined after the referendum, were to leave the Single Market, the Customs Union, jurisdiction of the ECJ, and end freedom of movement of people. The red lines were incompatible with invisible borders in Ireland and between GB and Northern Ireland. Hence the difficulty in finding a solution.

Within the red lines, there are only two Brexit trade options: an FTA (like Canada or South Korea) or ‘no deal’ (WTO terms) – see Figure 5.18. The EEA option would have required the government to relax its red lines.

The European Commission created Figure 5.18 to show how the red lines close down options.

Source: European Commission to EU27, published 19 December 2017

 

Post-Brexit options

Three options provide the reference points for the post-Brexit UK-EU trade relationship.  All three are outside the EU Customs Union:

  • Basic WTO terms – the UK trades solely under Most-Favoured-Nation (MFN) terms at the end of the transition period (1 January 2021).
  • FTA – the Canada option – relevant starting points are the Canadian and South Korean agreements which focus mainly on goods trade.
  • EEA-EFTA – the Norway option – offers Single Market membership and the benefit of the four freedoms.
    • Covers services and most goods (the main exclusions being agriculture and fisheries).
    • UK accepts EU regulations (and can give limited input with free movement of people, capital, goods and services.

Under all three options:

  • To avoid a hard border in Ireland there needs to be 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 in-depth analysis of Canada+ please see: What’s the Problem with Super Canada?, December 2018.

Trade impacts

The main trade impacts are:

  • WTO option (‘no deal’) raises the highest trade barriers (tariffs, customs and regulatory barriers) and damages trade the most.
    • UK exports to the EU would be subject to the EU’s schedule of WTO tariffs for third countries.
    • UK would have to apply tariffs (of its choosing) and other measures to imports from the EU and other countries.
      • UK would need to apply consistent tariffs to given types of imports no matter where they come from, including the EU.
      • If UK offers a lower customs duty to one country, it must offer the same to all other WTO members (the ‘MFN’ principle).
    • WTO rules on state aid make it difficult for UK to give financial support to boost exports by sectors or regions harmed by Brexit.
    • WTO rules do not permit sector-specific or country-specific agreements. For example, there could be no UK deals just for Nissan or for German cars (or components).
    • UK would be able to negotiate trade deals with non-EU countries.
  • FTA option is a step up from basic WTO terms rather than a step down from Single Market membership. An EU-UK FTA:
    • Eliminates tariffs for goods (assuming it extends to agriculture and fisheries).
    • Partially reduces NTBs for goods.
    • Partially reduces NTBs for some services sectors.
    • Allows UK to negotiate trade deals with non-EU countries.
  • EEA option enables the UK to stay in the Single Market but leave the EU Customs Union.
    • Minimises many frictions in goods and services trade between the UK and the EU)
    • Leaving the CU damages trade in goods, particularly in relation to integrated supply chains (e.g. in agri-food, automotive and pharmaceuticals). There is a knock-on effect to services trade associated with goods trade.
    • Single Market membership requires adoption of the four freedoms of movement (capital, goods, services, people).

Economic impact

The government analysed the economic impacts of the three principal Brexit trade options in terms of trade barriers, regulation and migration. For full details, please see impact assessment.

They found that the benefit of UK trade deals would be small compared to the loss of EU benefits.

  • A trade deal with the US would benefit GDP by about 0.2% in the long term.
  • Trade deals with countries and blocs, such as China, India, Australia, the Gulf states and Southeast Asia could add, in total, a further 0.1- 0.4% to GDP.
  • All this would be worth much less than the losses from UK-EU trade barriers (loss of c.5.0% of GDP for a basic FTA).

Even when the UK gets an FTA with a country that does not have an EU FTA, the UK’s advantage could be short-lived. The size of the Single Market means that the EU should be able to negotiate better terms than the UK. On the other hand, the UK may have more flexibility.

DExEU assumed that all EU trade agreements with third countries would transition to UK-specific arrangements. Since then, the Department for International Trade (DIT) has made progress (see UK-EU trade above). Rollovers with some larger countries may only be partial because of complications over Rules of Origin and the difficulty in replicating all Mutual Recognition Agreements.

Sources:
UK Trade Forum, International trade: 10 facts about the UK’s deal with the EU, November 2018
HMG, EU Exit, Long-term economic analysis, November 2018
Richard Barfield, UK trade and the World Trade Organisation, September 2018

 

UK Global Tariff

The UK submitted its tariff schedule (its bound tariff) to the WTO in 2018 for certification.  The tariffs that will apply to UK imports are in the ‘UK Global Tariff’ (UKGT). These apply to imports from any country that does not have a preferential UK trade agreement  – that is, it trades on WTO terms with the UK. The US and China are in this category. The applied tariffs are generally lower than the bound tariffs. UK tariffs cannot exceed the bound tariff. However, the UK may raise its tariffs at short notice up to the bound level. The applied tariff tariff is called the MFN tariff or, in my table, for simplicity, the ‘WTO tariff’.

The new tariff regime applied from 1 January 2021. It provides a baseline for negotiations for FTAs with the EU, the US and other countries. Products from developing countries will continue to attract no tariffs to protect their trade, because the UK has replicated the EU’s Generalised Scheme of Preferences.

The DIT consulted industry in developing the revised tariffs. Points to note include:

  • UKGT  is simpler than the EU’s Common External Tariff (CET)
  • UKGT tariffs are slightly lower than EU 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.
  • Trade specialists believe that these additional problems mean there is little to gain from moving away from the CET before Brexit day.

Table 5.12 shows that for WTO countries:

  • Average UKGT MFN tariff is slightly lower than the EU 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 EU CET (60% by value are tariff free, compared to 50%).
  • UKGT is less liberal than the 2019 no-deal tariffs (only 70% by value carry zero tariffs compared to 96%)

At the tariff line level, the UKGT:

  • Applies to 9,500 products and around 2,500 products are tariff-free
  • Eliminates tariffs of 2% or less;
  • Maintains a 10% tariff on finished cars but cuts rates on automotive components;
  • Almost all pharmaceuticals and medical devices (including ventilators) are tariff free;
  • Maintains tariffs on agricultural products e.g. lamb, beef, and poultry;
  • Applies 0% tariffs on imports used in UK production, including copper alloy tubes (down from 5.2%) and screws and bolts (down from 3.7%).
Table 5.12: UK tariffs compared      
UK imports with 0% tariffsAverage tariff for UK imports
WTO countriesEU if 'no deal'OverallWTO countriesFrom WTO countries
By valueBy valueBy valueBy tariff lineBy valueBy tariff line
UK bound tariff60%32%46%0.7%
UK 2019 no-deal tariff96%81%88%95%0.8%
UK Global Tariff70%44%57%47%1.5%5.7%
EU Common External Tariff52%N/A87%26%2.1%7.2%
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

 

UK trade deals

Non-EU markets and the UK

Post Brexit, it is likely to be difficult for the UK to:

  • Maintain UK competitiveness in non-EU markets in the face of reduced UK participation in the EU and the costs of the new trade barriers.
  • Land significant new trade deals with other countries quickly, apart from rolling over EU trade agreements.
  • Replace lost trade in intermediate goods with the EU, because this involves specialised inputs to integrated supply chains.

The UK will succeed in other markets when it overcomes trade barriers and is competitive. Naturally, markets which are attractive to the UK are attractive to others.

  • China and India are attractive due to their scale and growth. However, 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 to other countries outside the EU. For example, Australia, whose leading trade partner is China, is prioritising a trade deal with the EU over the UK.
  • Foreign Direct Investment in the UK has fallen for three successive years.

Trade attractiveness 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:

  • EU27, 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.
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)

 

Replacing existing EU agreements

The UK’s trade agreement with the EU is the most important as the EU accounts for 47% of UK trade. A further 18% is with partners that have EU trade agreements. These lapsed at the end of the transition period.

The government has been rolling over existing EU agreements with 70 countries, accounting for £226.1 billion or 15.9% of trade. The new agreements are ‘cut and paste’ versions of existing EU agreements with some minor changes. However, Turkey is now an FTA  rather than customs union. The status at 1 January 2021 was that:

  • 64 of 70 had been replaced
    • 31 were fully ratified (trade value: £109.6 billion)
    • 33 were provisionally applied or subject to bridging arrangements (trade value: £111.6 billion)
  • 6 to be negotiated and finalised (trade value: £4.9 billion)
  • The provisionally applied included (* = top 20 partner):
    • Norway* – £25.5 billion
    • Canada* – £22.4 billion (partially applied)
    • Turkey* – £18.4 billion
    • Singapore – £17.5 billion
    • Vietnam – £5.8 billion
    • Mexico – £5.3 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.

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

 

Likelihood of US-UK trade deal

The US is the UK’s main trading partner outside the EU. However a rapid 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 5.12, 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.”

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

 

Non-trade agreements

In early 2019, the EU’s Treaties database listed 1,261 international agreements to which the EU is party. These are a mixture of bilateral and multilateral treaties. Previous analysis by the FT found that those of interest to the UK relate to 168 countries. By law, the UK will be excluded from all bilateral agreements with the EU on 1 January 2021.

However, not all of the treaties require action to maintain continuity following Brexit. The government’s view was that about 1,000 EU treaties are relevant. It said that only 157 would need to be replaced in the event of ‘no deal’, but that the UK would be seeing to replace an unspecified number of additional agreements.  As the FT pointed out, many countries will want to know the outcome of EU-UK talks before finalising their own commitments.

Non-trade areas that these agreements cover include:

  • aviation
  • nuclear
  • environment
  • fisheries
  • justice
  • political cooperation

The UK would remain a party to most mixed multilateral agreements (where it is already a party in its own right) but the UK would not remain party to mixed bilateral agreements. Around a quarter (over 300) of the EU’s international agreements are “mixed” agreements which cover competences shared by the EU and member states.  At the UK’s request, the EU has notified other parties to international agreements that the UK is to be treated as a member state during the transition period for the purposes of these agreements.

UK engagement is ongoing for agreements in many areas. This includes customs co-operation, fisheries, organic equivalence, justice and home affairs and wider political co-operation. Most air services agreements have been concluded, as have nuclear co-operation and safeguards agreements. In March 2019, the government listed 158 international agreements, across different policy areas, that it is seeking in order to replace current arrangements should the UK leave the EU without a deal. It also referred to an unspecified number of additional agreements in certain policy areas.

Sources:
HMG, Department for Exiting the EU, International Agreements if the UK leaves without a deal, November 2019 (Withdrawn)
House of Commons Library, UK replacement of the EU’s external agreements after Brexit, May 2019
FT, After Brexit: the UK will need to renegotiate at least 759 treaties 30 May 2017, Paul Mclean

 

Trade infrastructure

Government

The UK’s Department of International Trade (DIT) has made good progress 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

 

Privater 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.

Last updated on 17th April 2022 by Richard Barfield