The UK’s trade deficit in goods

This is about a bad trend in some questionable data: the official data says that the UK has a huge balance of trade deficit in goods, it’s getting worse and the driving force behind the trend has been the growing deficit with the EU. True? Probably. This trade deterioration needs to be noted, diagnosed, discussed as part of the Brexit negotiations and reversed. 

The chart below shows the trend in the UK’s trade balance in goods with the EU and the rest of the world. The deficit with the EU has grown from £5bn in 2000 to £95bn in 2017. (See ONS codes and actual data in the screen shot below the chart, column D.) The deficit with the rest of the world has gone from £28bn to £41bn over the same time (col H). The deficit with the EU has widened by £89bn while that with non-EU has widened by £13bn. Nearly 90% of the growth in the UK’s deficit in goods since 2000 has been due to trade with the EU.

The contrast is even more dramatic looking at the trend in recent years. The UK’s deficit in goods with the EU has widened by over £50bn since 2010. In contrast the deficit with the rest of the world has narrowed by £13bn. The single market does not seem to be working well for UK plc. As Larry Elliott put it in a Guardian article, if the UK was on the outside looking in knowing that would be the impact, “Would we really be gagging to join?”

Screen Shot 2018-05-22 at 13.49.56.png

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The deficit with China has widened from £3bn to £21bn since 2000 (col C), which means that the UK’s deficit in trade in goods with the world excluding the EU and China has narrowed since 2000. The deficit excluding EU and China has fallen from £25bn in 2000 to £16bn (col I). Excluding also the erratic that is oil, the deficit has fallen further and was in balance in 2015 (col J).

The point here is not to say that if all the bad things are excluded there is only good happening! But, that the UK’s dire deficit in goods is in major part – £89bn of the £101bn widening since 2000 – due to the EU, the customs union and single market. It is also the case that the UK’s goods balance with countries outside the EU has been performing much better.

I understand why many exporting companies resist Brexit as they don’t want anything to change but the aggregate figures suggest that other EU countries benefit at Britain’s expense, with imports from the EU growing much faster than UK exports to the EU. (See table 9.4 in section 9 of the ONS Pink Book.) It would be good to hear more from economists in and out of the Treasury and Bank of England about how the deficit might be reduced. If it matters!

Meanwhile it might be good to ask what the future holds for the goods deficit if the UK stays in a customs union? Is there a way to halt the growing deficit with the EU? Perhaps a fall in the pound and some new trading partners is needed? A full Brexit, a clean break, offers one possible way out of the problem IF trade deals in non-EU markets can be struck. While that might seem a distant dream the status quo hardly looks rosy.


The big caveat!

Just a small warning that the numbers, while the Pink Book has been assessed as National Statistics and taken from the ONS website, might be deeply misleading.

David Norgrove, UKSA chair, opened last week’s ESCoE Conference on Economic Measurement 2018 and was struck by the impact that the Brexit vote has had on interest in trade data. It’s an ONS backwater no more. In addition, the ONS held a “Trade event” in April (see the slides here) to unveil developments in the statistics. Despite their tight lips, the statisticians know that there are problems and it was hard not to leave the event feeling more pessimistic about the quality of the data we have and the huge gaps that remain. At least the various government departments (ONS, DIT, HMRC and others – not to mention the UN, Eurostat and other countries’ stats offices) are now having talks about talks on data sharing but there is a long way to go before all the data is marshalled and we can be confident in the accuracy of the story they tell.

I found one example of probably highly misleading data in the figures above.

Consider the figures below – from table 9.4 in the Pink Book with some smaller EU countries omitted and my calculations in the final added column. (The data above goes to 2017 but the country data below only runs to 2016.) The final column shows that of the £57bn deterioration in the UK’s goods deficit with the EU in the last five years, £16bn is with Germany. Yet much more, over £22bn, is with Belgium and Netherlands. More modest amounts are due to France (£5bn), Italy (£3bn) and Spain (£3bn). These figures are out of all reasonable expectations given their respective populations and rates of economy growth.

The explanation is the (infamous) “Rotterdam effect”. I wrote about this two years ago: “Trade statistics – are they good enough?” Rotterdam, Antwerp and Hamburg are huge container ports with ships heading off to all corners of the world. This means that much of the UK’s trade to countries outside the EU gets recorded as trade to, respectively, the Netherlands, Belgium and Germany. In turn, a good part of the deterioration in the deficit with the Netherlands, Belgium and Germany is nothing of the sort – the goods are just on their way somewhere else.

The population of France is two and half times greater than that of the Netherlands and Belgium combined yet the data show that the UK’s deficit deteriorated with them by over four times as much as it did with France. It’s not plausible. Consequently, it’s entirely possible that £20bn or more of the £57bn deterioration in the UK deficit with the EU is allocated to the wrong country. Is that a basis on which to make decisions?

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The slides of the ONS “Trade event” in April (see the slides here) are worth studying as they show more areas of potential concern.

Trade asymmetries (where exports from country A to country B do not match the imports that country B declares from country A are as huge as ever. (See the slide below from the ONS trade event.)

Screen Shot 2018-05-22 at 12.32.15.png

And the above is about goods. Services just adds another layer of complexity – so many international flows of money around banking and software are very loosely based geographically, and it’s mind melting just to think about flows of money related to leasing or ships and planes of no fixed abode. Oh, and then there’s exchange rate differences, fraud, taxes and tariffs, timing discrepancies, and much more. The figures must have a huge health potential to mislead and it’s shame that the ONS does not give the warning.  

Meanwhile big hitters in the Brexit debate are making the same old mistakes. Ex-PM Mr Blair was one the BBC’s Today Programme this morning (listen from 2.32 here, with trade at 2.37).  He clearly doesn’t understand the Rotterdam effect! Or chooses to ignore it as it doesn’t help his argument.

PS

Trade figures are often quoted for goods and services combined. (See this House of Commons briefing paper, no 7851, May 2018.) They are not the best figures for use in the Brexit debate as the single market does not include services. It also follows from the comments above that the quality of services data is more questionable.

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