I can see why many individual British businesses with established exports to the EU want the country to stay in the single market. The UK’s departure from it will be a change and, while the future might or might not offer more trading opportunities, change diverts corporate attention and can be disruptive. That said, from a national perspective – UK plc – the statistics show that the single market has increasingly been operating against the economic interests of the UK as a whole. In that macro sense, looking at the data, the single market is bad news as it’s driving the country’s ever-widening trade balance in goods.
The UK’s trade in goods deficit has been deteriorating since 2000 – and it’s entirely due to EU flows. This is the UK’s “single market deficit” as our imports from the EU grow more rapidly than exports to the EU.
The UK’s trade deficit in goods has widened (in real terms) from around £25bn in 2000 to £130bn last year. A couple of months ago, the ONS produced a background note on the trend and their message was clear: “The widening UK trade in goods deficit is mostly due to trade with the EU.”
“Mostly”? It would not be stretching credibility to say that the deficit widening is entirely due to trade with the EU. The numbers bounce around from year to year so looking at the three year averages, the UK’s trade deficit with the world ex-EU is pretty much where it was in the early 2000s, just over £30bn a year. In contrast the deficit with the EU has widened from nothing to £90bn. The ONS chart says it all.
This deepening trade deficit shows that the single market is not working for the UK. That is not to say that there aren’t some UK companies with thriving export businesses but the national picture is clear – we are importing way more from the EU than we ought to be given the level of exports. And it is the faster growth of imports, see the chart, that is driving the wider deficit.
Source: ONS Pink Book
Some might say that a widening trade deficit in goods is not a problem. It is indeed offset to a varying extent by a surplus in services. But as the overall trade deficit feeds into an expanding current account deficit, the problem with goods (and the EU) becomes a key and stubborn part of a larger economic imbalance of concern.
Overseas deficits do need to be financed. The financing takes many forms and some look more desirable than others. For example, being able to sell government debt at reasonable interest rates is more attractive in many eyes than selling off key national assets. It is also a political issue as countries rightly feel an unease as they become ever more reliant on imports for key products. It might be a social issue too as communities that used to produce manufactures lose out to imports from other countries. Whatever the pros and cons it is rare to find anyone arguing for a larger deficit in goods!
The growing deficit in goods with the EU is not the end of the world but it is something that needs to be understood. It is perhaps time for the Treasury, Bank of England, CBI and supporters of the single market to give serious consideration to it, and establish policies to arrest and reverse the trend. There is much that needs to be understood about the products that the UK exports, their exchange rate sensitivity and more.
UK plc needs to work on trade relationships in areas where it has a comparative advantage in world markets – and it does not look like it is goods within the EU. As the country looks to boost exports it is perhaps time to give serious thought to markets beyond the EU. It is also time to appreciate that while a modest weakening of the pound will give a temporary rise in inflation it could also give a longer term boost to exports.
Many people seem to be against the government’s proposed withdrawal deal that involves accepting the ‘rule book’ for goods. From the point of view of these statistics, signing up to that deal seems to cement in place the EU’s trading advantage.