Once Upon a Time in the UK - Brexit and Trade at a Glance

Dr Michael Gasiorek and Dr Peter Holmes are co-founders of InterAnalysis and Senior Lecturers in Economics at the University of Sussex. Using their recently launched TradeSift Pro software, here they examine the implications of Brexit on different sectors in the UK.

There has been much talk about the economic costs of Brexit. The overwhelming conclusion from numerous independent studies is that the economic impact will be negative, but the size of the impact is uncertain. First, this is because predicting the future is just difficult. Secondly, because the ‘Leave’ campaign have been singularly unclear about what the future trading arrangement actually will be, and the ‘Remain’ campaign have been singularly unsuccessful in getting the Brexiters to address this. For example, the IMF has warned of a decline of GDP of up to 5.5%; others estimate a large total fall in trade, for example a 19% fall in the case of one of the Treasury estimates.

This is predicting the future, is therefore speculative, and has proved too easy for the Leave campaign to dismiss. It is worth therefore reminding ourselves of what we do and can know, which is the aim of this note. Where much of the discussion has focussed on the aggregate effects here we also consider the implications by sector, as this too has been neglected to date.1

One table, which summarises key features of the UK’s trade broken down by principal sectors is sufficient. The table takes the top 15 export sectors of the UK to the world in 2011, which between them accounted for a little below 95% of the UK’s exports to the world. The last row of the table gives the average figures for the whole economy:

 

Why Trade with the EU Matters

Sector

 

Share of Interm. Exports

Share of exports going to EU

UK jobs from exports to EU

(1000’s)

EU / World Jobs*

EU ave.  tariffs**

 

4-digit tariff Peaks…

Business Services

0.92

0.63

826.27

0.50

Na

Na

Financial Intermediation

0.87

0.48

349.91

0.41

Na

Na

Chemicals and Chem. Products

0.59

0.63

200.22

0.58

4.40

6.03

Transport Equipment inc. cars

0.43

0.42

182.94

0.42

4.02

10.18

Coke, Refined Petr. & Nuc. Fuel

0.69

0.72

69.73

0.63

0

1.43

Electrical & Optical Equipment

0.52

0.46

160.19

0.44

2.59

5.41

Mining and Quarrying

0.99

0.53

49.75

0.54

0

0

Basic & Fabricated Metals

0.93

0.51

189.57

0.46

1.86

3.17

Machinery, Nec

0.45

0.38

106.20

0.38

1.87

4.24

Food, Beverages and Tobacco

0.13

0.50

76.60

0.47

9.41

32.00

Textiles and Textile Products

0.24

0.68

45.96

0.65

9.11

11.7

Comm., Social & Pers.

0.69

0.50

120.19

0.47

Na

Na

Rubber and Plastics

0.83

0.62

65.47

0.53

4.58

5.9

Post and Telecommunications

0.83

0.76

186.70

0.51

Na

Na

Manufacturing, Nec; Recycling

0.34

0.48

35.64

0.46

1.87

3.28

TOTAL

0.68

0.50

3783

0.45

 

 

1Notes: Table prepared using the TradeSift software; *Share of total export jobs accounted for by exports to EU; **MFN tariffs; … Highest tariff at the 4-digit level; Source: WIOD and TRAINS databases

What do we learn from this Table?

    

On average 50% of UK exports go to the EU, but in some sectors the share is much higher, especially in services (business services, financial services, post and telecoms) but also the chemical industry, textiles, rubber & plastics: Of course Brexit will not cause trade to stop – but Brexit will jeopardise some of this trade, and this will matter more in certain sectors. Other than vague statements about being able to sign trade agreements, those in favour of Brexit have not offered any clear alternative.

    

The UK is highly engaged in other countries’ value chains – nearly 70% of the UK’s exports are in intermediate goods and services. In 1995 the figure was just over 60%. Global supply chains are when products are designed, produced and assembled in more than one country. Gone are the days when goods were made entirely in one country: Linkages with other countries and production processes are important for the UK in a way that was not the case when we first joined the EEC in the 1970s. Internationally integrated production process tariffs on imports make your exports less competitive.

    

Out of the UK jobs which are driven by exports, 45% of these come from exports to the EU. This accounts for nearly 4 million UK jobs. For example there are over eight hundred thousand jobs from the export of business services alone to the EU. For some sectors the share of export jobs linked to the EU is significantly higher: Any negative impact of Brexit on jobs is likely to be more significant in some sectors such as chemical, coke and fuels, textiles.  

    

What cannot be seen from this table is that of these jobs from the UK’s exports to the EU, nearly 40% (1.5 million) derive in turn from the EU’s exports to the world. In contrast if we take UK jobs from exports to non-EU countries, only 16% come from what these countries export: The UK is much more closely integrated in EU supply chains than in other countries’ supply chains.  

    

If the UK were to leave the EU, it would have to negotiate trade agreements with many countries in the world. In the interim it would levy tariffs on imports. Hypothetically, the UK could choose not to levy tariffs, but that would leave it in a very weak bargaining position for getting better access to its export markets, and is therefore highly unlikely. We have no idea what those tariffs would be, and nor do the Brexiters. We do however know what the current EU tariffs are (see the last two columns of the table). As well as these being the likely tariffs that the UK would face on exports to the EU, these perhaps serve as a very rough guide as to the tariffs the UK might levy on imports: In some sectors the tariffs are low, or even zero. In certain sectors, such as Food, Beverages and Tobacco, Motor vehicles and Textiles, the tariffs can be high. Even small tariffs can have a big impact on the UK’s exports and imports and once again the effects will be quite different across sectors.

    

Tariffs and the rules surrounding them, such as rules of origin are complex. Re-negotiating these will be time-consuming. It is naïve to believe that other countries would not retaliate. Of course not all trade in these products will be blocked. But the UK will have to face tariffs on exports to the EU, as well as to the approximately 60 countries with which the EU has a preferential or bilateral agreement. The UK will also need to decide what tariffs to apply on the more than 160 countries which currently have preferential access to the EU. The complex renegotiations are likely to take several years, during which time UK firms will face uncertainty with knock-on effects on investment.

The regular tariffs may well be the least of it. In addition to facing the EU’s tariffs, the UK, like any other partner would run the risk of facing other forms of trade sanctions (such as anti-dumping and safeguard duties). If the UK exercised its right to avoid EU State Aid rules, such sanctions would be a likely response. Moreover, as members of the EU our technical standards need to conform to the overall EU rules (which as an EU member state the UK has had a say in setting). In return not only do we get duty free access, but our products are automatically assumed to be in compliance. If we are outside the EU our products, even if made to EU standards will no longer be automatically accepted as compliant and may be subject to Testing and Certification procedures - though no one can know how this will work in practice.  And if we exercise our right to adopt different product regulations, we could risk our goods being blocked altogether.

The data above shows how much trade, how many jobs and which key sectors could be in some way be negatively affected by changes in trading arrangements with the EU.  It is not clear whether the Brexiters do not understand this (which would be worrying); really believe that it would not happen (which would be even more worrying), choose to ignore this on the populist pillars of sovereignty and immigration (which would be foolish), or choose to deflect discussion on the grounds of political ambition.

Clearly sovereignty and immigration are important issues. But so is our economic outlook. Let us hope that that in a few years’ time we do not look back with regret that once upon a time in the UK we were an integral part of Europe.