With UK exports at £669bn in 2015, it hardly needs to be said that trade is critical to the UK economy. Despite this huge number, however, the UK has the largest current account deficit in the G7, approaching 6 per cent of GDP.
Understanding the reasons for the UK’s trade deficit is critical to designing the right post-Brexit trade strategy. In a report commissioned by the newly launched “Leave Means Leave” campaign, the benefits of the EU’s Single Market are shown to be more imaginary than real.
Three problems need to be considered. First, the UK runs a substantial global surplus in services and a substantial deficit in goods. The UK’s goods trade deficit with the EU was £89bn in 2015 while we recorded a £10bn goods surplus with the Americas (largely the US).
It is very odd that the UK should be in surplus with the US, where there is no preferential trade deal, and yet in a massive deficit within the EU’s Single Market.
Second, the UK runs a trade surplus with the rest of the world and a very large deficit with the EU. This is a paradox – the UK experiencing underperformance in the regulatory regime it is tied into, but enjoying out-performance in the rest of the world where it is not. Having common EU regulations does not appear to give the UK any advantage.
Third, the EU’s GDP growth has lagged every other region in the world for a generation – and its rate of relative decline is accelerating. This has caused British businesses to vote with their feet away from the declining EU to faster growth markets. In 1999, 61 per cent of UK trade was with the EU, now it is 43 per cent. By 2025, the report suggests the EU will account for under 35 per cent of UK trade.
It is the structurally low EU economic growth and its favouring of trade in goods over services, where the UK has a strategic advantage, which has caused the UK’s exports with the EU to perform so poorly compared with the rest of the world.
With average tariffs into the EU just above 1 per cent, and only a few sectors such as agriculture being above 10 per cent, the benefit for goods manufacturers from being inside the Single Market without facing its tariff regime is minimal. In any case, it is in the EU’s interests to agree a zero tariff deal with the UK for its high tariff sectors because its members sell more to the UK than the UK sells to the EU.
Further, it is a fallacy that one needs to be inside the Single Market to trade with it. The US, China, Japan and Australia all enjoy access so long as their products meet Single Market regulatory standards, just as the UK can trade with China so long as Chinese standards are met for its domestic market.
In its defence, it is claimed the EU is the largest market in the world. But this is false, because when the UK figures are removed, the US is the world’s largest market, with a GDP of $17,947bn, compared with the EU ex-UK GDP of $13,381bn. The UK does not have to be “inside” the US to trade there. Why then should the UK have to be “inside” the EU’s Single Market to trade with it?
The key lesson is the UK does well with the world where business should be tougher and very badly with the EU where it should be easier. When we leave the EU, remaining in the Single Market will not improve this trade deficit. On the contrary, it may make matters worse as the UK will be required to adopt in law EU regulations without any say in their framing, resulting in needless costs for all businesses, even if they do not export.
It would be the “no say, low growth, regulatory burden, sovereignty illusion” option – locking in perpetual trade deficits. That is why no deal is better than a bad deal.