“Global Britain” is fading under strained international supply chains and Brexit woes

In response to the decline in Britain’s international trade, during the pandemic and since the end of the EU transition period, the government has launched a new trade strategy to boost exports up to £1 trillion a year by the end of the decade.  The new scheme is likely to prove elusive as the worsening deterioration in worldwide cross-border supply chains may instead be the final nail in the coffin for the “Global Britain” endeavour.  This faltering policy sits alongside a Brexit agreement, where significant damage is being inflicted on the UK economy and its export prospects.

UK goods trade plummets vs pre-pandemic

Although the UK’s international trade in goods rose this year over 2020; trade levels have declined relative to the pre-pandemic period.  According to the Office for National Statistics (ONS), Britain’s goods exports, in September 2021, fell by -12.2% in contrast to exports in September 2018.  Similarly, this year’s third quarter goods exports sunk by -11.6% when compared with the same period over 2018.

Notably, the ONS data excludes voluminous trade in precious metals, which some have argued artificially lifted exports to record levels since the 2016 EU referendum.  This position may have some merit given there was zero value added to these materials during their passage through the UK for re-export to end-user markets overseas.

“Global Britain” and the worsening supply chain squeeze

As last summer’s fuel shortage crisis at filling stations fades into memory, it is easy to overlook the intensifying gridlock currently grinding more distant international supply chains into a logjam across the world.  The side-effect has been a relentless and steep rise in global supply chain-induced inflation evident in the form of high headline inflation and rising prices at factory gates.  In the UK, last October’s headline and producer inflation levels were 4.2% and 8% respectively.  These were the highest rates in several years mainly driven by high energy and transportation costs.

The eurozone and most European Union (EU) economies face similar problems.  While overall inflation in the eurozone has exceeded expectations at 4.9%, in November, producer prices were up by 22% being the highest such rate on record.  Even Germany’s carefully manicured export-driven economy has exhibited inflationary supply chain stress; recording price hikes of 5.2% and 18.4%. The latter was the fastest rise in producer costs since 1951.

The story is no different in other developed world economies.  In the United States (US), inflation has surged to 6.2%, the highest in over 20 years, while Canada’s producer prices of 17% have hit historically high levels.  Perhaps more alarming have been the extreme double digit rates of producer price inflation spreading across emerging markets, signalling a more severe supply chain squeeze is yet to come.

The underlying causes of supply chain constraints can be partially attributed to underinvestment in production facilities and transportation linkages in the wake of the 2008 global financial crisis.  This long-term decline in supply capacity combined with sudden spikes in demand as global economies emerged from the pandemic and launched large scale fiscal expansions.

In this unstable international supply chain environment, a “Global Britain” policy tilted towards boosting economic growth through prospective membership of far flung regional trade deals and hastily agreed bilateral ones – also with economies on the other side of the world (see article “EU promotes high quality trade deals, as UK founders on hasty new agreements”) – seems ill-conceived and impractical.

This is not to say that deals with global trade partners should not be secured.  Rather, the emphasis should be on deepening regional trade integration; an outcome governments in regions the world over are painstakingly cooperating on.  The one exception is the UK government’s ideology of disengaging in trade relations with neighbouring countries.  Not only is it dismissing the importance of regional trade, but the government is wilfully undermining the ability of Britain’s business community in successfully exporting to the EU.

The Brexit deal’s impact on UK goods trade with the EU

According to the UK Trade Policy Observatory (UKTPO), the 14% decline in UK exports to the EU, during the first seven months of 2021, was due to the imposition of complex conditions within the EU-UK Trade and Cooperation Agreement (TCA).  All told, the fall in UK exports to the EU amounted to a hit on the UK economy of about £44 billion, a starkly opposite scenario to that painted by Prime Minister Boris Johnson following the TCA’s conclusion end-2020.  At that time, Johnson hailed the deal as leading to greater business with the EU than even during Britain’s membership of the bloc.

Taking aside the pandemic’s impact on trade, the UKTPO estimates about three-quarters of the £44 billion loss was accounted for by lost potential goods imports from the EU, while a quarter didn’t materialise due to foregone exports of goods.  The extent of these losses may even have negated the post-pandemic economic recovery, as the losses continued to mount beyond the initial three-month teething period.

The existence of new customs formalities and introduction of regulatory measures were the principal reasons for the lost business in spite of the TCA being the EU’s first tariff and quota free arrangement with any trading partner.  Among its most challenging conditions were the new “rules of origin” entailing complex documentary requirements.  These have proven especially onerous for small and medium sized enterprises (SMEs) inadequately equipped to handle the new reporting measures.

In many cases, SMEs have simply opted to pay customs duties rather than forgo the expense and time of complying with the rules, thereby mitigating the benefits of the tariff-free deal much promoted by Johnson.  This has given rise to around £8 billion to £11 billion of UK exports being subject to tariffs over the seven month period despite being eligible to benefit from the TCA’s preferential treatment.

While most tariff rates are low, some can be prohibitively high especially for SMEs often operating on thin margins.  For instance, there is a 12% tariff on textiles while a 50% duty is applicable on certain agricultural goods. The UKTPO claims that in excess of half a billion pounds were paid by UK businesses in customs duties.   As a result, escalating costs and bureaucracy at the border has almost crippled a number of export sectors; precipitating a significant drop in sales to the EU by UK textiles, clothing and footwear exporters, in particular.

An ONS survey reports that up to 48% of goods exporters described the end of the EU transition period as their main challenge.  This contrasts with only 7% viewing the pandemic as their main problem.  Meanwhile, about 50% of goods importers considered Brexit their principal challenge and only 5% identifying the pandemic.

Slump in financial services exports to the EU

ONS data reveals that over a two-year period ending June 2021, financial services exports to the EU fell by 30.6% amounting to a decline of £2 billion in lost exports. By contrast, non-EU exports of financial services only rose by 5.1% (£0.5 billion), clearly far from compensating for the loss of such exports to the EU.

The steep fall is largely due to EU exit-related rule changes given the TCA’s limited provision for maintaining access in this area.  Accordingly, financial services such as share and derivatives trading have either moved from the UK directly into the EU or through intermediate countries including the US, both in the lead up to Brexit and afterwards.

The government’s consistent assertions, before the end of the transition period, was that international trade would not only expand significantly with more so-called “dynamic” non-EU economies, but that even trade with the EU would continue growing under a tailor-made deal for the UK.  Yet when taking into account the fall in trade arising from the pandemic, neither of these grandiose claims were borne out by reality.

In light of these facts, there is little reason to believe the government’s latest headline-grabbing trade strategy of boosting exports up to £1 trillion a year, by 2030, will fare any better given the mounting international supply chain crisis and the skyrocketing global inflation it is spawning.