By Catherine McBride – 5 minute read
THE OBR (Office for Budget Responsibility) published its annual report evaluating its fiscal forecasting record last month. The report doesn’t mention Brexit specifically but does admit that:
‘Net trade was less of a drag on growth than expected across both the March 2021 and March 2022 forecasts, respectively contributing 1.0 and 1.5 percentage points more to GDP growth than forecast. This is partly due to stronger-than-expected export growth.’
So, will the OBR still stick with its forecast that Brexit would cause UK trade to be 15% lower than if we had remained in the EU?
The UK’s trade data certainly doesn’t show such a decline – thankfully for us all, however we may have voted. And the changes that do exist are certainly not due to Brexit. There was a massive fall in trade with all countries during Covid and a massive increase in oil and gas imports from non-EU countries since Russia invaded Ukraine. Neither was caused by Brexit. For most industries, UK trade with both EU and non-EU countries has been very similar since the UK left the EU.
But as Brexit could only possibly alter trade with the EU, which only makes up 42% of total UK trade, then for total UK trade to fall by 15% the OBR must still be expecting UK trade with the EU to fall by 36%. This doesn’t look likely.
There has been some recounting of UK and EU branded goods that are majority made in Asia, Africa or Turkey, due to the Trade and Co-operation Agreement’s (TCA) Rules of Origin. There have been changes in EU distribution, so some EU countries now import more UK goods which they redistribute around the EU. But in general, not much has changed in EU and UK trade.
So where did the OBR’s forecasts go wrong? The statement below comes from the OBR’s Economic and Fiscal Outlook, March 2020 publication:
‘we have assumed since our November 2016 EFO that both exports and imports would be around 15 per cent lower after 10 years than they otherwise would have been. More recent studies confirm that this assumption is broadly consistent with the average estimated effect of leaving the EU, to trade instead under the terms of a typical free trade agreement.’
It would appear that the OBR has never reviewed or revised this assumption even though, of the ‘more recent studies’ it cites above, three were from 2016, one from 2017, six from 2018 and two from 2019. None of these studies could have known the exact nature of the UK-EU Trade and Cooperation Agreement (TCA), which is not a typical EU free trade agreement.
Typical EU trade agreements do not give third countries completely tariff-free and quota-free market access from day one, as the TCA does. Most EU trade agreements remove tariffs and increase quotas over many years and some EU agreements never give completely quota-free access to EU markets, especially for agricultural goods.
The external studies also assumed that UK-EU trade would experience non-tariff trade friction, but this is not apparent in the trade data. UK trade is dominated by large multinationals who export and import more goods and services to the rest of the world than they do to the EU, so they would not have been greatly perturbed by some additional EU paperwork. The UK’s largest exporters include Rolls Royce, JLR, JCB, GSK, BAE systems, Diageo, BP, Shell, Unilever, etc. These companies complete trade compliance forms every time they trade with the rest of the world, but incredibly our EU membership fee was subsiding their EU trade.
But although UK EU trade is dominated by multinational companies, the UK government has gone out of its way to support the few SMEs who only exported goods to the EU by setting up support funds to teach SMEs how to comply with EU customs, while HMRC now has a digital customs platform that will help SMEs complete customs declarations. Additionally, the Chanel Tunnel, responsible for 25% of UK trade including most SME trade with continental EU, announced in July this year that its border pass technology is allowing trade to clear customs and cross the channel at the same speed as before Brexit.
Finally, when the OBR’s external studies were produced their authors would have had no way of knowing how the TCA’s Rules of Origin would affect trade between the UK and the EU. Even during the years between the studies being written and the UK leaving the EU, more and more UK and EU manufacturing was being moved to lower-cost producers in Asia and Africa, consequently, many goods produced for UK and for EU companies are no longer counted as UK or EU exports or imports under the TCA’s rules of origin.
The OBR didn’t understand this either, claiming import substitution had caused the change in UK imports from EU to Asian countries in its March 2022 report on the impact of Brexit on UK trade, without realising that most of this change was simply a reflection of how many ‘EU’ goods are now mostly made in Bangladesh, Vietnam or China. Although admittedly even the German finance minister appeared to be unaware of this as recently as last month when he complained that the UK wasn’t buying enough German goods.
Between 2019 and 2020, UK car imports from China increased by 800% while imports from the EU are down 18%. Chinese car imports were less than £400 million in 2019 but increased to £3.6 billion in 2022. Yes, this could be a sudden change in consumer preference, but it could also just reflect the many EU vehicles that are now majority made in China or made using Chinese parts as well as the large number of Chinese imports landed in Rotterdam, Antwerp or Hamburg that are no longer counted as EU imports by the UK – as they were before Brexit.
But despite the assumptions used by the OBR’s external estimates being well past their sell-by-date, and actual ONS trade data showing little difference between UK trade with EU and non-EU destinations, the OBR appears to be sticking with its long-term predictions about Brexit.
This unshakeable belief shows that the OBR has not compared the TCA with a typical EU trade agreement, has notexamined the TCA’s Rules of Origin, does not understand the economic forces that drive trade in general and certainly does not understand the global nature of UK trade.
The OBR would be well advised to heed Keynes’ advice and change its mind about Brexit now that the facts have changed the credibility of its assumptions.
Catherine McBride is an economist and the author of Brexit and UK trade – What has changed? a paper analysing UK trade performance by sector since Brexit. She is a member of the Government’s Trade and Agriculture Commission.
Image via Adobe Stock