Collapse in German imports from UK bodes ill for post-Brexit trade

Good morning from London where schools have now reopened and one in three people have received their first dose of a Covid-19 vaccine, boosting morale and hopes for a prompt economic and jobs recovery. 

However, the mood has been spoilt by preliminary imports and exports data for the first month in which the UK traded with the EU on new terms following the end of the Brexit transition period. This is the focus of today’s main piece, which looks at the scale of the collapse in UK exports to Germany, the eurozone’s largest economy and by far Britain’s largest EU trade partner.

In Brussels, meanwhile, the European Commission is poised to reveal the details of its controversial market-access deal with China. (To understand why it’s so controversial, take a look at these two takes — here and here — from Trade Secrets.)

A plunge in UK-German trade

It’s not the best of starts to the post-Brexit relationship between the UK and its second most important trading partner (after the US), we must say. Germany’s goods imports from the UK shrank by €2bn in January compared with the same month last year to just €1.6bn, a 56.2 per cent plunge, official statistics showed this week. The scale of the drop, as this chart shows, is unprecedented this side of the millennium:

Indeed, the inflation-adjusted value of goods that Germany imported from the UK reached its lowest level since German reunification in 1991, according to Financial Times calculations.

The end of the transition period was not the only factor. German demand was limited by a national lockdown and overall goods imports were down 9.8 per cent in January compared with the same month last year. Businesses might also have delayed trading given the risk of queues at the border and might have run down stock piled before the end of the transition period. But the collapse of the value of goods imports from the UK was far larger than that from France, Italy, Belgium, Denmark, the Netherlands, Austria, Poland, Portugal and Spain combined: 

There was some effect the other way too. The hit to German goods exports to the UK was less dramatic than that of imports but still large, with a 29 per cent fall in January compared with the same month last year.

It’s a similar a story elsewhere. The FT reported last week that French exports to the UK were down 13 per cent in January compared with the average of the previous six months, while French imports from the UK fell 20 per cent, according to the French customs office. Preliminary data from Italy showed imports from Great Britain plunged 70 per cent in January compared with the same month last year.

All of which confirms the UK fiscal watchdog’s estimates that the border disruptions are hitting UK exports more than imports, with the Office for Budget Responsibility expecting the UK-EU trade disruption to amount to a 0.5 per cent hit to the economy in the first quarter. 

Commentators universally agreed that a big part of this drop is Brexit related. James Smith, economist at Dutch bank ING, said part of the fall was “undeniably down to disruption as firms got to grips with new paperwork and processes”. Those disruptions are well captured by business surveys. About 61 per cent of UK manufacturing exporters reported additional paperwork as a challenge to exports, according to an official survey from the Office for National Statistics run in the two weeks to February 7. Between 25 per cent and 30 per cent of manufacturers faced changes in transportation costs, customs duties or levies and disruption at UK borders.

Worryingly, Andreas Rees, an economist at UniCredit, warned that the costs of adjustment might mean the cost of cross-border trade was now “prohibitively high” for smaller businesses. He added that the “grim” bilateral trade picture was partially the result of the fact that the EU-UK trade agreement was not signed until the last minute “and neither authorities nor companies were fully prepared”. The UK and EU agreed a last-ditch trade deal to avoid tariffs on most goods which came into force on January 1. However, trade was still disrupted by changed customs requirements, transportation delays and shipping costs. The UK has delayed or reduced stringency in the application of some tax burdens and checks until July, but the EU has applied full customs requirements due on exports from Great Britain to the EU since January 1.

To end on a positive note, things are unlikely to remain this bad forever.

The OBR expects disruption to dissipate as businesses on both sides of the Channel grow accustomed to new trading arrangements (though it stated that “further disruption is possible when the UK enforces the agreement in full on its side of the border later in the year”).

Yael Selfin, economist at KPMG, said that trade figures were likely to be closer to normal later this year as ports traffic statistics improved. Those figures have shown some improvement in the most recent week for which we have data. However, she warned that “questions remain as to how the trading relationship will settle once companies adjust fully to the Brexit reality”.

Still, there’s always hope that a clutch of deals between the UK and trading partners further afield can plug the gap. Hmm . . .

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Source: Economy - ft.com