Kemi Badenoch’s booster strategy fails to cover the cost of Brexit on UK trade

Afternoon. It’s been a rather depressing week in Brexitland, where some days it seems as if time stands still.

This week investors attending the Department for Trade’s International Trade Week were treated to the UK business secretary Kemi Badenoch telling the world that:

“Contrary to some media reports and many pre-Brexit establishment voices, the data says Brexit has not had a major impact on UK-EU trade.”

It was presumably intended in a positive, boosterish kind of way to signal that the UK was ‘open for business’, but the sight of a UK minister dismissing the work of multiple serious trade economists on the effects of Brexit as mere “media reports” raises questions of credibility with both international investors and UK business.

From a narrow political point of view, the speech had the desired effect on domestic headlines, with both the Sun and The Express berating the Brexit “doom-mongers”, a phrase used by both in near-identical headlines.

“‘Stop talking ourselves down!’ Kemi Badenoch blasts Brexit doom-mongers as exports soar” was the headline in the Express. 

The basis for these newspaper claims of “soaring” exports was a paper by the Institute of Economic Affairs, the free-trade think-tank. 

The top lines in the press release sent to journalists said that UK goods exports “rose by” 13.5 per cent to EU countries and 14.3 per cent to non-EU countries between 2019 and 2022, which “indicates no impact of Brexit on goods trade”. 

It didn’t take long for the likes of Jonathan Portes, professor of economics and public policy at King’s College, London to accuse the IEA and Badenoch of taking people for fools, since when you adjust for inflation you get a very different picture.

Do that, and you find UK goods exports to the EU falling over the period by 7.2 per cent and non-EU exports by 9.8 per cent, what Portes calls a “significant deterioration in UK export performance”. 

The IEA report did include these numbers, but of course it was the unadjusted numbers headlined in the press release that made it into the Express and the Sun.

More recent OECD real trade data, adds Sophie Hale at the Resolution Foundation, shows that by the middle of 2023, total UK goods imports and exports remained 11.3 and 14.7 per cent down, respectively, on pre-Brexit levels (Q1 2019) which was “by far the most negative shift in the G7”.

The central argument of the IEA’s report is actually that since UK trade has fallen to both EU and non-EU destinations, then logically the contraction cannot be attributed to Brexit, it must be due to wider global factors. 

At first blush, that feels like something of a clincher — you would expect trade to the EU to fall more after the UK did a ‘reverse trade deal’ with the bloc — but that overlooks the fact that modern trade and supply chains are deeply intertwined.

As John Springford at the Centre for European Reform pointed out, the drop in imports from the EU to the UK (while the rest of the EU’s have risen) points clearly to a Brexit impact on UK trade which is plausibly the result of the UK being slowly cut out of EU value-chains.

Nicolo Tamberi, research fellow at the Centre for Inclusive Trade Policy at the University of Sussex, also suggests that the weak overall performance of UK goods exports post-TCA “might be a consequence of the large fall in imports from the EU, which translates into higher cost/less intermediate inputs hence the overall fall in UK exports.”

It’s worth noting that the impact of this effect also falls “behind the border”. So while larger companies do the bulk of exporting and importing, if the amount of trade they are doing shrinks, it will impact the smaller companies that supply them. Another indirect effect of Brexit.

There is also a substantial and growing body of academic work that shows the number of products and trading relations between the UK and the EU have fallen very sharply since Brexit — in simple terms, this is mostly SMEs giving up trading with the EU because it is too complicated.

The IEA report argues that SMEs were given an adjustment fund to help adapt to the new trading arrangements, but trade group surveys repeatedly show this isn’t happening. This is partly because new and emerging regulatory barriers, including carbon taxes and various forms of supply chain due diligence (the so-called ‘Brexit 2.0’ effects I’ve written about), keep appearing over time.

You could still argue this doesn’t matter, since big companies do most of the trading and they can absorb the bureaucracy and costs, but that overlooks the fact that some of those smaller exporting companies would have become bigger companies and now won’t. 

(Last week’s report on cosmetics companies like Doncaster’s Apothecary 87 is a case in point. As the boss Sam Martin told me: “My original vision for the company was more grand, more global and I’d love to get back to that, but we have to cut our cloth to the world as it is now.”)

Another way to measure potential Brexit effects is to look at the UK’s “trade openness” (imports + exports as a share of GDP) and compare it to peer economies that were suffering other headwinds, like the pandemic and Ukraine energy price shock.

Hale at the Resolution Foundation finds that UK trade openness was 3.6 percentage points below pre-pandemic levels (H1 2019 to H1 2023), compared to a rise in trade openness of 0.2 points across the G7, excluding the UK. That included a 0.4 percentage point rise in France, which has a similar trade profile to the UK.

It was notable that in the same week Badenoch gave her speech saying “nothing to see here” the governor of the Bank of England Andrew Bailey was giving a speech in Ireland warning that Brexit had “led to a reduction in the openness of the UK economy”.

Step back, and what is most concerning about the Badenoch speech is that while there’s lots of legitimate argument to be had over Brexit effects, which remain uncertain both in terms of the size and the relative impact on goods versus services, is it really credible just to wish them away?

For much of the Brexit process the UK has spent too much time talking to itself. The Badenoch booster strategy is, I fear, another example of this — designed to win headlines in the Sun and the Express and burnish her Conservative leadership credentials but attracting weary derision from both investors and economists.

Talking to investors, diplomats and trade bodies the refrain you hear is that the UK needs “a plan” and it needs the political capacity to implement it in the real world, staying the course over political cycles. 

The Badenoch speech does little to signal that the UK is really moving on, notwithstanding Rishi Sunak’s creditable efforts to stabilise relations with Brussels. His own party conference speech claiming Brexit had boosted growth in the UK was in the same vein.

And as Stephen Hunsaker, the economics researcher who authors the UK in a Changing Europe’s quarterly trade tracker, observes, the danger in not really confronting the challenges of Brexit is that UK trade slides deeper into the doldrums.

“Stagnation is the danger of ‘nothing to see here’,” he said, “because eventually it will become more clear the UK is being left behind in future trade deals and business strategies which will become evident when it’s too late down the road to change it.” 

Brexit in numbers

This week’s chart comes courtesy of a sobering piece of reporting by my Europe-facing colleagues Henry Foy and Ian Johnston analysing the EU’s own struggles to discover its competitive edge after the Covid-19 pandemic.

Part of the challenge is the deluge of state subsidies that have undermined the core level playing field of the EU single market, which relies on a tough state aid regime precisely to avoid big countries distorting the market for others. 

And the numbers are extraordinary. According to unofficial commission figures seen by the FT they report that EU state aid expenditure rose from €102.8bn in 2015 to €334.54bn in 2021, but between March 2022 and August this year, Europe approved €733bn in state support — with Germany accounting for almost half of that figure (although not all of it will necessarily be spent).

At the same time, the EU is larding its trade processes with a welter of new regulations — on supply chains, plastic packaging, carbon adjustments — that are causing the “Brexit 2.0” issues that we’ve discussed before in this newsletter.

The EU’s detractors will argue that this deepens the case for Brexit — unshackling ourselves from the corpse, so to speak — but the challenge remains that the UK continues to conduct half its trade with a bloc where it no longer has a seat at the table to make the case for a more competitive approach. As it once did.

Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.

Source: Economy - ft.com