UK loses out to EU in trade with global markets ahead of Brexit

Welcome from London where the clock is ticking on the Brexit transition period.

Time runs out on December 31 and, with less than a month to go, uncertainty continues to govern whether or not the UK and the EU will manage to sign up to any arrangement at all. Even if a deal is reached, it’s likely to be on far less favourable terms than exporters would like.

It’s understandable, then, that the UK is eager to press ahead on improving arrangements with countries outside the bloc. Unfortunately for them, Financial Times research has found that the UK’s attempt to become a prominent exporter to non-EU countries received a setback this year.

The subject of today’s main piece is this research, which shows that the UK is not only likely to see a significant deterioration in its relationship with its main trading partner, but will do so at a time when it is losing market share in key extra-EU markets — including China, the US, India and South Korea.

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The data contradict Brexiter optimism

Boris Johnson, the UK prime minister, claimed during the Brexit campaign that after leaving the EU, the UK would enhance its trade relationship with “the most lucrative and fastest-growing markets in the world”.

However, the data show EU member states, particularly Germany, have managed not only to grab much larger market shares in key markets, but have also widened the gap over the course of this year.

Since the summer, China has been a rare bright spot for the global economy. It has been the source of demand for many exporters thanks to its success in largely containing coronavirus. However, the UK has not benefited as much as other European countries from this trend.

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In the six months to October, the value of goods imported into China from the UK fell 18 per cent compared with the same period last year, while it rose 1.1 per cent for goods coming from Germany — and by more than 5 per cent for goods produced by Italian manufacturers.

Column chart of annual % change in China's imports from Europe (six months to October), showing that imports from the UK contracted more than those from Italy, Germany and France

China’s trading relationship with Germany already dwarfed that with the UK before the pandemic. Since 2014, Chinese imports from Germany have been constantly about 4 times higher than those from the UK. The chasm has grown — spiking to 5.4 times higher. To get a sense of the figures involved, over the six months to October, it imported $53bn-worth of goods from the eurozone’s economic powerhouse; it acquired less than $10bn of merchandise from the UK.

With Italy, we’ve seen a complete about-turn over the course of this year. In the six months to October, China imported 18 per cent more from Italy than from the UK — reversing the figure from last year when it imported 9 per cent more from Britain than Italy.

The UK’s underperformance might well reflect temporary factors, such as imports of pandemic-related goods. This would certainly go some way to explaining why, after a period during which Chinese imports of goods originating from the UK grew at a similar pace as those from other countries, we are now seeing such divergence.

In the six months to September, the US imported about $23bn of goods from the UK, less than half the $52bn imported from Germany. It was also 29 per cent below what the US imported from the UK for the same period last year. While that is not surprising in and of itself, the UK-US figures represent a much faster contraction than for Germany and for Italy. It is a similar drop as the one recorded for France.

Line chart of US imports from Germany/US imports from the UK, rolling 6-month sum, ratio, showing that US imports from Germany have fallen less than those from the UK

That lost market share will only exacerbate concerns for the future of the US-UK trade relationship. President-elect Joe Biden has already spoken out over Brexit, warning Johnson not to upend the Northern Ireland peace process.

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It’s the same picture elsewhere. South Korea’s imports from Germany rose 5.7 per cent in the six months to October, compared with the same period last year, but imports from the UK fell 13 per cent. From April to September, Indian imports from Germany and Italy have fallen much less than those from the UK. In value terms, both of these emerging markets import double the value from Germany, compared with the UK. French exporters have also lagged behind their German and Italian counterparts, but they tended to outperform the British.

It is not as though industry in the UK is blind to this. According to the latest survey from the European Commission, the net share of UK manufacturers reporting improved competitive positions in both EU and extra-EU markets dropped to a multiyear low in November and fell to far worse levels than for EU companies.

Line chart of net balance, %, over past three months, showing UK companies have reported falling competitive positions in the EU

The prime minister himself, however, has been less reluctant to admit defeat.

Policy watch

Is China’s Belt and Road Initiative about to become a lot more environmentally sound? The country’s President Xi Jinping surprised everyone earlier this year when he announced that Beijing wanted to become carbon neutral by 2060. While critics — rightly in our view — say this is too little, too late, it appears that Beijing’s stance could have a more immediate impact on this aspect of trade policy.

Christian Shepherd reports that a study backed by China’s environmental ministry has called for polluting Belt and Road projects to be placed on a negative list to encourage the country’s banks to avoid environmentally harmful investments along the route. According to lawyers, the study paves the way not only for a ban on coal investments but also for China to establish stricter and broader standards for disclosure, environmental impact assessments and engagement with local communities. The question now is whether the rest of the government will back the study.

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