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Two Tests for UK Trade: Does seamless, tariff-free trade boost exports and does distance matter?

During the UK’s departure from the European Union, debate about UK trade policy was dominated by two assertions:

  1. That seamless, tariff-free trade with the EU was the optimal outcome for UK manufacturing;
  2. That trade grows fastest with countries that are nearest.

In this report, trade analyst, Phil Radford performs two correlations on UK trade data to scrutinise the evidence for these two assertions. By comparing the performance of the UK’s 14 largest manufacturing export sectors in EU and non-EU markets from 2000–2019, the author finds:

  • UK-EU TRADE: ‘…there is no relationship between the comparative benefit enjoyed by a sector in the EU – in terms of tariffs and seamless access – and its comparative performance in EU markets over the past 20 years. In other words, there appears to be no connection at all between the supposed benefits of seamless, tariff-free trade with the EU, and the export performance of UK manufacturing sectors.’
  • ‘This research shows that over the past two decades, UK exports to the EU performed best where the effect of the Customs Union and Single market were weakest, or absent. The only sectors that performed comparatively well in EU markets were either small (food products) or slow growing (chemicals) or facing imminent decline (refined petroleum).’
  • Radford also finds ‘…the UK’s aerospace sector enjoyed the least advantage in EU markets, compared to other manufacturing sectors, and yet its comparative performance was easily the best.’
  • ‘In crude terms, the only area of UK trade in which there is a clear positive correlation between the supposed benefits of seamless, tariff-free trade on the one hand, and comparative performance on the other, is in the UK’s largest manufacturing import sectors.’
  • THE EU–UK TRADE AND COOPERATION AGREEMENT: ‘In general terms, most countries develop trade policy to increase exports and to discourage imports from displacing domestic production – at least where domestic production appears to be competitive. This is more or less the reverse of what seamless, tariff-free trade with the EU achieved in the final two decades of UK membership. In so far as the TCA with the EU replicates the terms of the UK’s previous trading relationship, it may turn out to be a very bad deal for the UK.’
  • DISTANCE: ‘Looking only at the top 10 countries, there is a strong positive correlation. This means that for 65.2 per cent of UK goods exports, there is a strong inverse relationship between geographical proximity and trade growth. The further a nation is from the UK, the faster exports grew – after GDP growth is taken into account.’
  • IMPORT PARTNERS IN EU: ‘With the exception of France and Ireland, all the UK’s principal import partners in the EU have succeeded in increasing exports to UK faster than the UK economy itself has grown.’
  • His findings ‘instantly reveal the EU’s domination of UK imports. Germany easily outstrips China and the US as the UK’s biggest import partner.’

Those results lead Phil Radford to draw some significant conclusions in this report:

  • OVERSTATED ASSERTIONS IN MODELLING: ‘Both of these conclusions support the assertions of liberal, free trade economists that the benefits of seamless, tariff free trade with neighbouring economies in the EU are overstated in the economic models used in official trade forecasts.’
  • ‘If these two tests are a fair reflection of UK trade performance then it follows that tariffs, non-tariff barriers and distance are not the principal drivers of UK export performance – at least for goods.’
  • SUBSIDIES: Radford also finds there ‘…is clear evidence that investment is a main driver of the trajectory of UK trade in cars and auto parts with the EU. And the scale of subsidies involved indicate that taxpayers’ cash is the magnet that draws investment away from UK plants.’
  • MODELLING: Radford finds ‘any forecasting model that fails to take into account the potential for tax policies to impact investment and therefore trade flows is likely to wildly miss its mark, at least in the UK’s pharmaceuticals industry’.
  • WHAT DRIVES THE GROWTH OF UK EXPORTS? ‘The decisive factors in the growth of UK exports over the past 20 years appear to have been: movements in investment (automotive goods and pharmaceuticals); subsidies (automotive and aerospace); corporate taxation (pharmaceuticals); and sheer entrepreneurship (aerospace, machinery, beverages).’
  • UK-EU TRADE AGREEMENT: ‘The current UK-EU trade agreement faces multiple challenges as its iniquities become obvious. At some inflection point in the future, the UK Government will have to decide what it is ultimately worth. If its purpose is to increase exports, then its proven benefit is limited to the food and chemicals sectors.’

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