UK forced to change tack as trade with EU descends into chaos
- Jeremy Warner
14 MARCH 2021 • 5:00 AM
Have you tried importing anything from the Continent of late? Despite the further delay in imposing UK border controls, to help ease the complexities of new trading arrangements with the EU, it is already proving a costly pain in the proverbial. As I have learnt to my cost in purchasing a piece of furniture from the online retailer Etsy.
For starters, it has taken more than two months longer to deliver than advertised – blame it on Brexit, says the Portuguese manufacturer. It has also cost around 40pc more than the price agreed in additional VAT, “use of deferment”, and customs clearance charges. So much for the tariff-free trade the recently signed “Trade and Cooperative Agreement” was meant to deliver. I very probably would not have bought the item had I known about these extra costs.https://00d05c97f32fa098652ceb7614b786f4.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html?n=0
Technically speaking, the additional VAT charge has nothing to do with Brexit; it was separately introduced at the same time to stop platform retailers such as Etsy escaping VAT on imported, lower cost items. Yet it has all come together to make buying stuff from abroad very much more cumbersome and expensive than it was. About time too, some will argue.https://cf-particle-html.eip.telegraph.co.uk/c9db23bd-75ab-466d-805a-0c300ddccf3d.html#amp=1
For too long, the UK market has been an easy touch for foreign, and particularly European, producers, helping to generate one of the largest trade deficits in goods of any advanced economy in the world. Put simply, we buy a lot more produce from them than they do from us.
Only once in my time as a financial journalist has this deficit shown any sustained sign of reversing – in the aftermath of Britain’s departure from the European Exchange Rate Mechanism in the mid-Nineties.
Ever since the turn of the century, however, it’s just got bigger and bigger. Fortunately, this widening gap in goods has been partially offset by a growing surplus in services, particularly high value business and financial services.
Even so, the UK economy manages to generate a consistently large current account deficit, making it highly dependent on inflows of foreign capital to prevent things tipping over into a fully blown balance of payments crisis of the sort that used to plague the nation in the Sixties and Seventies.
For a multitude of reasons, it would therefore be nice if we made more stuff. With its levelling up agenda, and its determination to make the economy more self-reliant and resilient, the Government thinks so too. Might Brexit provide such an opportunity?
Some background. It’s hard to put an exact date on when the UK lost the plot as a manufacturing nation, but roughly speaking it coincided with Britain’s accession to Europe’s common market.
That’s not to attribute cause as such to membership of the EU. Grown fat and lazy on once captive imperial markets, large parts of Britain’s manufacturing base had long since become internationally uncompetitive.
But those markets were increasingly shutting us out in their own drives for self-sufficiency. That’s why the UK joined the supposed alternative of the European Economic Community; sadly, many British firms found the adjustment to this more demanding, competitive landscape difficult, or even impossible.
The harsh medicine of the early Thatcher years sealed their fate.
But let’s not exaggerate here. In point of fact, Britain produces more manufactured goods in absolute terms today than ever. It’s just that service sectors have grown by far more.
Relative to GDP, manufacturing output has been falling for 50 years or more, and is today just a third of its previous level. In itself, this is no bad thing. Thanks to globalisation and technological advances, manufactured goods prices have been falling rapidly relative to others.
Britain’s comparative advantage in services, where prices have been racing ahead relative to goods, has therefore stood the nation in good stead, enabling citizens to buy cheaply from abroad what they no longer produce at home.
Yet the transition has also been a socially destructive one. Once proud manufacturing regions have been rendered all but obsolete. We have, in a sense, traded our dignity for cheap foreign pap and a life of perpetual service. In some respects, we’ve only ourselves to blame.
Britain’s markets are more open to foreign invasion than almost any other country on the planet. UK consumers are also seemingly far less loyal to national brands than their European peers. “Buy British”, and “I’m backing Britain” campaigns have fallen on deaf ears. We like the choice and price of what our relatively unprotected borders give us.
Despite the increased friction in trade with Europe, Brexit has so far made only a marginal difference to these dynamics.
Renewed lockdown has naturally caused trade in goods with the Continent to plummet, but our exports have fallen by far more than our imports. Exports to the EU were down a staggering 40pc in January, but imports less than 30pc. The trade gap has therefore got worse, not better. The barriers they’ve put up to us are much harsher than the ones we have imposed on them.
All the same, you’d have thought a combination of Brexit and the Government’s Covid inspired purpose of making the UK a more resilient and self-sufficient economy might, in time, lead to some degree of import substitution: my own attempts to buy a Portuguese table being but one small example. It’s made me more inclined to seek British made alternatives in future. The impact on intermediary goods – components used in the finished product – might be even greater. Rules of origin requirements are, for instance, forcing foreign-owned car manufacturers in Britain to source more of their components from UK suppliers.
They have also made the establishment of a UK battery manufacturing facility, or gigafactory as Elon Musk likes to call such establishments, vital to Britain’s future as an exporter of electric vehicles – Lucas Industries recreated for an environmentally friendly age, as it were. The Government is promising big money to those willing to give it a go. Another plus, it might be thought.
Well, perhaps. Reinvigorating Britain’s manufacturing sector may be a worthy cause, but is it an entirely sensible one?
Not if at the expense of high-end service industries, which as things stand are among our most successful exporters, but, amid a steadily deteriorating relationship with the EU, seem to have been largely ignored in the quest for Britain’s new Jerusalem.
This Government is good at contradictory messages, trade being a case in point.
The more protectionist mindset implied by the goal of import substitution sits uncomfortably with Downing Street’s “Global Britain” pretensions. Switching the emphasis in public policy away from services to tradable goods is all well and good, but as Ben Broadbent, a deputy governor of the Bank of England, has pointed out, “a significant curtailment of trade with Europe would force the UK to shift away from producing the things it’s been relatively good at, and therefore tends to export to the EU, and towards the things it imports and is relatively less good at”. Quite so.https://00d05c97f32fa098652ceb7614b786f4.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html?n=0https://liftigniter-amp-website.platforms-prod-gcp.telegraph.co.uk/liftigniter-more-stories.html#amp=1More from Business
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