Britain’s underperformance in goods exports intensifies as further obstacles loom

The UK’s international trade volumes continued a trend of incremental decline in May, according to the latest ONS data, as British companies struggle to increase goods sales overseas. Imports exceeded exports by almost £20bn in May, as the long-running goods trade deficit deteriorates again after a short-lived improvement in April.

Goods exports by the UK have been poor all year. Volumes significantly declined in May with the European Union (EU), Britain’s largest trading partner, and modestly elsewhere, while imports rose in both segments. In May, UK goods exports to the EU fell back by £1.1bn, or 6.8%, to £14.8bn, excluding precious metals. Exports of fuels and chemicals both fell by £0.3bn, while exports of machinery and transport equipment and material manufactures decreased by £0.2bn. The main contribution to the fuel exports fall came from reduced exports of crude oil to Germany and Sweden, according to the ONS, while falls in medicinal and pharmaceutical products to Germany and Belgium led to the decreased exports of chemicals. In the same period, goods exports to non-EU countries fell by £0.3bn, or 2.1%, to £16.0bn.

At the same time, the UK imported more goods from the EU in May, up by £0.7bn, or 2.8%, to £26.8bn, driven by an increase in imports of cars from Germany, attributed to the easing of supply chain issues. German manufacturers saw a surge in orders for cars and other vehicles in May, according to the Federal Statistical Office of Germany. Imports from Germany were up 21% on April 2023 to £6.6bn, led by £2.5bn in motor vehicles. This data aligns with the UK’s stellar first half for light commercial vehicles, electric vehicles and vans, which rose for six consecutive months, according to the Society of Motor Manufacturers and Traders (SMMT). However, reaching an agreement between the UK and EU in the coming months on “rules of origin” for electric vehicles (EVs)and batteries will be crucial to avoid damaging new tariffs for both sides. Under current rules, EVs traded between the EU and the UK must have 60% of batteries and 45% of parts by value sourced from the EU or UK or face 10% tariffs. The UK government, backed by carmakers from across Europe, is reportedly seeking a deferral of a post-Brexit trade rule it argues will pile disproportionate costs onto the industry from 2024.

UK imports of non-EU goods also rose, by £1.3bn, or 5.9%, to £23.8bn. The UK’s total trade exports were down £1.4bn, or 4.4%, to £30.7bn, while total imports rose £2.0bn, or 4.2%, to £50.5bn.  Consequently, Britain’s trade in goods deficit widened by £3.5bn in May to £19.8bn.

These lacklustre British export volumes are attributed to inflationary pressures, the effects of global supply chain restructuring, and ongoing frictions related to a continuing flow of new requirements for UK exporters by the EU. As the EU introduces new regulations, such as incoming rules on carbon border taxes, plastic packaging and supply chain due diligence monitoring, the effect is to increase regulatory divergence between the UK and the 27-nation bloc, which creates fresh barriers for British exporters. For example, UK companies will become more difficult to trade with from October when EU companies will be required to compile reports on the carbon emissions attached to certain imported goods (e.g. steel, aluminium and fertilisers). The rules will require EU companies to buy certificates to cover emissions embedded in products from 2026. The extra paperwork and costs will hurt UK companies that supply products to EU businesses covered by the regulation.

Boosting exports is central to reviving UK’s post-pandemic economic recovery, but firms of all sizes are facing familiar stumbling blocks. New research by the British Chambers of Commerce (BCC) showed that in the second quarter, half of all SME exporters (50%) saw no change in overseas sales, and almost a quarter (24%) reported a decrease. The majority of businesses (54%) say smoother customs procedures are the key to boosting UK exports, while one in four (42%) favour lowering tariffs, just over one-third (35%) said there is a need to reduce regulatory barriers, and one in three (29%) want better support for smaller businesses.

The sluggish trade volumes data comes as the UK became the first new country to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) since its inception six years ago. While the government has said joining the pact will unlock access to a region with a total GDP of £11 trillion, official estimates indicate the CPTPP will only add 0.08% to the size of the UK’s economy in ten years. This is a stark contrast to Bloomberg Economics estimates earlier this year that Brexit was costing the UK economy £100bn each year. Separately, UK and Turkey announced talks on a new free trade agreement.

If you would like to discuss any matters regarding Imports and Exports or engage the services of BTG Advisory please contact David Abbott in our London office.