Brexit: can the UK strike good trade deals with the EU once it leaves the single market?

Rob Griffin takes a look at how valuable the UK is to the EU for imports and exports and why it will be beneficial for both to strike a good deal after Brexit.

It’s one of the most intensely debated subjects surrounding Britain’s decision to leave the European Union: how are trading arrangements with the EU likely to change over the next few years?

Will our companies find it impossible to sell their goods and services? Are we going to pay substantially more for imports? What agreements will need to be put in place to ensure firms won’t end up going bust?

Various arguments were put forward by the Remain and Leave camps during the run-up to June’s historic referendum but neither side could deny that the EU is a vitally important trading partner for the UK.

We actually exported £223 billion of goods and services to other EU member states during 2015, equating to almost 44% of total UK exports, according to data compiled by the Office for National Statistics.

When you consider that exports to the United States over the same period were £95.1 billion, while those headed to China stood at £15.9 billion, you get a sense of how vital the EU region as a whole is to the wellbeing of British firms.

However, it’s a two-way street as we’re also very important to EU nations. In fact, the value of UK imports from the EU last year was valued at £291.1 billion, meaning we bought almost £70 billion more from the region than we sold.

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The view of experts

It’s a fact acknowledged by Capital Economics in a report entitled, The economic impact of Brexit, compiled for Woodford Investment management, which is run by Neil Woodford, one of the most successful fund managers of his generation.

‘It is highly probable that a favourable trade agreement would be reached after Brexit as there are advantages for both sides in continuing a close commercial arrangement,’ it states.

Even the worst-case scenario, in which Britain faces tariffs under ‘most-favoured nation’ rules, meaning we’ll be able to trade on the same terms as non-EU partners do today - is not viewed as disastrous.

‘Exporters would face some additional costs, such as complying with the European Union’s rules of origin, if they were outside the single market,’ it added. ‘However, these factors would be an inconvenience rather than a major barrier to trade.’

So let’s take a closer look at the figures.

Exporting to the EU

Germany is without doubt our most important trading partner among all of the EU nations. Not only is it the destination to which we export the most goods (£30.4 billion in 2015) but also from where we receive the most imports (£61.7 billion).

Although we exported the most amounts of goods to the United States during 2015 (£47.2 billion) a long list of EU countries featured among our top 10 most important export markets, according to the ONS.

In order these are: Germany (£30.4 billion), France (£17.9 billion), Netherlands (£16.8 billion), Ireland (£16.7 billion), Belgium & Luxembourg (£11.7 billion), Spain (£8.9 billion) and Italy (£8.4 billion).

The two remaining countries in the list are both non-EU - China (£12.7 billion), which came in at number six, and Switzerland (£8.1 billion), which was at number 10.

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Importing from the EU

As previously mentioned, we import the highest amount of goods from Germany (£61.7 billion), followed by Netherlands (£31.6 billion), France (£24.4 billion), Belgium & Luxembourg (£21.4 billion), Italy (£16bn), Spain (£14 billion) and Ireland (£12.8 billion).

The most important non-EU import sources are China (£37.9 billion) which came in at number two on the top 10 list, the United States (£34.7 billion) which was third, and Norway (£13.2 billion) that came in at number nine.

* It’s worth noting for both imports and exports the so-called ‘Rotterdam effect’, where goods initially exported to one country are then re-exported elsewhere. This can skew the share of exports going to a particular country – in this case the Netherlands.

Latest statistics

So how has trading been recently? Well, between the three months to February 2016 and the three months to May 2016, exports of goods to EU countries increased by £2 billion, according to ONS figures published in July 2016.

This has been attributed to exports of cars increasing by £0.6 billion; machinery increasing by £0.4 billion; chemicals increasing by £0.3 billion; and a £0.2 billion increase in aircraft.

Meanwhile, imports from the EU increased by £1.9 billion. This includes a £1.0 billion uptick in machinery; a £0.4 billion increase in food, beverages and tobacco; and a £0.7 billion increase in material manufactures.

Conclusion

So how important is the UK to the EU?

Over the longer-term the UK’s export position in the global economy has slightly weakened. In fact, the ONS states that its share of world exports has fallen from 5.6% in 1999 to 3.6% in 2014.

However, it’s not all bad news with trade activity having improved with some of its partners, particularly China and Switzerland. The US, meanwhile, has maintained a relatively stable share of UK exports of 16% to 18% over this 15-year period.

Encouragingly, the UK is currently one of the top three export destinations for six EU countries – Germany, Ireland, Spain, Cyprus, Netherlands and Poland, according to figures compiled by Eurostat.

It is the second most important export market for both Ireland and Poland in terms of total trade value in 2015, and number three on the list for Germany, Spain, Cyprus and the Netherlands.

The UK is also one of the three main sources of imports for three EU countries. It’s the most import for Ireland, the second for Cyprus and the third for Malta, once again based on trade value in 2015.

When you analyse the most recently published trade balances of goods and services – which sees total imports subtracted from the exports – it reveals that the UK is buying in more from the EU than it sells.

In fact, it only exported more than it imported to six countries during 2014 – Bulgaria, Croatia, Denmark, Estonia, Luxembourg and Malta – according to the most recently published figures.

Business leaders and politicians will be hopeful that the UK continues to be seen as an important export market for EU nations – a fact which is likely to be important when negotiations take place over trade arrangements going forward.

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