The impact of Brexit on trade in the first two years after leaving the EU was complicated by global events: first the pandemic, and then the spike in energy prices. This means the 2023 data – the third year of trade post-Brexit – is the first real opportunity to see what’s going on.
At first glance, the UK’s 2023 trade performance is exactly what you might expect from an economy adapting to new trade barriers – losing momentum like a tire with a ‘slow puncture’. After a more sluggish pandemic revival than our G7 peers, British trade excluding precious metals has since been essentially flat, falling 0.2 per cent between 2022 and 2023.[i] Depressingly, this leaves trade openness (imports and exports relative to GDP) below its 2019 levels by the end of 2023 (3 percentage points below) – while France, with its similar trade profile, was 0.4 percentage points above.[ii] Even the US, in the midst of a trade war with China, has seen openness rise by 0.1 percentage points between 2019 and 2023.
A story of two halves: weak goods, stronger services
The impact of Brexit is most obvious in UK goods trade. By the end of 2023, goods trade had shrunk to levels not seen since 2015. This isn’t just part of a general slowing of goods trade around the world – the UK’s goods exports and imports have contracted by 13.2 per cent and 7.4 per cent since 2019, by far more than any other G7 country.
Many people expected goods trade to be weak, but few expected non-EU trade to be hit as hard as that with the EU. The equally feeble performance across the UK’s trade partners means that in 2023, the EU share of goods imports and exports had returned to its pre-Brexit level.
But just as you might conclude that Brexit has been a disaster for trade, UK services trade is soaring. Services trade was growing quicker than goods long before Brexit – in the two decades since 2003, services trade (imports and exports) grew from 33 per cent of the UK’s total trade to 45 per cent. Just looking at exports, services are an even bigger 56 per cent share of the total. This services trade doesn’t appear to have taken notice of Brexit, growing 14.0 per cent between 2019 and 2023 – faster than France, the US and Japan. And by the end of 2023, UK services trade was 2.8 per cent above its 2010 to 2018 trend.
Some have been alarmed by the 6 per cent fall in services exports in the final quarter of 2023. But we should be cautious about over-interpreting this single data point in an otherwise strong year for services trade. Services trade growth is not always smooth, and the longer-term picture is what we should take more seriously here.
The picture on services trade is positive, but the devil is in the detail
Of course, services trade is notoriously difficult to measure; the US and the UK can’t even agree who is selling more services than they are buying from the other. This results in both the UK and US reporting a services trade surplus (exporting more than they are importing from each other).
But ‘mirror’ data (using imports recorded in the rest of the world to measure export from the UK) paints a different picture about the quantity of trade in services. The good news is that US and EU mirror data (representing 64 per cent of UK services trade) corroborates the positive direction of travel for UK services. But we don’t know exactly how much services the UK is selling overseas. The US reported the UK’s services exports to the US had grown by 30 per cent less than the ONS figures between 2016 and 2022. The numbers for the EU meanwhile suggest that the UK’s services exports to the EU had grown 13 per cent more than the ONS believes. Assuming that the UK’s exports to the EU did in fact grow in line with Eurostat data, UK services exports in 2022 would be £50 billion higher than if we use US reported growth for the UK exports to the US.
So what next?
The UK’s gravity-defying services strengths and its goods weaknesses looks set to be the story for the foreseeable future. This has implications for a UK trade strategy. First, we need to be honest about what the UK’s growth in services exports means for workers. Although traditionally most would point to manufacturing workers as those most exposed to trade shocks, it is the highly-paid bankers, lawyers and consultants who are now in view. Second, our trade strategy needs to be aligned with broader economic goals that can spur the UK out of stagnation. Previous Resolution Foundation research has found a that significant change to our goods relationship with the EU is required to prevent supply chains for our most productive manufacturing sectors unravelling over time. And that for services, we must harness our strengths beyond the EU in innovative new agreements.
