UK trade 15 months after the EU referendum

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Today the Office for National Statistics have released September’s figures for international trade. The trade deficit in the last 3 months widened to £9.5 billion compared to £6.5 billion registered between April and June 2017. The deficit was much smaller (£7.1 billion difference) compared to the same period a year ago.

It is sometimes difficult to give a right (or useful) interpretation to one new data point, however, since we now have 15 months worth of post-EU referendum data, it may be a good occasion to analyse what happened to trade so far and if any Brexit campaign predictions have actually materialised.

J-curve: waiting for Godot?

The J-curve theory states that after a strong currency depreciation, a country’s trade balance will worsen initially because higher prices on imports will be greater than the reduced volume of imports. Afterwards, the effects of a weak currency will boost exports and reduce imports improving the trade balance.

As Martyn wrote few days ago, since the referendum UK exports ran fast thanks to a depreciated Sterling (+15.1% since the EU-referendum), however imports ran quickly as well (+12.1%). The J-curve that happened to materialize around autumn 2016, now does not look so clear anymore. As said above, the trade balance actually deteriorated in the months since June 2017.

The J-curve is not a rule set in stone and probably the UK economy structure does not allow the country to widely benefit from a sharp currency depreciation.

J_curve 

 

EU vs non-EU trade, a sticky business

Has the share of trade with the EU changed in these 15 months? Well… not that much.

In the 15 months prior to the EU referendum the share of trade in goods with the EU had been equal to 52.5%. In the 15 months after, the figure has been roughly the same (52.4%).

The UK exported more in these 15 months post EU referendum than prior and the biggest increase was to EU countries whereas exports to the rest of the world did not actually pick up with the same pace.

 uk_trade_EU_nonEU2 

 

Newton was not an economist however

In 1687, Isaac Newton theorized the law of universal gravitation stating that point masses are attracted by a force directly proportional to their masses and inversely proportional to their distance. Since the 1960s this concept has started to be used by economists showing that flows of trade between countries are directly proportional to their size and inversely proportional to their distance. Sometimes we tend to forget that geography matters and how substituting a supplier/customer with another thousands of miles away is not that easy.

The ONS produce a chart with the top 50 countries by trade in goods with the UK and it’s not a surprise that the top markets in 2016 have been big countries or countries close to the UK. The top five are represented by Germany, US, the Netherlands, China, and France. To confirm once more how geography matters, Ireland is at the top of trade per head (total trade divided by population) and total trade with the “Celtic Tiger” (population 4.7 million) is equal to the sum of trade with a selection of big countries such as India, Brazil, Russia, Indonesia, Australia and Pakistan (population 2.15 billion)

In these last months we heard several times that the UK will find new trade partners after leaving the EU and/or restore great trade links with the Commonwealth countries. However, even if technology and globalization deeply shaped the world, it should not be a surprise that businesses still find easier and cheaper to trade with their neighbours instead of trading with someone far away, on a different time zone, with different rules or standards,… not to mention transport costs and time delays.

Geography matters, don’t forget it.

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