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According to the latest data from the ONS, the UK trade deficit widened to £13.3 billion in the second quarter of 2024, after being on a declining trend since the beginning of 2022. This was driven primarily by a £9 billion increase in the value of imported goods, reflecting strong domestic demand in the second quarter. However, a slower but well-received increase in the exports of goods by £1.3 billion was also noted, with 42 per cent of these destined for the European Union. In contrast, UK services trade kept rising, continuing the growth it had been displaying even before Brexit, leading to a services trade surplus of £39.1 billion.
Looking at the bigger picture, trade in goods has been under pressure since the United Kingdom left the European Union as a result of increases in non-tariff barriers and successive shocks affecting trade globally. Non-tariff barriers apply to most manufacturing and agricultural industries, which are facing additional paperwork and customs duties, alongside the UK government’s border target operating model being implemented in 2024. In addition, the United Kingdom has been struggling in diversifying its trade portfolio since Brexit, partly due to several global challenges, leading to sluggish growth in both exports and imports of goods to/from non-EU countries.
Conversely, the status of the UK as the world’s second largest exporter of services remains unchanged, with little sign of a change in this trend. In two decades, the combined exports and imports of services has risen to 45 per cent of total UK trade, while they currently represent 56 per cent of total exports. In comparison to the lacklustre trade in goods, the growth of trade in services outpaced that of most countries. This has been driven substantially by business and management consulting and public relations services.
The trade activity of the United Kingdom is not solely directed towards final consumption of goods and services. In 2020, the goods-producing industries relied on imported products for 35 per cent of their intermediate inputs, while the services sector relied on imports for 20 per cent of its intermediate inputs. These imports contribute to production of 25 and 15 per cent of the export of goods and services, respectively. This is a measure of backward linkages in a supply chain, indicating that the United Kingdom is not that heavily dependent on imported inputs for the production of exports. Based on the OECD’s data on trade in value added indicators, the UK’s backward position is relatively low, but in line with most developed economies, as it reflects its specialisation in services exports which tend to have lower import content relative to manufacturing exports. However, those sectors hit by trade barriers include those who rely more heavily on EU imports for their export production, which are motor vehicles; food, beverages and tobacco; accommodation and food service activities.
In turn, the UK economy displays a greater strength as a supplier of intermediate inputs to other countries, denoting its important presence in forward linkages. As such, nearly 70 per cent of the UK’s exports to the European Union are used as intermediate inputs, with Ireland, Germany or the Netherlands being the main trade partners. Also, roughly two thirds of UK value added embodied in foreign world exports is consumed by the EU. Despite rising non-tariff barriers, UK industries still play a significant role in EU regional supply chains, particularly financial and business services.
The position of UK sectors regarding their trade network centrality also tells how exposed they are to different trade shocks via direct and indirect effects, through cascade effects in their input-output linkages. However, a country’s participation is distinct from its positioning in the supply chains. Like most advanced economies under the current global trade fragmentation, the United Kingdom is participating less in global value chains through increased domestic content of its exports. It remains nonetheless well positioned in terms of forward linkages. On the backward position, the main exporting (downstream) industries are supply of chemical products, as well as of transport and machinery equipment, and so are placed in a more exposed position to trade shocks. These industries are also highly intensive in technology and show higher labour productivity than the manufacturing sector as a whole, despite relatively slower business expenditure on R&D. The recent increase in goods exports is also driven by these particular sectors.
The government has different avenues to address the UK trading position. First of all, as more non-tariff barriers are expected to be introduced due to the UK’s border target operating model, negotiations over new trade agreements should be taking place. Given the position of the UK in the global trade networks, these should be oriented towards multilateral agreements, rather than focused on bilateral deals. The proportion of trade exchanged with non-EU regions has not increased as much as expected before Brexit, which might indicate not only global trends but also the importance of flexibility required by some industries to quickly close down gaps that are opening along their supply chain. This might pose a challenge, given the current global fragmentation along political lines....
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