The UK’s trade figures have been buffeted of late by changes of definition and accounting practices, large flows of ‘erratics’, rising energy and commodity prices and rising shipping costs. This hasn’t inhibited zealots on all sides from claiming that they ‘prove’ that either Brexit has not been a failure (few go so far as to point to Brexit successes, other than the vaccines) or has been a disaster.
It’s worth looking ‘under the bonnet’ and trying to strip out some of these factors. Cebr is assisted in this by our past research, for example our study of the impact of smart ledgers on world trade where we researched the impact of transport costs on trade flows and our various studies for Maritime UK where we look at the often underappreciated role of shipping in the economy.
The particular factor to which we have paid most attention recently has been shipping costs. These have risen dramatically from pre-pandemic levels. At the time of writing the Baltic Dry Index is roughly double its pre-pandemic level but at times in the past two years it has been four times as high. More relevant is the average contract price index which we estimate to be currently 431% higher than its pre-pandemic level. Though as spot prices have fallen dramatically recently, contract rates are likely to fall for the rest of this year.
For trade in goods, it is worth splitting between long haul (i.e. to the US or Asia) and short haul (across the channel to Continental Europe). This split is fairly similar to the EU/non-EU split.
We have modelled the impact of higher shipping costs carefully. For short haul (e.g. to Germany) pre-pandemic the typical pre-pandemic cost of freight and logistics for UK exports was 3.5% of the value of the exports. The current cost incorporating higher shipping costs is 7.3%. For long haul (e.g. from the UK to Singapore), the pre-pandemic cost was 7.5%. Now it is as much as 20.4%, although this will fall back as the current lower spot price factors in to contract prices.
We can also consider the impacts of higher prices on demand in terms of elasticities. You would expect a much lower elasticity when price movements are driven by external factors, such as shipping costs, which must also impact the prices of products from commercial rivals. But even if the elasticity were as low as 1.0 in this particular case, the impact of rising shipping costs alone would be enough to reduce the UK’s short haul exports by 3.8% and long haul by 12.9%. Further, assuming an elasticity of 1 is probably fairly cautious. This would partly explain why post-Brexit, exports outside the EU have fallen from 54% of UK exports in the second half of 2019 to 48% in February to April this year. The impact of relative price changes on energy and semi-manufactured exports, where the EU exports have been boosted by rising prices, would seem the main explanation of the rest of the rising share of EU exports by value.
Rising shipping costs, through their impact on import prices, have also added to inflation in the UK. A recent IMF blog1 suggests that they may add 1.5 percentage points to inflation in Western economies this year.
LSE analysis2 suggests that Brexit has sharply reduced the range of goods traded between the UK and the EU, as the cost of trading causes smaller traders to exit the market both for exports and imports. This seems consistent with anecdotal and survey evidence. This has reduced both exports and imports, the latter by slightly more. There is little net GDP effect initially, but long term the economy loses the benefits of specialisation.
Finally, to glimpse the future of UK trade, it is worth looking at the UK’s telecoms services and business services exports. These are hard to measure and probably understated. But they have risen from 42.4% of the UK’s pre-pandemic exports of services in 2019 to 51.5% in the four most recent quarters to Q1 2022. In cash terms they have risen by 7%.
So the relatively weak performance of UK exports outside the EU can, to a considerable extent, be explained by the impact of rising shipping costs and should not be used to deflect the argument that Brexit has affected exports.
The coincidence of rising shipping costs and Brexit has enhanced the effect of ‘deglobalisation’ for the UK and reduced the country’s trade intensity. The scale of the impact of the rise in shipping costs is not very different from that estimated from Brexit. Moreover, for the UK, it hits the part of the economy, non-EU exports, that had been expected to prosper post Brexit.
Increasingly, UK exports are likely to be based on digital services which are subject neither to shipping costs nor in many cases from trade barriers, though they are still often subject to regulations on product standards and other aspects of commercial policy. This will mean that neither Brexit nor shipping costs will have the scale of impact that they have at present. But this long term is some distance away.
1 IMF Blog March 28 2022 How Soaring Shipping Costs Raise Prices Around the World by Yan Carrière-Swallow, Pragyan Deb, Davide Furceri, Daniel Jiménez and Jonathan D. Ostry
2 Centre for Economic Performance Paper No.1847 April 2022 Unravelling deep integration: UK trade in the wake of Brexit Rebecca Freeman, Kalina Manova, Thomas Prayer, Thomas Sampson
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Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.