A recent report from the BBC suggests that the UK is in due course to becoming Germany’s 11th trading partner in terms of exports.
The German-owned, Federal Statistics Office reports that Germans spent £13.8bn, or nearly 11%, less on British goods in the first six months of 2021, thus placing the UK’s trade with Germany into freefall.
Historically, since the 1950s, the UK has been in Germany’s top 10 trading partners, and, before the Brexit vote in 2016, the UK was Germany’s fifth-largest trading partner.
Hence, our drift away from the EU has led to a freefall in terms of trade with the region as Brexit red-tape increases the costs of trade between the UK and EU.
For example, lorry drivers typically get paid by the mile and not by the hour, meaning that extra border checks and bureaucracy, which are now in place due to Brexit, are placing significant slowdowns at borders, and for lorry drivers time is money.
This places smaller British firms at a massive disadvantage as local businesses cannot cope with supply delays and increased transportation or logistics costs. Nevertheless, even multimillion-dollar businesses are suffering from these issues, earlier last month McDonald’s ran out of Milkshakes and Coca-Cola could not get hold of the materials necessary to make their cans.
What will this mean for the UK economy? Well, the likelihood is an increased current account deficit. The UK current account deficit sits at -3.5% of GDP, which, although an improvement since the Brexit vote, still places us below the government objective of balancing the current account.
However, as our exports to Germany decreased by 11%, and with key industries such as agriculture and pharmaceuticals seeing their share of exports falling by 80% and 50% respectively, the UK’s exports to Germany are declining. Not only will this have an adverse effect on the firms within these industries, but, this will also contribute to a worsening current account deficit as despite the UK exporting less to Germany, we have seen the UK importing more from its European counterpart.
Despite this, the UK is still buying a lot from Germany, with imports up 2.6% to $32.1bn in the first six months of this year.
So, with imports rising and with exports falling, the UK current account deficit will likely fall due to this trade pattern with Germany.
However, this may not be the case as, despite Brexit, the UK has been making moves in retaining its position as a significant economic power. A Guardian article from June reports that last year, the UK secured 975 instances of FDI, which was the second-highest in Europe and slightly below France which managed to secure herself 985 instances.
The figures, provided by accountancy firm EY, suggest that the UK has seen success during the pandemic, especially post Brexit, as the nation almost achieves the top spot in Europe for FDI.
One way the UK has managed to achieve this is through its use of government intervention to set up enterprise zones.
These enterprise zones involve tax breaks and other financial incentives, such as the training of workers, which was used in the case of Siemens, a German green tech company, who set up within the UK in the Humber-Estuary to produce wind turbines.
The presence of Siemens within these regions will help to rebuild these areas as local businesses benefit from increased demand for their services as newly employed engineers and technicians spend their new disposable incomes on goods and services, thus helping to achieve an economic multiplier effect.
At the same time, the production of wind turbines helps the UK achieve its climate target of the Paris Agreement which involves the UK becoming carbon neutral by 2050.
This production of wind turbines and other specialised technologies which are entering the UK, such as the planned Tesla Gigafactory, will likely lead to a boost in the UK’s trade once complete.
This is because these, through the division of labour, a component of specialisation, firms and businesses in green technology or electric vehicles will be able to export their excess output to nations around the globe.
This is especially the case in future as once China’s middle class grows and as the CCP begin to make the transition to greener energy generation methods so that they can sustain their growth, global demand for green technology as well as electric vehicles will ramp up.
Consequently, it will be logical to assume that in the long-term, once the UK’s FDI projects are complete, the UK will be in the perfect position to see a balanced current account as the nations ability to reliably export technologies that will be in demand by nations such as China will give the UK a strong competitive advantage in a global market.
Written by Hubert Kucharski