In order to conform to the definitions used by the International Monetary Fund (IMF), trade statistics published by the UK’s Office of National Statistics are generally presented using the Balance of Payments (BOP) method.

For the purposes of the BOP method, the value of imports is the value of the goods at the point of export (i.e. the customs border of the exporting country), excluding insurance and freight costs.

Freight and insurance costs are then recorded as imports of services, if the payments are made to an overseas company; otherwise they are considered to be domestic transactions, which are excluded from the accounts.

Since the end of the Second World War, only in the years 1956, 1958, 1971, and 1980-1982 did the trade in goods generate an annual surplus. In 2008, the annual deficit on trade in goods reached a record £92.9 billion, with imports 37% higher than exports. The gap has widened nearly every year since the 7% low recorded in 1997.

Source: ONS

The deficit is normally cyclical, rising when the UK economy experiences an upturn, and falling when conditions are less buoyant (because we import less).

Given the strength of domestic (and especially consumer) demand for much of the 2000s, it was inevitable that imports would rise consistently. Export performance has been more mixed, with the global economic slowdown of 2001 causing exports to stagnate for several years.

In 2005 and 2006, however, exports bounced back with two years of solid growth, fell in 2007 before bouncing back strongly again in 2008. Towards the end of 2008 and into 2009, however, both imports and exports began to slide, reflecting the weakness of both domestic and overseas demand.

A “record trade deficit” is not necessarily the problem that it might appear. Since trade flows are recorded in nominal terms (i.e. not adjusted for inflation), and since prices tend to rise steadily over time, it follows that a modest increase in both exports and imports can easily generate a “record trade deficit”.

The reality is, therefore, often less worrying than newspaper headlines might suggest.

It is often useful, therefore, to look at the goods deficit not in cash terms, but in relation to the overall size if the economy. Measured in this way, the goods deficit has indeed deteriorated markedly and steadily since 1998.

Not only was the 2008 shortfall the highest ever in cash terms, it also matched the biggest ever annual deficit as a share of GDP. With the UK economy worth £1.4 trillion in 2008, the goods deficit was equivalent to 6.4% of GDP, on a par with the previous year’s share.

1970 - 2005

During the late 1970s and early 1980s, production of North Sea oil expanded rapidly, and combined with rises in the price of oil, resulted in a sharp increase in Britain’s export earnings.

Between 1970 and 1982, the value of Britain’s oil exports soared from £0.3 billion to over £10 billion, accounting for a fifth of the total value of UK goods exports.

Indeed, the figures for 1982, the last year when Britain enjoyed a surplus on trade in goods, highlighted the significance of oil to the UK’s balance of payments on overseas trade. Britain’s overall surplus on trade in goods in that year was £1.9 billion. However, stripping out the surplus of £4.6 billion on oil, the underlying balance on trade in goods recorded a deficit of £2.7 billion.

It is important to note that, despite the advent of North Sea oil, Britain continues to import significant quantities of oil. This is because the particular grades of oil that are extracted from the North Sea are not suitable for all uses, and other grades of oil are imported, chiefly from the Middle East.

Nevertheless, the UK has enjoyed significant surpluses on trade in oil from the 1980s up to the early years of the 2000s.

2005 - present

The surpluses on trade in oil ended in 2005, when imports rose faster than exports, pushing the oil balance into the red for the first time since 1979 in which colour it has remained.

Oil still accounts for a significant proportion of the UK’s exports, with overseas sales of £32 billion in 2008 accounting for 12.7% of total goods exports. Since 2003, however, imports of oil have soared and in 2009 the oil deficit widened to £5.4 billion.

The failure of oil exports to keep pace with imports in the past two years has been blamed, in part, on key production facilities being subject to extensive shutdowns for maintenance work.

But it must also be acknowledged that North Sea oil is not an infinite resource, and some commentators suggest that production may now have reached its peak. If that is indeed the case, then further years of oil deficits can be expected in the future.

Source: ONS

A special feature of trade in oil is that the price of oil can fluctuate widely see producer input prices 8.3 Measuring Inflation As a result from time to time both exports and imports of oil can move sharply in value.

As examples, the value of UK oil exports fell from £10 billion in 1997 to £7 billion in 1998 and in 2008 rose to £31.8 billion from £22.8 billion in 2007, a jump of 39%.

A similar volatility exists with respect to certain categories of goods known as ‘erratic items’.

These are high-value items, where a small number of transactions can have a disproportionate effect on the overall balance of trade. In the UK, ‘erratics’ are defined as ships, aircraft, precious stones and silver.

As their name implies, the value of both exports and imports is subject to significant monthly fluctuations.

For most of the 1980s and 1990s the UK enjoyed a healthy annual surplus, often over £1 billion but then the picture changed.

Since 1998, the erratics balance has been negative, with the deficit widening to £3 billion in 2006, before shrinking to £0.9 billion in 2008.

Source: ONS

Because of the fluctuations in the value of oil and erratics, a more accurate picture of the trade position can be gained by stripping these items out.

This so-called ‘underlying’ trade is particularly sensitive to trends in the wider economy (both domestically and globally), with the global slowdowns of 1998 and 2001 both resulting in growth of underlying exports grinding to a halt.

The long-term trend shows steady growth of both imports and exports, with the gap widening markedly since 2000; in 2008, imports amounted to £137 for every £100 pounds of exports.

The tables below show how dramatically the UK’s trade in goods changed over the course of a hundred years.

TABLE 17.3: A) UK's TOP 10 EXPORTED PRODUCTS, 1900

B) UK's TOP 10 EXPORTED PRODUCTS, 2008

TABLE 17.4: A) UK's TOP TEN IMPORTED PRODUCTS, 1900

B) UK's TOP TEN IMPORTED PRODUCTS, 2008

Historically, the UK was an importer of foods and basic raw materials for industry (such as cotton, timber, wool, and silk) but, since 1970, these goods have taken a steadily declining share of UK imports.

Between 1970 and 2006, the share (by value) of imports accounted for by food, drink & tobacco fell from 22% to around 9%, while the share of basic materials dropped from 15% to 3.2%.

This decline is, however, relative rather than absolute and reflects the increasing importance of manufactured goods in trade.

Source: ONS

Imports of manufactured goods have grown rapidly over the last 30 years. The proportion of imports accounted for by finished manufactures rose from less than a quarter in 1970 to 50% by 2006.

Over the same period, total manufactures (comprising finished and semi-finished goods) increased their share of UK imports from 52% to 73%. At the start of the 20th century, total manufactures accounted for less than 25% of imports.

The UK’s trade in goods is dominated by manufactured goods. Included in this category are a wide range of products, including telecommunications equipment, motor cars, office machinery, and electrical machinery and equipment.

Their share of exports declined during the late 1970s and early 1980s (because of the advent of North Sea oil), but recovered during the late 1980s. Since the 1990s, manufactured goods have typically accounted for around 80% of all goods exports.

Machinery and transport equipment is a particularly important component of manufacturing, accounting for around 35% of both exports and imports in 2008.

Motor vehicles also feature prominently in the trade ‘top ten’, but despite the presence in this country of a number of foreign-owned manufacturing plants which export much of their production across the EU, the UK is a net importer of motor vehicles.

Source: ONS

Despite the challenges faced by some parts of the UK’s manufacturing industry, the value of exports of manufactured goods has grown steadily since 1970, with only four years – 1998, 2002, 2007 and 2008 – seeing a fall in export values.

In volume terms, manufactured exports increased by nearly 150% between 1991 and 2006 but fell back by 12% in 2007 and 2008 as the global slowdown gained steam.

Import growth has been a little faster in recent years. In 1983 there was widespread dismay when, for the first time since records began, the UK experienced a deficit on trade in manufactured goods.

The UK has not had a surplus on trade in manufactures since 1982, and the deficit widened markedly from 1997 onwards. In 2007, the deficit on manufactured goods reached £62 billion, narrowing to £57 billion in 2008, compared with just £7 billion in 1997 when New Labour came to power, with the gap between exports and imports widening from 5% to 30%.

Despite the weakening performance of UK manufacturing, some subsectors have held their own in international markets, notably chemicals and pharmaceuticals.

During the 1990s, the drinks sector also contributed a substantial surplus, but this has declined markedly during the early 2000s, showing a deficit in 2004 and 2005.

Changes in the types of goods traded have also influenced the geographic distribution of trade between Britain and our trading partners. Most of the UK’s trade in goods is with other developed countries.

In 2008, Europe, North America, and other OECD countries accounted for 80% of UK trade. The US maintained its position as Britain’s largest single export market, accounting for just over 14% of our exports, but Germany ranks as the UK’s largest source of imports, supplying 13% of our goods imports.

Perhaps the most significant trend over the past fifty years has been the increasing proportion of our trade that is accounted for by EU countries.

In 1970, UK exports to the EU were worth just £3.3 billion, or just under 40% of total UK exports. By 2008, exports to our EU partners were £141 billion, representing 56% of the total, down from £152 billion (62%) in 2006.

Imports likewise have tended to come increasingly from our EU partners. Over the period 1970-2008, imports from EU countries rose from £3.2 billion to £180 billion, increasing their share of UK imports from 38% to 52%.

Source: ONS

As a result, EU countries accounted for eight of the UK’s top ten export markets in 2008 (the other two being the US and Switzerland), and seven of the top ten import sources (the other three being US, China, and Japan).

British trade with the EU has been in deficit for most of the period of membership, the only exception being 1982 when a modest surplus of less than £1 billion was achieved.

From 1991 to 2000, the UK’s deficit with EU countries was broadly stable, typically about £4 - £5 billion annually over the period. From 2001, however, the deficit widened sharply, reaching £39 billion in 2008.

This largely reflected the relatively strong growth in the UK domestic economy, which encouraged imports; at the same time, economic conditions across much of the EU (and especially in the two biggest markets, Germany and France) were much more subdued, which made exporting difficult.

It also reflects, of course, the continuing geographical enlargement of the EU (discussed in section 17.3 above), which now comprises twenty-seven countries, compared with fifteen at the start of 2004.

The increasing importance of trade with the EU has seen a steady decline in the proportion of UK trade carried out with other countries, particularly with countries of the former British Empire.

In 1900, for example, India was Britain’s third-largest export market (ahead of France) and our fifth-largest supplier of imports. By 2008, India stood in thirteenth place, in terms of our export markets, and nineteenth in the rankings in terms of our import sources.