Is trade THE killer issue? Claim and counter claim has certainly sown confusion,which is a great pity. We wanted to explore the facts and were surprised by the real numbers and the facts about the EU and trade. (Where possible the sources are shown in brackets).
Sorry to start with numbers – skip these bullets if you’re bored already!
- In 2014 UK GDP was worth USD2,989 billion (World Bank)
- Exports of goods and services were 28.4% of this (World Bank)
- Of these exports, 44% went to the EU (ONS)
- Of the latter, two-thirds were in goods rather than services
- Therefore in 2014 8.2% of UK GDP were exports of goods to the EU
Put another way, 92% of the UK economy is doing something other than exporting goods to the EU. Hmmm.
The Remain leadership are spending an awful lot of time on this one issue (trade of goods with the EU) bearing in mind it represents a fairly small part of the UK economy. It’s a shame Leave aren’t highlighting this point.
Within this 8% of GDP trade some industries are clearly going to be more exposed than others to a Brexit vote, for example car manufacturing. The political reality is that if there was a vote for Brexit the government, with the referendum behind it, will have to focus very hard on working to help these industries – but we shouldn’t feel guilty about giving the Government work to do, that is their job.
For example, think Celtic Tiger. Without the constraints of the EU, pull the plug on Corporation Tax, slash it to 10%, and watch the queue round the block for global businesses to grow their UK operations.
In any event, as Ashoka Mody explains later, existing trade relationships have a strong tendency to persist, even with changes in the terms of trade – it doesn’t all suddenly stop as some might scare you into believing.
Why Only Goods?
In the above numbers I haven’t included Services (which represent one third of exports to the EU) as they are of a very different nature when it comes to trade.
Here is what the former CEO of HSBC had to say:
“Europe needs Britain far more than Britain needs Europe… the City is the greatest financial centre in Europe if not the world. Its unrivalled pool of talent, concentration of firms and markets in almost every conceivable product, as well as its welcoming tax, regulatory and legal environment, make it pivotal for every European financial services company. The EU will do everything to ensure it retains unfettered access to London” (Michael Geoghegan, FT)
Some Other Interesting Facts On Trade
- The EUs share of global GDP has fallen from 30% in 1993 to 24% in 2013…
- …this is because the non-EU economies, particularly emerging economies, have grown faster (ONS)
- For the same reasons UK trade with the EU has fallen consistently since 1999 (ONS)
It is said that the UK will struggle to make trade agreements on its own, yet:
- Britain is the only major EU economy that exports more outside the EU than within it (Rishi Sunak MP)
- The EU has more than 50 trade agreements in place, but…
- …after half a century the EU still does not have a free trade deal in place with a single top 10 economy (Rishi Sunak MP)
- In contrast Australia (half the GDP of the UK) has trade agreements with China, Japan, and the US
- Other medium-sized nations have also put successful deals in place e.g. South Korea, Switzerland, and Canada
- 90% of global growth is generated outside the EU (European Commission)
More generally, even as a Plastic Paddy (i.e. Irish born outside Ireland) I must admit that Britain has been a very successful trading nation for a few hundred years, and often in spite of its European neighbours – it’s in the DNA.
In contrast you must wonder whether the EU is really committed to successful trading with the rest of the world – and even if it is, whether the unwieldy structure of the EU hinders this process. Recent news was very enlightening on this point, and barely reported, but for the FT…
The FT reported on 31st May that the world’s biggest trade deal between the EU and US is under threat due to “an increasingly bitter onslaught from politicians”.
Guess who was the biggest obstacle? France, “largely because of fears that the deal could harm its hallowed farming sector and lessen the value of… iconic French wines, cheeses, and meats”.
And the French President said “There can be no question of sacrificing our interests to get a deal”.
Various Trade Agreement Options Post-Brexit
Here is a decent paper which sets out the alternatives for trade deals, written in early 2014 by a group of economists firmly in the Remain camp, the Centre For European Reform. Brexiteer economists will undoubtedly argue with the model forecasts, and in addition I believe politics will drive economics post-Brexit, making these sorts of models of limited value for either side – but nonetheless this paper is a good overview of the options.
Their view is that post Brexit the UK and EU would negotiate an FTA (Free Trade Agreement). Rather than repeat their analysis, I suggest reading page 9 for their summary of how an FTA might work.
How quickly such an FTA might be negotiated is very much a political issue.
On the one hand German car makers and French wine makers will be pushing for tariff-free access to the UK.
On the other hand, in the lead up to elections in Germany and France in 2017, they might not want to be seen to be soft on the UK.
Last but not least there is the option of not having any tariffs at all on UK imports, unilaterally. This is a fascinating idea. Tell EU countries, “we won’t put any tariffs on your goods coming into the UK, and whether you put any tariffs on goods we export to you is completely up to you”.
Such unilateral free trade would completely change the atmosphere around trade – totally non-confrontational. (More discussion here)
The Comic Economic Consensus
Ashoka Mody is an economic professor at Princeton and former deputy director at the IMF for European research. He regards the forecasts of IMF director Christine Lagarde, the UK Treasury, the OECD and George Osborne as comic.
He makes the point that once you go back to core principles you reach a humbler conclusion: economics is neutral on whether to leave or remain, and “the battle for Brexit must be fought on other grounds”.
His fuller analysis is here. What he says on how companies adjust to tariffs is particularly interesting, and is based on experience and academic research which completely contradicts the scaremongering of David Cameron and the Remain team
That’s it! A ramble around trade, what some say is the most important issue of this referendum.
See more insights here