Eurosceptics are fond of pointing out that we have a big trade deficit with the EU. It exported £291 billion to us in 2014 while we exported £229 billion to it. So the other member states would, they say, lose more if our trading relationship broke down. So if we hang tough in our negotiations, we’ll get a good deal. The likes of BMW would be so desperate to sell to us that they would force the German government to open the EU market to us in return.
Chris Grayling, Leader of the House of Commons, trotted out this line on the BBC Today Programme (1 hour 38 minute mark) on March 10. Daniel Hannan, the Tory MEP, and Douglas Carswell, UKIP’s only MP, have made similar points.
There are many problems with the argument.
One is that it totally ignores proportionality. Britain’s exports to the EU represent 12% of our GDP. The rest of the EU’s exports to Britain represent just 3% of its GDP. Neither side would win from a trade war. But we would be hit proportionately much harder. We need them more than they need us. They could afford to play hard ball. We couldn’t as, if they limited access to the single market which accounts for 44% of our exports, we would be hit badly.
Another problem is our fallback position. If we didn’t get a trade deal, we’d have to rely on the World Trade Organisation (WTO). The snag is that the WTO works well for goods (where the Germans are strong) and doesn’t do much for services (where the UK is strong). We wouldn’t be able to put many restrictions on German and other exports to us, but they’d be pretty much free to shut us out of their services markets, including finance. So we’d have a weak negotiating position.
Yet another problem is that some EU countries might see our departure as an opportunity to grab some of our crown jewels. The two main prizes would be: to slice up parts of the City and entice it to Frankfurt, Paris, Amsterdam or Dublin; and to attract some of the large flows of foreign direct investment that now come to Britain, in part so that businesses can access the entire EU market. This would give some EU countries an incentive to stop us getting full access to its market post-Brexit, CEPS, a Brussels-based think-tank argues in a recent report.
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That might not be the only incentive to play hardball. The EU might not want a velvet divorce as that might encourage other countries to peel off.
As if that’s not enough, the argument that the EU needs us because we have a deficit assumes the only good thing about trade is exports. But imports are beneficial too. If EU exports to the UK were artificially restricted, our consumers would be harmed. They would have to pay more when they shop and would have less choice. It’s particularly odd to find Tory free-marketeers, who are supposed to understand the flaws of mercantilism, ignoring this point.
This article was updated on March 10 to take account of Chris Grayling’s comments on the BBC.
The headline on this article was updated on March 14
820,000 or 20% of all cars manufactured in Germany were exported to the UK last year. Infantile scaremongering to suggest that Germany would put a fifth of their flagship manufacturing products at risk over Brexit.
But it’s not just Germany who would have to agree to a deal so would the other 26 remaining members. And with the French elections coming up next year, and Ms Le Pen looking so strong at the moment and wanting to leave if it is seen as easy for Britain that would be dangerous for the current French government. Plus many other remaining states may see an opportunity of getting a share of the “spoils” should the UK decide to leave.
The question is not whether or not German cars will or will not continue to be exported to the UK — British consumers are still going to want German cars, and the existing fleet of BMWs and Mercedes are still going to need a lot of spare parts. The question is — who will have greater power in the negotiations about a new trade deal? The 27 countries of the EU which take in 44% of UKs exports, or Britain?
Anotherpoint to factor in the discussion about the UK/EU trade balance is the question of local content. See this:
http://www.nakedcapitalism.com/2016/03/the-implications-of-brexit-for-the-rest-of-the-eu.html
And in particular:
“Along with the US and China, the UK is currently one of the most important trading partners for the other EU states. In 2010-2014, total exports to the UK were 2.9% of EUx GDP, and total imports from the UK were 2.4% of GDP. Trade in goods such as cars, machinery, and chemicals dominates the EUx’s trade volumes with the UK, constituting about 70% of total exports and imports of goods and services. In goods trade, most EUx member states are running a sizeable surplus with the UK, in total 0.6% of EUx GDP in the past five years (see Figure 1). This surplus almost disappears, however, when accounting for foreign value added in exports, which was 30% in 2011 for EUx goods exports to the UK and 23% for UK goods exports to the EUx, according to OECD data. In services trade, most EUx countries are running deficits with the UK, amounting to a total of 0.2% of GDP. This is almost entirely driven by financial services, while deficits of the EUx in other parts of services trade are offset by surpluses in tourism.”
Are your figures correct? I thought that our trade deficit with the EU was running at about £89 billion.
Also shouldn’t you point out that in global terms the EU is becoming less important. Over the last 20 years the EU’s share of global trade has fallen from 30% of global GDP to about 24% now.
I think your other point, expressing exports as a percentage of GDP, simply shows how bad British business has been in trading with the rest of the world.
When I was involved with an insurance company some twenty years ago nearly100% of our business was with Europe. Now Europe represents only 25% of the business and they have offices in the middle east and the far east.