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Europe is growing in importance as a UK trade partner

Love thy neighbour

By Alan Winters  

Find Prospect’s full report, “Brexit Britain: the trade challenge,” here

What did European integration ever do for British trade? The answer is: quite a bit. In the 1960s Britain had closer trading relations with countries outside Europe, notably the Commonwealth nations. Since then trade has strongly re-oriented towards Europe with Britain experiencing much smaller declines in market shares in Europe than elsewhere. Trade with the European Union appears to support more sophisticated UK sectors.

Since the UK joined the European Economic Community (EEC) in 1973 its economic performance and international trade have changed dramatically. The world has changed too, so not everything we observe can be laid at the door of the EEC, but in terms of trade patterns much of it can. The EEC was a customs union—an area with zero tariffs between members and a common external tariff on imports from outside the bloc—and so the UK had to adopt European tariffs, which were considerably higher in agriculture and roughly the same on average in manufacturing as she had before.

The EEC originally had six members, expanded to nine (including the UK) in 1973 and then gradually to its current 28. Integration has also deepened through the adoption of common regulations, notably in 1992 with the launch of the single market, which enabled trade between its members that is barely more difficult than between counties in Britain. Today the EU is the largest market in the world.

Trade agreements tend to increase the trade between members. Sometimes this can be at the expense of trade with non-members, but most evidence suggests that the creation of new trade is stronger than the diversion of trade from non-members to members. This is why economists believe that trade agreements tend to be good for economic welfare. When a single European market is created “trade creation” is particularly likely to outweigh “trade diversion,” for two reasons. First, many single market regulations reduce the costs of cross-border trade and hence more trade, and hence economic activity, becomes possible and profitable.

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Second, in many sectors, trade between the member and non-member countries barely exists initially because differences in standards and regulations prevent it. Thus the extra trade stimulated by the European single market arose as UK suppliers challenged domestic producers in Europe, and vice versa: an increase in competition that benefitted consumers.

In 1968-70—before UK accession could be confidently expected—21 per cent of UK exports of goods went to the six original EEC members; this rose to 41 per cent by 1990-92 before declining to 32 per cent by 2012-15. We can also ask what share of different markets the UK manages to capture. For the world as a whole, the UK’s share has fallen from 6.2 per cent in 1968-70, to 4.9 per cent in 1990-92, to 2.4 per cent in 2013-15. However, over the same periods the UK’s share of the EEC market evolved from 4.6 per cent, through 7 per cent to 4.3 per cent. That is, the EEC countries have moved from accounting for a considerably smaller share of UK trade than the global figure, to a share that is almost twice as large.

The patterns are similar for the current EU membership but slightly more muted: the EU took nearly 50 per cent of UK exports in 2013-15 and the UK had a market share of 3.9 per cent. The declines in all these shares since the early 1990s reflect the growing importance of emerging markets and the precipitous fall in UK competitiveness.

The best way to see how European integration has affected mutual trade is to compare the UK’s share of the EU market with its share of the world market. The chart above (see figure 1) plots this from 1962 to 2015 for the original six EEC nations (in blue) along with similar data for imports (the EEC’s share of the UK market compared with those nations’ share of world markets.)

At first the UK did less well in the EEC than elsewhere (its share was 30 per cent lower), and vice versa, but following accession, trade in both directions surged. By the mid-seventies the UK and EEC did as well with each other as elsewhere and by the mid-eighties they did 30-40 per cent better. When the single market kicked in there was another surge, so that now mutual market shares are 50-70 per cent above their respective global norms.

The commodity composition of trade also matters (see figure 2, above.) A proportion of UK imports from the EU are agricultural goods, at least some of which we could get more cheaply elsewhere; the share has fallen, however, from around 30 per cent in the early sixties to about 10 per cent now.

In terms of UK exports the largest share is in machinery—nearly 40 per cent of non-oil exports now—but the sectors that have increased their shares are chemicals and especially pharma (around 20 per cent) and instrument engineering (15 per cent). Thus trade with the EU seems to support more sophisticated sectors and this is even truer if we consider services as well.

 


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On the 17th of January 2017, Prospect hosted a roundtable discussion with the contributors to: Brexit Britain: the trade challenge. This report is designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. The discussion was chaired by Tom Clark, Editor of Prospect. Participants included Tasmina Ahmed-Sheikh MP, Miriam González and Vicky Pryce.  

To find out more about how you can become involved in Prospect’s Trade Challenge programme, please contact david.tl@prospect-magazine.co.uk

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