WORD COUNT: 1028 words
Assignment 2016
The EU and UK are undeniably close trade partners seeing as the EU makes for a large proportion of trade deficit with the UK as of 2014. Nonetheless, strong economic growth in many non-EU emerging economies has resulted in important trade activity with these non-EU countries, eating into proportion accounted for by EU since 1999, despite the value of EU trade increasing. The sheer growth in UK’s trade volume is reflected in the downward trend in Graphs 1, 2, & 3 below.
Considering the total current account balance (Graph 1), UK’s trade deficit has been in decline from 1999 to 2014, with exceptional peaks in 2001, 2006, and 2011. The same pattern is observed in UK’s total trade in goods with the EU (Graph 2). Faster growth in the UK’s terms of trade with the EU deteriorated UK’s overall trade balance with the EU, and significantly widened trade deficits (ONS, 2015). The inference is the high proportion of UK-EU trade is strongly reflected in the current account balance and hence has huge contributions to UK’s trade balance on the whole. The peaks which can be accounted for by neoliberal policies and weakening of the sterling (Pimlott, 2009 and Cadman, 2015) were followed by severe worsening in deficits. This says something about the effectiveness and sustainability of fiscal and monetary policies to improving terms of trade.
In spite of that, UK’s improving balance of total trade in goods with the rest of the world somewhat cushions the current account deficit. The choppy evolution post-2006 (Graph 3) marks UK’s shifting trade relations with non-EU states. UK exports of goods to non-EU countries have grown at a faster rate than imports; “stronger export growth to non-EU countries has resulted in the proportion of UK exports destined for the EU falling from 54.8% in 1999 to 44.6% in 2014” (ONS, 2015). As more goods are exported to non-EU states, less goods are being exported to EU states and this is reflected in part in the worsening EU trade balance too. While the UK is building economic ties with emerging economies, it has to trade off bits of its ties with the EU.
One criticism of the current account as a robust measure in analysing EU’s importance as a trading partner is the Rotterdam effect which concerns UK’s large trade volume with Netherlands, specifically. As Webb & Keep (2016) have remarked, “It has been argued that some UK-EU trade may ultimately be with non-EU countries [i.e. UK goods are shipped to China via Rotterdam]. If this is the case, and some of the goods bound eventually for China are recorded as exports to the Netherlands, the volume of UK trade with the EU will be overstated. However, if trade with the Netherlands is ultimately with another EU member state, the volume of trade with the EU will not be affected.” While the magnitude of the Rotterdam effect has yet to be quantified, it certainly indicates a gap in the current account as a good measure. UK’s contribution to EU budget also speaks volumes louder than the current account of the EU as a trading partner and future prospects of EU-UK trade. Due to UK’s large net contribution to EU budget, this signals UK’s advantage in negotiations and influence over access to EU trade; even while the current account tells us large trade deficits undermines UK’s position.
The impending possibility of a Brexit has multiple implications for the UK economy. A top concern is the shift in UK-EU trade relations. As a non-EU member, UK will undoubtedly experience lower trade with the EU due to higher tariff and non-tariff barriers. At worst, where intra-EU non-tariff barriers continue to fall 40% faster than in the rest of the world over the next decade, we expect cumulative fall in trade costs of 10%; at best, where intra-EU barriers fall only 20% faster than in the rest of the world, the total fall in trade costs are only 5.7%. (Dhingra, Ottaviano, & Sampson, 2015) Reduced market integration would cost the UK the price of trading with the European single market, as the Swiss and Norwegians have. Economists estimate the net fiscal benefits at less than 0.53% (ibid). As we see from Graph 2 the sheer volume of UK-EU trade, the loss in trade revenue far outweighs any fiscal benefits and might well injure the UK economy. Interestingly, we must consider UK’s strength and influence as a major trading partner that may leverage negotiations in UK’s favour, obliterating concerns for fall in trade.
Conversely, the Brexit may lead the UK to open more trade opportunities with the rest of the world, and explore new markets to a greater extent. Mansfield (2014) says “Although the years immediately surrounding the exit are likely to feature some degree of market uncertainty, if the right measures are taken the UK can be confident of a healthy long-term economic outlook outside the EU.” Without the hindrance of high contributions to the EU budget, the UK has more resources available to strengthen economic relations with the Commonwealth nations, China, African countries, and the USA. They may also shift immigration regulations for more relaxed movement of labour among these nation-states and bring in even more human capital. Arguments for long-run slower productivity growth due to reduced trade may well be resolved by the increase in human capital from emerging economies. The UK will also have stronger selectivity of who it allows into its borders, solving for the widespread urban homeless. As the entrants are higher-performing individuals, it is less likely they will end up jobless, homeless, and dependent on welfare.
There are ever-growing economic possibilities attached to Brexit — good and bad — heavily reliant on the importance of EU as a trading partner. The empirical evidence from current account for trade with EU signals strong implications of cost to UK more than the EU if Brexit really took place. However, it could also be an opportunity for UK to explore new economic ties and other markets as we see that the trade deficit with the rest of the world has been falling, signalling positive trade relations for UK ahead.
References
Dhingra, S., Ottaviano, G., & Sampson, T. (2015). Should we stay or should we go? The economic consequences of leaving the EU. CEP Election Analysis Paper, (22).
Cadman, E. (2015). ‘UK trade deficit shrinks to 4-year low’, The Financial Times, 7 August [Online]. Available at:http://www.ft.com/cms/s/0/dbd69658-3ce0-11e5-bbd1-b37bc06f590c.html (Accessed: 13 March 2016)
Mansfield, I. (2014). A Blueprint for Britain: Openness not Isolation. The Institute of Economic Affairs Brexit Prize.
Office for National Statistics (ONS). (2015). How important is the European Union to UK trade and investment? [Online] Available at: http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/rel/international-transactions/outward-foreign-affiliates-statistics/how-important-is-the-european-union-to-uk-trade-and-investment-/sty-eu.html (Accessed: 10 March 2016)
ONS. (2016). Time Series: Gross Domestic Product – GDP CP. [Online]. Available at: http://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ybha (Accessed: 10 March 2016).
ONS. (2016).Time series: Bop:Total Current Account Bal EU28 sa £m. [Online]. Available at: http://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/l877 (Accessed: 10 March 2016).
ONS. (2016). Time series: BOP:Balance:CP SA:Non-EU(2007):BOP:Total Trade in Goods £m. [Online]. Available at: http://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/lgdt (Accessed: 10 March 2016).
ONS. (2016). Time series: EU (inc. Croatia):BOP:Balance:SA:Total Trade in Goods £M. [Online]. Available at: http://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/l87q (Accessed: 10 March 2016).
Pimlott, D. (2009). ‘UK trade deficit falls to lowest since 2006’, The Financial Times, 9 October [Online]. Available at: http://www.ft.com/cms/s/0/3023af12-b4ba-11de-8b17-00144feab49a.html (Accessed: 13 March 2016)
Webb, D. & Keep, M. (2016). In brief: UK-EU economic relations. House of Commons Library.