The debate on the UK’s membership in the EU is heating up. Given the PM is setting out more detail on his negotiation and its export week, this seem like a good opportunity to serve up some facts and figures on the UK’s trading relationship with the rest of the European Union.
Currently, about 79% of UK exports go to the EU, US and other developed economies. Advanced economies will still account for about 40% of world GDP (43% in 2014) in 2020, and the EU will still account for more than a third of that at 15%. What is more, the EU is still expected to be in the world top four economies by 2050, and home to a population of 630mn or 9% of the world total.
This means that while emerging markets will continue to grow in importance and capture a larger share of world GDP, developed economies will still be a key source of export demand for the UK. The UK therefore cannot afford to significantly alter the terms on which it can access one of the world’s largest export markets.
The UK manufacturing sector produces and exports a diverse range of products. Demand for these products differ substantially from country to country and region to region As such, it is unlikely that, in the short term at least, were the UK to leave the EU manufacturers would be able to easily find alternative markets for some of these products.
For example, the EU market for petroleum products is three times as large than all markets outside of the EU combined. Signing free trade agreements with new export markets cannot necessarily create demand immediately. What is more, regulatory barriers to exporting to emerging markets – from where new demand must be found - will continue to be high for some time to come. Developed markets will remain the most accessible to UK exports.
Diversity in a country’s export base is paramount for the resilience of an economy against fluctuations in global demand. A possible exit of the UK from the EU – making it harder and more costly to trade with one of the largest markets in the world – could undermine efforts to improve the resilience of the UK economy.
In EEF’s 2013 Europe survey, almost half of manufacturers responded that they will attempt to increase their market share in the EU. However, another quarter of manufacturers are looking to emerging markets for additional opportunities. It is clear that it’s not an either/or situation for UK manufacturers – diversifying their export base is key to their business strategy.
It is unclear how quickly the UK would able to negotiate new FTAs alone. In EEF’s 2013 Europe survey, 81% of manufacturers would like to see the EU negotiating more FTAs with non-EU markets.
The benefits of the EU’s FTA agreements are straightforward. For example, in Latin America the only country with which the EU has an FTA with is Chile. Taking the top 5 economies in Latin America for UK exports, Chile is the second largest market after Brazil, despite being the smallest economy. Weighted by GDP, the UK exports twice as much to Chile as it does to Brazil and Colombia.
Loss of access to EU market will be felt beyond loss of exports
The impact of a possible exit of the UK from the EU is not confined to exports. A number of component manufacturers have set up shop in the UK to take advantage of Original Equipment Manufacturers (OEMs) supply chains. For many of these OEMs the EU is the single largest export market.
The existence of OEMs also draws foreign investment – mainly from Europe – into UK plants. That inward investment is largely predicated on eventual access to the EU single market. Therefore a loss or partial loss of that market would trickle down the supply chain. This means that the negative impact on UK GVA and employment could be larger than the impact of the loss of exports.
And it’s not just about exports
About 53% of total UK imports are sourced from the EU. A possible exit of the UK from the EU could impact on manufacturers’ supply chains across the rest of the EU prompting as increase in lead times and transport costs, an increase in tariff and non-tariff barriers, as well as potential quality issues if components need to be sourced from new markets.