Throughout the EU referendum debate there have been many claims from both sides about the EU’s status as a global trading bloc, our trade relationship and its diminishing growth in recent years. These statements often seem conflicting, but the statistics reveal a complicated picture that provides few easy answers. The EU was larger than any individual economy following its formation in 1993, and despite EU GDP falling below that of the USA in 1998, it regained this status in 2003 and remains the world’s largest economic bloc. The EU’s share of global GDP however, has fallen since its incarnation from 30% in 1993 to 24% in 2014. This can be attributed to two factors. Firstly, growth in the BRIC economies (Brazil, Russia, India and China) and other emerging markets has outpaced the EU. Secondly, since the economic crash of 2008 and the ensuing Eurozone crisis, the EU has struggled to get back on track, failing still to reach the levels seen before the recession.
According to the most recent data, the total value of UK exports in 2014 was £515 billion, of which was 57% were goods and 43% services. 44% of total exports went to countries within the EU, 17% to the USA, 8% to the BRIC nations and 30% to others. By contrast, we imported around £555 billion worth of goods and services in 2014, of which 53% came from the EU, 19% from the BRIC nations, 9% from the USA and 19% from elsewhere. This makes the EU our largest trading partner by far, following the traditional trend of strong trade links between us and the rest of Europe. However, strong growth in developing economies outside the EU has seen the UK’s non-EU trading partners grow in importance. As a proportion of the UK total, trade with Europe has fallen consistently since 1999 from 55% to 45% today, despite the value of our trade with the EU increasing by 5% a year over the same period. In fact, the faster growth of UK-EU imports than UK exports has caused a deterioration in our trade balance, with the deficit reaching £62 billion in 2014 compared to £11 billion in 1999.
The EU is also the primary source of foreign direct investment (FDI) into the UK, accounting for 48% of total FDI, sending £496 billion to the UK in 2014. A survey conducted by Ernst & Young found that the UK attracted more FDI projects than any other EU nation in 2014. The EU is also a major recipient of UK investment; 43% of UK-owned overseas assets being located within the EU, although this has fallen from 52% in 2010. The stock of EU-owned assets as a proportion of all foreign assets held in the UK has also fallen from 53% in 2009 to 46% in 2013, although the value of these assets has increased by a quarter over the same period. Again this decline is explained by the growing importance of non-EU owned assets held in the UK, the value of which increased by 64% between 2009 and 2013.
The true figure for the value of our trade with Europe is sometimes questioned by the Rotterdam effect. Goods that are exported to the rest of the world but are landed at Rotterdam (or Antwerp) first before being re-loaded onto ships bound for destinations further afield will be shown in the UK’s HMRC Trade in Goods statistics as EU exports, even though their ultimate destination will be non-EU. For example, goods bound for the USA which are swapped from a small ship that sailed from a UK port to Rotterdam before being reloaded to a larger ship for the trans-Atlantic journey will appear as EU, not US exports. This is true the other way round, with imports coming from non-EU countries but via these ports being shown as EU imports, so crude oil from Saudi Arabia that is unloaded at Rotterdam, perhaps for initial processing before being shipped to the UK, will show as imports from the Netherlands, not the Middle East.
The effect is real, but difficult to quantify. Early in 2015 the Office for National Statistics attempted to calculate the value of this problem. With 8.5% of UK goods exports to the EU bound for the Netherlands, the effect must, by definition, be smaller than this. Around half of our exports to the Netherlands is oil-based, and this will account for the largest share of the Rotterdam effect, as there is very large-scale refining and storage capacity at these ports. The ONS notes that the actual effect is hard to calculate and so recommends assuming that around half of all UK goods exports to the Netherlands are, in reality, bound for non-EU destinations. On this measure, the UK’s real trade in goods with the EU is at most four percentage points lower that the official statistics suggest, at around 46% (2013 data) compared to an unadjusted 50%. Similar errors may arise from the same issue at smaller ports, although the Scale of Rotterdam means its effect is likely the largest.
So, even accounting for this, the EU remains the UK’s largest trading partner by a large margin and, whilst its share of our trade will inevitably continue to decline as emerging markets mature across the globe, Europe will remain our single largest trading partner for many decades to come.