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Thursday, January 17, 2013

A new angle to UK-EU trade?

The WTO and the OECD yesterday announced the release of a new set of trade data. This data tries to pin down the “value added” from trade rather than just the gross figures. Essentially, this means the data tries to track where the final demand for an exported product/service comes from, thereby netting out trade which simply contributes to the production line of the finished good/service.

The data provides an interesting new contribution to the UK-EU debate on trade. Notably the figures highlight that, under the value added approach, US trade looks more important to the UK than European countries. The Guardian questions whether this could aid the calls for the UK to exit the EU.

Superficially it may, but looking at the data more deeply, we think not. As the WTO/OECD note:
“This suggests that UK exports to other EU countries are at least partly intermediate services and inputs that are then further processed and shipped to other countries (in particular to the US).”
So, although the US is the source for the ‘final demand’ we still have to export our products or services to other countries in the EU for them to take advantage of this demand. Being a member of the EU and the single market plays a big role in allowing us to do this. The real question is, would the UK still be able to access this final demand from the US if it left the EU?

Well, it’s almost impossible to say. One thing that seems certain though, is that, since many of these exports are intermediate ones, there is no guarantee that we would still be able to export them outside the EU even if the final demand remains from the US (this point is hinted at by Ian King in the Times).

A final interesting point is that the increase in value added exports to the US seems to occur for most large EU countries. Why this is, is not entirely clear. To us, it seems that it could be motivated by specialisation within the EU, with EU members producing various component goods and services which are then combined into final exports to the US. If this is the case then this seems a positive result to us, as it surely increases the cost competitiveness of exports from the EU (including the UK).

From the perspective of the UK/EU debate this 'value added' data is another interest metric to add, although at the moment it offers little more conclusive evidence than what we currently have. The bigger benefit comes in broader terms, as the FT notes, providing further support for free trade. With protectionist forces flaring up during the eurozone crisis, countries would do well to keep that in mind as well.


Rik said...

Looks to be mainly the Rotterdam/Antwerp trade. Which is basically mainly logistics and nothing else. Consolidate stuff in the largest harbour to reduce costs (transportcost (economy of scales) and paperwork costs (economy of scales)). Difficult to see how that would be jeopardised by an exit. It is not that difficult to put things in a container yourself and fill out export forms yourself and put it on a containerboat.
Might even give new possibilities (taking business from Holland and Belgium).

Same thing likely the other way around (doing all EU import formalities in Rotterdam (iso in all membercountries seperately) in order to reduce cost and for convenience.

More important is imho what the UK would be in case of a Brixit. Hard to see it in any other way, even with and tradeflows adjusting, as the most important tradepartner outside the EU.
A point I have not seen properly brought up. How in any way can the EU afford in the economic mess it is in, to to jeopardise the relation with what would be in fact its largest trade partner.

jon livesey said...

I am not so sure that you really have a strong argument here, Take the example of Airbus.

On the one hand you could claim that outside the EU, we would not be shipping the wings and engines that end up in the US as final demand.

But in that case, what has Airbus got to ship? It would take enormous effort to replicate the infrastructure of either Filton or Rolls Royce.

In addition to that, you really need to distinguish UK components that are shipped to the EU to be integrated into some product that is then shipped overseas, to end-user UK products that are simply shipped through the EU, and could be shipped directly overseas.

Open Europe blog team said...

@ Jon Livesey

Thanks for the comment. We think we actually agree with you here. As we note, its not certain either way from the data how trade would look if the UK left the EU. It is equally plausible that the trade could remain or that it could not - as you note you cannot tell from this aggregate data (ultimately, as always, it depends on what relationship the UK has with the EU post exit). Hence our conclusion, that while the data is interesting, it is not conclusive.

Ray said...

Having been involved in manufacturing for inclusion in other products to go to a third party, I can tell you it is a very serious and expensive thing to changes horses mid gallop. Airbus for instance, finding developing and testing a new wing supplier would be an immense cost, repeat immense, and it would be the same for any component at all in any machine. I supplied components for a supplier to SNCF, the cost of accepting our product was such that the tariff placed on that product would have to be significant to make them go through it all again.

Rollo said...

We REIDsteel export most of our product world wide: but barely any to the EU because of rampant protectionism in this 'single market haha. We need to trade with the real world which is growing; and not shackle ourselves to the sinking ship of EU. They may think us rats: but rats survive and prosper; and show a lot of sense.

Erick Staal said...

Question: if the US is the main export market for Britain's 'final demand' product, why wait for a Brixit anyway to change the logistics streams? Britain is closer by ship to the US than mainland Europe, isn't it. However, since business is rational there must be economies of scale involved to still have the logistics chain of Britain going through the mainland instead of going directly from Britain to the US.
Concerning Airbus: for the current wing technology you may be right, but usually the opportunity costs involved in starting a new production line based on the results of technological innovation are usually much lower than relocating an existing production chain. See Asia: new production lines are started there. Not in the countries which lie on the European continental shelf.

Anonymous said...

Its great to compare the USA to individual European countries, BUT if the UK left the EU, it would impact them for all EU countries.

So, where's the combined EU trade figures versus the USA?

Unknown said...

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