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Nosemonkey's EUtopia

In search of a European identity

UK-EU trade, services and regulatory costs

Just found an interesting response to my UK-EU trade post from a couple of months back, from what is a new blog to me, Brittopic.

It’s worth reading in full to see a few objections and some issues raised – notably about the British balance of trade and the nature of the UK’s service-driven economy.

Below the fold is what started out as a comment reply on that site, but which got too lengthy to post there. It ends with my (little bit) tongue-in-cheek advocation of Britain joining the Eurozone – something I don’t believe I’ve ever done before – simply because the Eurozone is a bit like the Gold Standard.

(And yes, before you ask I *have* read a newspaper in the last year. I’m off to Greece on Sunday, in fact, and spend a good 30% of my day job focused on Ireland…)


First, agreed on the misuse of the “60% of UK trade is with the EU” claim as fact by pro-EU types. But no matter which way you look at it, our next biggest trading partner after the EU is the US, with the figures normally given as around 10-20% of our total trade. The various EU member states certainly amount to a lot more than 20% of our trade.

I also think that 60% is likely to be in approximately the right ballpark, (I tend to suggest “more than half” as a sensible alternative) – it makes logical sense for us to be trading most with one of the easiest blocs of developed countries it’s possible for us to trade with, especially when (as you note) we’re so reliant on exporting services. Trading with non EU/EEA countries is simply a lot more expensive – multiple different regulations/standards/exchange rates, plus greater transportation costs due to the greater distances involved, and many more logistical issues due to timezone differences (something I deal with daily, working in London but needing to communicate regularly with colleagues all over the world).

As an aside, the 60% trade claim is also certainly a lot less heinous a figure than the standard “75%-84% of laws come from the EU” claims coming from the other side… But enough of that…

On the two points you say I ignored, a quick reply:

1) Services and UK-EU trade

You have a point there when you say that “Given that the UK economy is largely service-based and that it is, at last count, the sixth most visited country in the world (tourism is an export and, yes, the report does exclude airport transfers), it is not sensible to rely only on goods trading as a measure of the UK’s economic relationships with other markets.”

However, as you brought it up, specifically on tourism there have been a number of reports from within the industry that tourists are increasingly avoiding visiting Britain thanks to it being outside the Eurozone (easier to use one currency on your holiday, after all). This has been partially offset in the last couple of years thanks to the weak pound, but it does sound plausible.

Regarding service industries more widely (and I stress, this is entirely off the top of my head – I’ve done no research into this at all), again the EU is a sensible place for most of our trade to take place. Similar timezone, for starters – you can run your service industry during normal office hours if you’re operating within the EU, while to deal with most English-speaking countries (the other logical customers for British service industries) you’re having to vary from GMT+12 for New Zealand to GMT-9 for Alaska. Of English-speaking countries, only Ireland and (the western part of) South Africa are in the same timezone, so it’s not overly practical.

2) The EU and regulatory costs

You also note that my earlier trade post “also ignores the cost of the regulatory burden on UK business of EU law (both in terms of money spent on compliance and profit foregone), which was estimated by the think-tank Civitas in 2004 at being between £17bn and £40bn a year.”

The reason I didn’t mention it is because I don’t see it as directly relevant, but also because I covered it here – note in particular the mention of the British Chambers of Commerce report, specifically the quote: “By value, EU legislation was only responsible for about 0.1% (£1.9m) of regulatory net costs in 2007/8″

The estimated cost of EU regulations varies wildly, depending on who you choose to believe. Eurosceptic-leaning people tend to believe the higher estimates, which often come from eurosceptic-leaning sources (like Civitas’ figures that you give, or Open Europe’s claims that the EU was responsible for £124bn of regulatory costs 1998-2009), while more pro-EU people incline towards the lower estimates (as I did in that quote above).

The truth is that, as with the trade figures, no one really knows how much of the regulatory burden can be attributed to the EU – and with estimates varying between c.15% and c.75% it’s not even clear whether it’s significant or not (not least because we have no way of telling what percentage of EU regulations would have been introduced even if we were not members). At least with the trade figures the estimates only vary between c.45% and c.65%.

A quick note on the balance of trade

Britain imports more manufactured goods than we export because Britain is no longer a manufacturing nation. So it makes sense to get the best prices we can on those imports.

Staying outside the Eurozone means that fluctuating exchange rates can work to our advantage (we can get cheaper imports if the pound is strong). However, part of the reason the UK’s trade surplus in services dropped from 2008 to 2009 is due to the weakening of sterling vs. the euro. If the pound is strong, Britain’s exports (services as well as goods) bring us less – but we get our imports cheaper.

But we have little real ability to influence exchange rates (short of drastic measures which would instantly set alarm bells ringing with any sensible investors and trading partners, and which could threaten major economic collapse). Which means the balance of trade is constantly shifting thanks to forces beyond our control.

You call on the government to rebalance our reliance on the EU to get a better trade balance. One of the easiest ways of doing this would be to standardise exchange rates with a bunch of our biggest trading partners in one go, thus allowing far better forward-planning. How to do this? Join the Eurozone.

Think of it as a modern-day equivalent of the Gold Standard. (Assuming the Eurozone survives, that is…)

14 Comments

  1. I’ll repost the comment I left on Brittopic’s blog.

    Very interesting. This blog is going in the feed reader.

    However, unless I’m wrong (quite possible), then yours might be something of a “having your cake and eating it” argument. You have two objections to Nosemonkey’s post:

    1) The British economy has a trade surplus in services, whilst Nosemonkey was talking mostly about the trade in goods

    2) Nosemonkey ignores the cost of the regulatory burden on UK business of EU law (both in terms of money spent on compliance and profit foregone)

    However, the focus of regulation in the EU’s single market is very much on the trade in goods. Regulation concerning the service sector is MUCH weaker than regulation concerning the trade in goods. How does that affect your argument?

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  3. Britain is no longer a manufacturing nation

    It’s not? Then where is? Last I looked (a few months ago) Britain was 6th largest global manufacturing country, and manufacturing is showing incredibly strong growth at the moment.

    I don’t think this matters to your overall argument, but the whole “we don’t make anything anymore” meme is something that really annoys me at times.

  4. The evidence of a casual perusal of case reports is that the most-litigated of EU regulation are the cases where the EU has harmonised an existing area of regulation, and businesses embrace the new, harmonised regulation, then have to defend attempts by member states to gold-plate the regulations, or enforce their old regulations. The most memorable cases, for whatever reason, all seem to involve belgium (requiring authenticity certificates for scotch to be issued by HM Customs (as was), which they had never done, requiring butter to only be sold in cubic form, and margarine only to be sold in truncated conical form, obscure regulation of security alarms).

    This leads me to believe, that if anything, the EU reduces regulatory burden, for the most part. The areas which tend to be covered by totally new regulation are either those where there probably should be regulation (like what kind of toxic chemicals you can put in corpses), or where political pressure would likely have lead to a patchwork of regulation anyway (such as disposal of lead-containing goods).

  5. Cool post. I think I’ll get the Magic of Making Up!!!!

  6. I have replied here: http://brittopic.blogspot.com/2011/02/uk-eu-trade-follow-up.html

    I must also agree with MatGB: the truism that “we don’t make anything any more” suffers from not being true. I think that it is an understandable product of the introduction of competition from emerging economies, the increased efficiency which has meant that less of the population is engaged in industry and increasing share of our economy taken up with financial services etc.

  7. Somehow I can´t comment on Brittopic’s blog directly so….

    1. Trade in goods:

    Just looked at German trade statistics (source: Destatis = German Federal statistics office) and British trade data (Pink Book) from 2009.
    The German national statistics usually use “country of origin” for imports and “destination country” for exports which hopefully should minimize the “Rotterdam effect”.
    Using both sets of data for goods it seems that roughly 14% of British imports came from Germany and 10% of British exports went to Germany in 2009.
    Given the number of EU countries I suspect that Nosemonkey´s “more than half” of UK trade is with the EU seems pretty reasonable.

    The funny thing is, I also found a Destatis study from 2005. Studying differences in trade statistics between several EU countries. One partner cooperating in this study was HM Customs & Excise. :)
    The author looked at the export/import data between 1989 to 2004 and compared them. For example Germany recorded Euro x billion export of goods to the UK compared to imports from Germany recorded by the UK.
    His conclusion?
    In 1989 the differences were pretty small (2%). And then started to grow. In 2003 the differences reached 14% (8 billion Euros). Which seemed to indicate UK based companies buying German goods and then exporting them again.
    Don´t know how that might have changed by now.

    (The Destatis website also had an older short report about a possible change in EU regulations. Mainly how exports and imports are reported. With more emphasis on “country of origin” and “destination country” to minimize the “Rotterdam effect”. That change was supposed to start in 2010? I didn´t research if it was already implemented.)

    2. Services

    - Tourism
    Looking at some websites about tourism (VisitBritain for example) in the UK it seems that roughly 2/3 of all tourist visits to the UK are EU tourists.

    - Regulatory burden on UK business because of EU law
    Brittopic seems to ignore the fact that if you want to export to the EU you have to comply with EU regulations? Regardless if you´re a member or not?

    - Financial services
    London is the financial center of Europe. Being a EU member (right of residency, right of work permit, easy travel, minimum set of standards accepted across the EU) probably didn´t hurt.

    Just what is Brittopic favoring in his post?
    I´m not sure what he wants?

    - Leaving the EU to help balance the trade deficit?
    In that case Chinese goods will be send directly to British ports and not via Rotterdam.
    And if the UK wants to export to the EU the companies still have to follow EU regulations.
    Add tariffs?
    Just watch the EU add tariffs too.

    Seems a bit like the UK should be free to export goods and services to the EU while being free to restrict EU exports to the UK?

  8. I can also not comment on Brittopic so here goes (Sorry, Nosemonkey, but you introduced us :)

    Brittopic, I will not comment on your entire post, just one point I believe is the most important and maybe also the most clarifying.

    You write
    “I reject the premise that our nearest and then our most easily talked-with markets are necessarily the best. Surely, we should be seeking to trade with the countries and regions with the most surplus money to send our way. The BRIC countries (Brazil, Russia, India and China), for instance, are widely-hoped to be the engines of the twenty-first century economy. Whilst European countries struggle with debt burdens and a faltering currency, we should look further afield. One of the reasons why so much of our trade is done with Europe (the central argument for increasing it) is because we have limited ourselves to deepening trade, rather than aggressively broadening it.”

    I totally agree that it is in all our interest to trade more with non-EU countries, the BRIC-countries in particular. But I take it as a bit unconnected to reality to think that the UK (or any other EU-country) would be able to mutually beneficial trade agreements by them selves. Belonging to the worlds biggest trade bloc can only help trade with others, be it by lessening customs, tariffs, regulatory obstacles.

    The problem, as mostly with the EU, is not the idea but the execution, which comes from the basic flaw of the EU – intergovernmentalism.

    • Kallisti, your comment on intergovernmentalism is not one with which I can agree, because I think that the costs of federalism in terms of sovereignty, identity and and diplomatic/military power outweigh any benefits which might – and only might – arise economically. But that is a different matter.

      My comments, taken in the context in which they were made, were a rebuttal of something which is often peddled out by pro-EU types in the UK: the argument is that because we trade significantly with Europe, we should support more such trade. This limits the options too much and has meant that it is only recently that we have seen real attempts to crack markets in China, Russia and India.

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  10. Thank you for your comments. I am sorry that you couldn’t reply on my blog; I think that I have corrected that now.

    I should be grateful for any specific links you have on the Destatis website; it would be interesting to know for sure whether or not the regulations had changed.

    On tourism, yes a significant number of visitors are from EU countries, my point was that this number were from both the euro area, which does not suggest to me that visitors are too much troubled by changing their currency, and from non-euro members, which suggests to me that the Poles and the Czech are not too troubled by exchanging into Sterling rather than the euro. The principal reason, other than geography, that this is the case is that there is a visa-free element to their movement which substantially reduces costs to them.

    The UK Government is notorious for ‘gold-plating’ EU directives and, given the UK’s apparently different understanding of legal principles, the onus is on Westminster to relieve it. My contention in introducing the matter of the regulatory burden was that it is an economic aspect of our membership of the EU which is not relayed in trade figures, despite its significance. The original point in all of this was that the statistics informing the debate on our economic relationship with the EU were unsatisfactory; ignoring the regulatory burden is one aspect of that.

    Just what am I favouring and what do I want?

    1) I do want to leave the EU, but it is not about the trade deficit because I favour the retention of the free trade area (my more complete stance on the EU is written here: http://brittopic.blogspot.com/2011/01/britain-and-eu-state-without-means-of.html). My comment on the trade deficit was to make clear that saying to the British public that 60% of our trade is with the EU and that this was inherently a good thing does not take into account the fact that our trade currently incurs a deficit. To put it in all-too-simplistic terms: the EU accounts for a 60% loss, not a 60% profit.

    2) I do not want – nor am I stupid enough to envisage – a situation whereby we sell to Europe tariff-free and import from Europe with tariffs. My point is that by deepening our economic dependence on Europe and foregoing alternatives, we are increasing our trade deficit and our level of indebtedness. I am objecting not to free trade (in fact, I want to see the CAP gone so that we can have more free trade), I am objecting to the interpretation both in fact and in sentiment of the statistics on trade.

  11. Hi Brittopic,

    I´m answering here because I already posted a comment here.

    “I should be grateful for any specific links you have on the Destatis website; it would be interesting to know for sure whether or not the regulations had changed.”

    What I read was an internal Destatis study from 2007/8 on how the proposed changes might influence/minimize the “Rotterdam effect”.

    Doing a quick search right now (“EU extrastat 2010 Rotterdam effect”) I found this from May 2009:

    http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=2&procnum=COD/2007/0233

    “The purpose of this Regulation is to revise the current statistical system of trade in goods with non-member countries (Extrastat) in order to:

    - reduce the”Rotterdam effect” resulting: (a) in an over-representation in external trade statistics of Member States having a high level of customs clearance or export but playing only the role of transit countries to the detriment of the Member States of actual destination or dispatch of the goods and (b) in a double reporting of the same goods in Extrastat as non Community goods and then in Intrastat as Community goods coming from another Member State, with a comparable situation at export;
    …”

    (Note: I didn´t read the actual regulation so I can´t comment on its effectiveness.)

    —-

    “Just what am I favouring and what do I want?”

    “To put it in all-too-simplistic terms: the EU accounts for a 60% loss, not a 60% profit.”

    Nope!
    As I mentioned in my first post (data 2009):
    - 144 of UK imports come from Germany
    - 10% of UK exports go to Germany
    - In 2003 roughly 14% of German exports to the UK were re-exported by UK companies. I assume at a profit. :)
    Talk about 14-16% (exports vs. imports, EU vs. non-EU) and I´ll take you seriously.
    Writing about an alleged 60% loss is just nonsense.

    “My point is that by deepening our economic dependence on Europe and foregoing alternatives, we are increasing our trade deficit and our level of indebtedness.”

    Uhh, I just don´t see how the EU is forcing the UK to concentrate on trade with the EU? You are perfectly free to boost exports to non-EU countries too.
    In fact, that´s what German companies – if media reports are right – are doing right now. Exports to BRIC countries seem to be booming.
    I confess I don´t quite see the problem?
    If German companies can do it, what is the problem for UK companies here?
    Just what is the specific (EU) obstacle for UK companies compared to German companies here?
    I´m really puzzled?

    • Blush!

      “Nope!
      As I mentioned in my first post (data 2009):
      - 144 of UK imports come from Germany”

      I of course mean 14%.

  12. Euro is the modern equivalent of the Gold Standard; which is why the UK should definitely not be in it. The Gold Standard was a disaster which almost bankrupted the country in the 1930s. Much like the ERM damaged the country in the 1990s, and the way the Euro helped to bankrupt Ireland and Spain, or left Italy with a decade of pitiful growth as it steadily lost competitiveness against Germany.