The Single Market: An £85 Billion Train Smash

The EU Single Market stopped being an asset for UK goods exporters a decade ago. Today, UK exports of goods to EU have stalled, imports are surging, and services don’t cover the deficit. The UK's global trade is far healthier — and for good reason.


  • UK goods exports to EU stalled in 2008

  • Exports to countries outside the EU are growing quickly

  • The £85 billion deficit in goods trade with EU worsens by £10 bn every year

  • The US does a better trade with EU than UK — and they’re on the outside

UK leaders say that the EU Single Market is a vital UK interest, but it’s not doing UK exporters any favours. Since 2008, exports to EU have stalled completely, and in 2015, the UK racked up a record £85 billion deficit in your trade in goods. When you compare how the Single Market works for other EU countries, analyse trade outside the EU, and see how countries like US export to the EU, it’s clear UK goods manufacturers get no advantage from being inside the EU Single Market. For them, the sooner the UK exits the better.


The EU Single Market: a dead-end for UK exporters …

Trade in goods – as opposed to services – makes up approximately two-thirds of all UK exports to EU, so the interests of producers should predominate in the economic side of the Brexit debate. The EU Single Market was supposed to accelerate trade between EU members. But your Office for National Statistics (ONS) reports that between 1999 and 2014, your goods exports to EU grew by just 2.5% per year. According to UK customs data, since 2008 the value of your goods exports to EU has actually declined.

This is not just poor, it’s failure. The long-term growth rate of your goods exports to EU is lower than your average post-war economic growth rate since 1948, which is 2.6%. It doesn’t matter which set of trade data you analyse[1], the numbers are consistent and damning. Today, the EU Single Market delivers no observable benefit for UK exporters.

What’s more, among EU countries, UK trade performance is uniquely bad. According to EU data, between 2002 and 2013, the UK and Ireland were the only EU countries whose exports with EU actually contracted, in €-value terms. Over the same period Germany’s export trade with EU partners has expanded by 50% (from €415 billion to €623 billion), Netherlands by 84%[2], Belgium by 43%, and Italy by 26%.

In effect, the UK gets a different economic experience from the EU Single Market, as compared to other European countries. It’s not that the Single Market doesn’t work, it just doesn’t work for you. What’s more, the fact that your partners’ EU trade has expanded while yours hasn’t means the reasons aren’t just related to the 2008 financial crisis or the Euro.


.. and an open door to imports

While the Single Market doesn’t help UK exports, it’s a different story for imports. Since 1999, the value of goods you’ve been importing from EU has risen by almost twice your overall export rate — 4.9% although this has slowed to 2.5% since the financial crisis.

With imports from EU growing far quicker than exports to EU, you are now incurring huge trade deficits, which reached £85 billion in 2015, according to HMRC data[3]. This deficit is structural; it’s part of a chronic trend[4]. Since 2011, your EU goods-trade deficit has widened by about £10 billion per year. The latest Office for National Statistics (ONS) trade bulletins typically report record deficits in EU trade, with 2016 likely to deliver a goods deficit close to £100 billion.

To put these numbers in context, your surplus on trade in services with the EU is slightly over £20 billion[5] per year. Of that, your financial services contribute just under a half[6]. So the success your services exporters enjoy in EU trade doesn’t pay for a quarter of the deficits that result from your trade in goods. Your overall trade with EU is unbalanced and steadily deteriorating.


Where’s the deficit coming from?

Fortunately, the trade data published by Her Majesty’s Customs and Revenue (HMRC) is extremely detailed, so you can see exactly where this poor EU trade performance comes from. Curiously, the data reveal that generally, the sectors where you have big deficits with EU are also those areas where you trade profitably with the rest of the world.

For example, in 2015 your biggest trade deficits with EU were: vehicles, -£28.5 billion; electrical machinery, -£10.2 billion; general machinery & nuclear reactors, -$10.5 billion; and pharmaceuticals -£6.5 billion.

In fact, as you glance down the balance for EU trade[7] for 2015 you will see trade deficits in almost every single category of goods. For whatever reason, the Single Market has turned you into a nation of across-the-board importers. This is not because UK industry is inert or uncompetitive in these sectors, however, since your non-EU trade in almost all these sectors is far healthier.

For example, overall, UK is a massive net importer of cars from EU — approximately £1.5–£2 billion each month[8]. This isn’t because UK car industry is uncompetitive. UK car exports outside of EU is one of your major success stories: your surplus in vehicles to the rest of the world is almost £10 billion per year. But the Single Market has turned you into a huge importer of European built cars[9].

Compare this with how the Single Market has worked for the German car industry. Since 1994, German manufacturers have maintained a steady 26% market share of internal EU trade in motor cars[10], tripling the value of Germany’s car exports within the Single Market to €166 billion in 2013. Incidentally, car imports from Germany is the main reason why UK typically imports twice the value of goods from Germany as you export[11] in any given month.

And in the few sectors where UK still has large surpluses with EU, the Single Market is not the reason. Your declining surplus in fuels (£8 billion in 2015) changes in response to production in the North Sea and West of Shetland fields[12]. Your aerospace exports – dominated by defence, Airbus wing manufacturing and Rolls-Royce – are either directly affected by political factors[13], or don’t face direct competition in Europe[14].


Exports outside the Single Market: growing at twice the pace

It’s when you compare UK’s trade with EU to the UK’s trade with the rest of the world that your commitment to the Single Market becomes perverse. Since 2008, your goods exports to countries outside the EU have grown on average by just over 5% per year[15], which is twice the rate your exports averaged from 1999.

What’s more, your trade outside the Single Market is far more balanced. Since 2008, you have steadily reduced a non-EU £61 billion deficit into £21 billion deficit[16]. When you add in the surplus that you earn on trade in services with the rest of the world, which is currently running at £16 billion [17] each quarter, you’re running a very health surplus on overall trade outside the EU.

Incidentally, this fast-growing, balanced trade is no way attributable to the ‘muscle’ the EU supposedly gives you in international trade negotiations. The biggest trade deal the EU has in operation is with South Korea[18], which is only your seventh biggest trade partner. As for the rest, you currently trade on World Trade Organisations (WTO) terms with these partners — and these are exactly the terms your exports will get post-Brexit if you do nothing but join the WTO.

The net effect of your fast-growing trade outside EU is to rapidly change UK’s best interest. In 1999, 55% of your goods trade was with EU; now it’s 43%; and in some months just 38% of your exports go to EU[19]. The trend is set. You will not increase exports to EU, or reverse your deficits unless you change the terms on which you trade with the Single Market. You cannot do that while you remain inside the EU.


If you vote Brexit, most of your trade will be unaffected

So what are your options? Your non-EU trade – which is most of your trade and also the fastest growing portion – will be unaffected by Brexit. The panic about your friends not wanting to sign trade agreements with you is an irrelevance. As a member of the WTO, you will have access to almost all major-economy markets on the same terms as you do now. That’s working out just great, with exports growing and an overall (goods plus services) surplus. Plus you have the power to strike your own trade deals where it suits you.

That leaves your EU trade to argue over. If you do nothing, your deficits will only get bigger. This represents a huge opportunity cost to industries in UK which aren’t gaining export markets in Europe.

Could Brexit help you improve goods exports to EU? Your Remain Camp believes that UK is in a poor negotiating position because you only account for 15–16% of EU exports, whereas EU accounts for 44% of yours. Their argument is: ‘They (EU) may have a big trade surplus with you, but they can wear losing it, because you are only a small part of their trade. So they will hold the initiative in re-negotiating the terms on which you sell into the Single Market.’

But as the example of the New Zealand – China FTA shows (see accompanying essay), you can have only a fraction of big country’s export market and still negotiate a trade deal that delivers rapid, balanced growth. Trade deals tend to be rational processes, designed to benefit both parties equally.

Of course, a post-Brexit renegotiation may be emotional. The EU may decide to punish UK to deter others from leaving. But if EU chooses this path, and erects trade barriers, then the UK will reciprocate. Business for Britain calculates that the added cost to UK exporters from tariffs on EU exports is less than your annual subscription to EU. This means the worst-case, down-side risk to UK is financially manageable: less than a major rise in Sterling, except that less than half trade would be affected.

Meanwhile, if tariffs did rise between UK & EU, the UK would experience long-term benefits. Since you import 64% more from EU than you export, the net effect of EU-UK tariffs will be to divert investment from EU to UK, as goods that were previously made in Europe and shipped free to UK are made in UK instead: cars being the most likely candidate.

The results would take time to work through, but your EU vote is a long-term decision. And shouldn’t your calculations take more account of long-term opportunities and benefits, rather than short-term disruption?


The US isn’t in the Single Market: its exports to EU grow faster than yours

Another way to assess the actual value of the Single Market – and what life outside would be like – is to see how non-European countries currently trade with it. The country whose trade with EU most resembles yours is the US. Last year, US exported £188 billion worth of goods, and imported £294 billion (as against £133 billion & £219 respectively for the UK). Like you, they have a big deficit, partially offset by services, and like you, their biggest traded sector was vehicles and machinery.

So is the US disadvantaged from being outside the EU Single Market? If you use Eurostat data from European Commission, then US exports grew at 2.5% per year from 2004 to 2014. That’s exactly the same rate as yours from 1999 onwards. Run the calculation with US data, over the same period, and US goods exports grew even faster: 4.9%. More importantly, US exports to EU have grown over the last five years. Yours haven’t.

The big difference – embarrassingly for UK – is in imports. According to EU data, US imports from EU have grown by just 2.8% per year, which is far below UK’s import growth rate of 4.9%. Using US data, imports grew faster (4%) but even still, imports from EU to US grew slower than exports. So unlike you, US trade with EU is becoming more balanced.

So the evidence from US is that even if you are completely outside the EU Single Market, you can still grow goods exports to Europe just as fast. This is definitely not what Single Market was supposed to achieve, but the facts speak for themselves. If US trade is a guide – and it’s the best there is – the only difference that the Single Market actually makes to UK trade is to stimulate imports.


What does this mean for Brexit?

This analysis shows that for UK goods exporters – who still generate the biggest share of your trade income – the Single Market is not an asset, it’s a liability. For whatever reason, the Single Market has stopped helping UK to export goods to Europe. Your exports outside EU are growing, inside they are falling. And despite being outside, with no influence in decision-making, the US is trading more successfully with Single Market than you are.

More important still, you are locked into a sustained deteriorating trend in your exports to the EU Single Market. Your goods deficit will almost certainly hit £95–£100 billion in 2016, and the surplus your services generate with EU will be lucky to pay for one-fifth. This deficit matters. In March, your current account deficit (which includes cross-border payments for investments) hit a record of 5.3%[20], your worst result since 1948.

Staying in the Single Market is going to hurt. But from the outside, the strangest part of your Brexit debate is how the Single Market is seen as reason to stay, when it’s a very good reason to leave. If national wealth figures in your Brexit debate, then at a minimum, you need to get a Remain spokesperson to explain how you are going to halt or reverse your £85 billion EU deficit goods, which is the dominating factor in all UK trade.


Access to the Single Market: Not worth fighting for

Once you accept that the Single Market gives UK exporters no clear, provable advantage, the economic risks of leaving the EU shrink dramatically:

  • It means you don’t have to worry about being part of the Single Market because on balance the Single Market does your EU trade more harm than good.

  • It means you don’t have to worry that EU will punish Britain for leaving, because the worst EU can do to UK is subject you to WTO level tariffs, which are financially manageable.

  • If you reciprocate with tariffs against EU imports, you will reduce your trade deficit, as investment diverts back from EU to UK. The EU’s loss will be your gain.

This analysis shows that leaving the EU Single Market and adopting the WTO as the basis for trade should be a serious consideration for the Brexit debate. It’s the course recommended by your Economists for Brexit on April 27th. That group imagines less bright prospects for UK goods manufacturers than this analysis suggests, but they too argue that outside the Single Market, UK’s trade deficit would fall and employment would rise.


A case made from facts – not predictions

The most relevant aspect of this analysis, however, is that it is built of hard facts. An absurd level of economic opinion in your Brexit debate is based on predictions and economic models. HM Treasury’s analysis[21] is simply the most prominent. These economic models have a dreadful record for predicting the future. This analysis relies on historical data and the tale they tell is clear.

So what should you do? Judged from the outsides, you’re stuck in abusive trading relationship. You can’t change that relationship without leaving, and you’re facing all sorts of threats about what will happen to you if you do.

Well, when you get threats from partners, it’s usually an expression of weakness. Your exporters have most to gain from leaving, and EU exporters have most to lose. So of course you are getting threats. But you don’t have to take seriously the threats of non-access to the Single Market, because the Single Market is the very thing you need to exit. Your EU exporters will be able to cope with the binding tariffs the EU has agreed with the WTO. And if UK reciprocates those tariffs during accession negotiations to WTO, then your trade with EU will become more balanced as global companies re-invest in UK-based production.

And your services exports to EU?

The interests of your services industry – including non-finance organisations – are discussed in the services analysis. But the blunt facts are: until your services quadruple the surplus they earn in EU, then their interests should be secondary. Your trade in goods is far bigger, and your EU deficit far outweighs the surplus your services exports generate. So in the Brexit debate, you can put the interests of your finance sector before manufacturing if you want — but looked at in terms of your European trade, it makes zero sense.

© Phil Radford


[1] There are two official sets of trade data for UK: the Office of National Statistics, which produces comprehensive updates on trade in goods, services and investment, and Her Majesty’s Revenue & Customs, which produces monthly updates on trade in goods. The EU agency, Eurostat, also produces trade statistics for EU states. Values for Eurostat data are denominated in Euros.

[2] Trade data from Netherlands is typically assumed to be inflated, owing to the ‘Rotterdam Effect’. This recognises that Netherlands acts as an import/export hub for multiple EU countries.

[3] HMRC Overseas Trade. 2015 data, February 9th 2016 release.

[4] HMRC archive data is the best source for trends in UK goods trade. Here is the data for 2015.

[5] The latest ONS release reports quarterly exports of £22.3 billion and imports £17.3 billion (Chapter 12). The trend of trade in services is stable from quarter to quarter.

[6] According to ONS estimates. Finance is the largest single component of Services exports; the others are insurance, professional services, intellectual property and creative industries.

[7] Table constructed from HMRC data, February 9th 2016 release.

[8] HMRC publishes monthly car trade statistics.

[9] For example, the three top-selling cars in UK are all made in continental Europe: Ford Fiestas (Cologne Germany, and Almussafes Spain); Vauxhall Corsa (made by Opel at Eisenach Germany and Zaragosa, Spain) and Ford Focus (Saarlouis Germany).

[10] A phenomenal performance given the EU expanded from 12 to 28 countries over this period.

[11] The latest ONS trade publication estimates monthly imports from Germany at approximately £5 billion

[12] The surplus in fuels (Line 27 in HMRC data) has decreased from £18 billion to £8 billion since 2011. It’s responsible for just less than one-quarter of the deterioration in your deficit.

[13] Until very recently, your government provided launch aid for all new Airbus models, thereby ensuring that wing manufacture remains in Broughton, Wales. Airbus has written to employees suggesting executives will reconsider UK investments if UK leaves EU. With your trade surplus in Aerospace, this is virtually the only industrial sector in which EU companies are likely to make this threat and the overall effect would be negative. In any case, if Airbus did scale back investment in Broughton post-Brexit, it would lose approximately one-fifth of the total state aid it currently receives.

[14] Rolls-Royce’s competitors in its principal aircraft market – turbo-fan engines – are GE and Pratt & Whitney, both of US. France’s Snecma collaborates with GE on some mid-sized engines (CFM), otherwise Rolls-Royce has limited direct competitor within EU.

[15] See Second Tab: Non-EU totals.

[16] ONS data suggests a slightly higher deficit on trade with Non-EU countries. HMRC data is generally preferred since one of the roles of HMRC is to levy customs on imports from Non-EU countries.

[17] Chapter 12

[18] The FTA with Canada has yet to come into operation.

[19] See ONS data from Dec-Feb UK trade.

[20] The current account includes trade in goods services and investment income. Most commentators attribute the deterioration in the current account to a collapse in investment income.

[21] HM Treasury analysis: the long-term impact of EU membership and alternatives. April 18th 2016. Typically, an analysis weighs the evidence from both sides of an assertion. This ‘analysis’ was atypical.

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