The real state of Britain's trade relationship with Europe

There’s a common misconception that Britain is disproportionately reliant on Europe as a market for its exports. And although the EU is certainly an important destination for UK products, it doesn’t (as some like to claim) receive the majority of UK exports.

Like most economic misconceptions it’s due to a misreading of the statistics. When it comes to looking at trade flows, most people tend to ignore services trade. When you do that, and look purely at the flow of goods from one country to another, Britain does indeed export more to the EU than anywhere else – £159bn in 2011, compared with exports of £140bn elsewhere.

But include services exports like finance, consulting, royalty payments and so on (and this invoves digging deep into the UK Economic Accounts, an enormous pdf somewhere deep inside the ONS website) and the picture is considerably different.

On this basis – looking at total exports of both goods and services – Britain’s EU exports were, at £234bn, comfortably lower than the £260bn of exports to non-EU countries. Now, in fairness, this is partly down to the euro crisis, which has decreased European appetite for our goods. But it underlines the fact that these international trade relationships are never as clear cut as many assume.

The other problem is that traditional trade figures don’t only tend to ignore services, they also typically tend to append the full value of an exported product to the final country of assembly. In other words, if your television was assembled in Korea, but consists entirely of Japanese-made components, the full value of the export will be credited to Korea’s national accounts.

I discussed this issue briefly in my blog a few months ago about where the iPhone is and isn’t made.

This makes much of the international trade statistics something of a nonsense. Happily there is another way of measuring trade, looking at how much value each country adds to a product’s final price. The Organisation for Economic Co-operation and Development looked at this issue just yesterday, and guess what?

It discovered that on this basis, too, Britain’s EU exports had been overstated.

On a gross basis (the normal way trade flows are measured), about 12% of Britain’s exports go to Germany. On a value-added basis, that share is less than 10%. And viewing our trade with the US on a value-added basis increases the export share there from around 15% to well over 20%.

Now, clearly there are far bigger and deeper issues to discuss when it comes to Britain’s relationship with the EU – not least the politics and the centuries of history both linking and repelling the countries. But it is at least helpful to be clear about the numbers.