Brexit Fantasies – They need us more than we need them

Summary

  • Around 60% of our trade goes to or through the EU
  • Around 10% of EU trade comes to UK
  • In the event of a “No Deal” exit from the EU, EU-UK trade will not cease but it will significantly reduce
  • From a UK point of view a reasonable estimate of a 25% reduction in trade creates a £75 Billion trade gap or 15% of our total trade
  • From an EU point of view the reduction could be 2% or less of total trade for many countries, several could see little or even no loss of trade
  • All countries however get a veto on the final deal and so therefore the UK is in the weakest possible position in terms of negotiations
  • We need them far more than they need us

 

 

As Brexit continues there still appears to be a significant thread of thinking which maintains “they need us more than we need them”, in other words, the EU is bound to cave in because they sell far more to us than we do to them and therefore a “no deal” scenario would hurt the EU far more than the UK.

If this is true, we have a strong hand.  If not, we’re bluffing, and we will be caught out.

So let’s examine this, step by step.  Many figures, quotes taken from fullfact.org

EU/UK Trade position

It is true that there is a large trade deficit between the EU & UK:

The value of trade to the UK and the rest of the EU—we exported about £230 billion worth of goods and services to the rest of the EU in 2015, according to UK data, while the rest of the EU exported somewhere around £290 billion to us.

It is this £60 Billion deficit that drives much of Leave thinking on why they need us more than we need them.  However, If you look at that deficit on a country by country basis March 2017 Trade with other European countries RB

it becomes clear that the deficit is hugely skewed towards Germany.  Only 5 in 27 nations have a surplus of more than £5 Billion.  Germany may need a deal but for most countries it’s much less of a concern, if it is a concern at all.

This becomes even clearer when we look at relative market sizes (thanks to  for charts)

asymmetry

44% of our trade goes into the EU, only 7% (admittedly some figures put it higher) of their trade comes to us.  More importantly, only one country (Ireland) has more than 10% of its trade with the UK.   This is important to understand as every individual country gets a veto on the final deal so all 27 must be convinced it’s in their best interest.

However, the EU also has existing FTAs with 53 countries and is close to completion on an additional 41 FTAs.  Existing FTAs cover approximately 13% of our trade and the new 41 FTAs a further 4%.

So.  44% + 13% + 4% = 61% of our trade going through the EU. And given the argument over exact numbers let’s say EU trade to UK is 10% of their total.

In other words, we need them for 60% of our total trade & they need us for 10% of theirs.

Let’s run through a “no trade deal” impact scenario.

Impact of no deal

The following is greatly simplified but, as the government has failed to estimate the impacts of the no deal scenario it’s probably as good a picture as any.  The day after March 2019, if no deal is in place we lose access to the Single Market, the Customs Union, the 50 additional trade deals the EU holds and the 41 close to completion.

  • UK – Trade will not cease with the EU and the other 50 countries, but it will reduce.  Let’s assume a reduction of 25% loss of trade from UK to EU
  • EU – The EU has a surplus and therefore it will lose more trade than we do, however, it will likely still have access to those 50 trade agreements.  But we’ll say 35% total loss of trade from EU to UK.

This is a simplification as we don’t know the exact mix, what sectors will be affected more or less etc. however 25% loss for UK, 35% loss for EU seems reasonable in the event of a no deal scenario and on the face of it shows they need us more than we need them. However:

  • For the UK – 25% of 60% total trade is 15% – a loss of 15% of our total UK wide trade.  This is significant by any stretch, its about £75 Billion.
  • For the EU – 35% of 10% is 3.5%. EU losses are a fraction of ours.

However that isn’t the whole story.

That 25% UK trade loss will create a demand gap in the EU, a £75 Billion market opportunity for the other 27 countries in Europe.  Cars that are no longer sold to Italy by the UK can be sold by France or Germany.  Every EU country will have 26 other single market EU countries (and 4 EEA ones) to sell to and all will be perfectly placed to go after that £75 Billion in available trade. If they capture even half of it their losses shrink to 2% or less.

As an illustration, Spain would lose 35% of its trade for the UK under these figures. However its UK trade represents only 7% of its total trade and therefore a loss in real terms of about 2%.  If Spain is able to capture some of the market opportunity vacated by Britain it can reduce those losses to perhaps 1%.  Not ideal, but not catastrophic.

How about the UK? Well, we will have no markets available to us after March 2019 that we don’t have today.  There is no new opportunity or opening in our markets that we can use to fill this £75 Billion gap.  Any new trade deals will be several years out and no-one, not even the Leave Leadership, now expects us to sign deals of any size on the day we leave.

Different % figures can be used however in any scenario the impact on the UK of no deal is magnified in comparison to the EU as they are 4 or 5 X more important to us than we are to them, as a proportion of our total export economies.  And as mentioned, we are even less important to most of the 27 who barely trade with us but who also get a vote on the final deal.

However even that isn’t the whole story.

The country with the single biggest surplus is Germany who have huge reserves & will support the EU.  We are running at a deficit and can’t even afford our NHS.  We don’t have a Germany in our corner.

To answer this, Brexit supporters will say “yes, but look at the deficit the UK has with Germany – the German’s will insist on a deal”.  They won’t, because the UK isn’t their biggest market:

german-export-shares

The EU is.  Germany exports nearly 7X more to the rest of the EU than it does to the UK. That market is far more important to Germany and it will preserve EU stability above all else.

Conclusion

It is simply wrong to say the EU needs us more than we need them, or that we can handle a 15% loss in total trade whereas they cannot absorb a loss of 2-3.5%.  Brexit supporters are guilty as always of taking a UK centric view which is based on a misconception of our actual bargaining power.

This is not helpful as clearly the UK needs a good deal with the EU, and fooling ourselves that we can simply wait for the EU to come to us does not help the UK at all.

Many will respond “ahh but of course we’ll get a deal” – that isn’t the point.  The point is we need a deal far more than the EU does and we cannot walk away without one, to do so would cause us far more pain than the EU.  Therefore, we will take what we are given or we will walk away with nothing.

The more we tell ourselves otherwise, the greater the chance we will walk away with nothing.

 

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5 thoughts on “Brexit Fantasies – They need us more than we need them

  1. You could add that total German cars sold to the UK are around 800k (all manufacturers). Let’s say that they lose 50% post -Brexit, i.e. 400k. VW alone is planning – and has capacity – for over 1mln new cars in China by 2020. The impact of Brexit won’t be negligible on them in terms of German jobs but not massive either, from a corporate perspective.

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  2. Some good points there. Many countries hardly export anything to the UK so don’t bother much about a trade deal.

    Bulgaria: a couple of crates of feta cheese each year
    Finland: a handful of fitted saunas for Russian oligarchs in Mayfair
    Malta: wrong, they don’t produce Maltesers

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  3. Denmark exports food e.g. butter, pork, cheese in the €1-1.5 bn/year range. As the UK needs imported food much of the export is badly needed in the UK and will continue. The UK consumers will just have to pay much more for ham, bacon and Lurpak(R) due to high WTO tariffs.
    The main fear in the danish agriculture sector is not so much the amount of export. The real concern is of a lack of needed workforce for the UK meat-slicing and other factories, of workforce for the diaries and for distribution to consumers within the UK.
    Lars 🙂

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