Here Is Why Brexiters Are Completely Wrong On Trade

The fight for the UK to remain a member of the European Union is now fully on. The country will have a momentous decision to make on 23rd June this year. I unfortunately won’t have a vote on my future as a German living in the UK, the country I have lived and paid my taxes in for the last 15 years. But I will take the opportunity to debunk as many dangerous myths of the Brexiters as I can and I will start today with the economic argument about trade.

You often hear that “the rest of Europe sells us more stuff than we sell them and therefore they will give us a free trade deal as they don’t want to shoot themselves in the foot”. You can easily debunk this myth in 2-3 steps.

The first thing is that this isn’t a 1:1 comparison of UK vs. The Rest. The Rest doesn’t exist as one unit as it is a group of 27 countries. So the comparison is 1:27 and 27:1 – not 1:1. With that clarified let’s take a look at the UK’s export statistics. The visualisation below also represents a weighting of the importance of export destinations. If you now assume as a thought experiment that the terms of trade were to worsen after a Brexit you can see the accumulated effect: worse trade terms with Germany (10% of exports), the Netherlands (7.9% of exports), France (6.3% of exports), and so on – you get the picture. The UK would have worse trade terms with 27 countries, many of which are key export destinations.

Graph 1

Source: MIT Observatory of Economic Complexity

What would worsening trade terms mean vice versa? For Germany for instance? Have a look at the same visualisation for Germany.

Graph 2

Source: MIT Observatory of Economic Complexity

In the case of worsening terms of trade Germany would have worse relations with one market: the UK representing 6.4% of total trade. The UK is undoubtedly an important market but there is no cumulative effect. This leads to the first conclusion: if there are worsening terms of trade which the EU almost certainly would have to enforce – I’ll come back to this – the UK will be much harder hit than any of the remaining 27 member states. This is a very important point that is often muddied by ‘us and The Rest’ rhetoric.

Another often heard argument is that the UK is global in its outlook and should not be somehow forced to focus on European trade. This is obvious nonsense as another look at the charts shows. Germany is a true global exporter and has a trade volume that is more than three times the UK figure ($1.38trillion vs $453bn) whilst being a member of the very same EU. If there is an issue with UK export performance you need to look at the products and services on offer. The institutional factor of the EU is certainly not holding the UK back from selling globally.

The final point is about the politics of Brexit. Some people might still argue that Germany would want to avoid any negative effect on its exports even though the UK is in a weaker position. There are two considerations here: first, there would be huge pressure on the remaining EU member states to give the UK a bad deal. The EU already has renationalisation tendencies and Brexit would set a new precedent. It would be important to show that exiting and keeping all the benefits is not an option. You cannot have your cake and eat it. Second, as you can see for instance in the case of sanctions against Russia, there can of course be political reasons that trump pure economic considerations. The fact that 3.3% of German exports go to Russia did not prevent the German government from pursuing policies that could worsen the terms of trade.

In conclusion, I think there is clear evidence that the UK is in a much more vulnerable political position regarding trade than the remaining EU member states if it comes to Brexit. Rather than being in a strong negotiationing position there is pressure on the remaining EU member states to set a deterring precedent and give the UK rather harsh treatment. And if you ever believed that the EU holds Britain back from trading with the rest of the world have a look at Germany and explain how this can possibly be the case.

Update 23rd February 2016:

There has been quite a bit of discussion about this blog in social media and it was claimed that I am missing a point by omitting that the UK would be free to negotiate its own trade deals with the rest of the world after Brexit. This is another point that will worsen the UK position.

The whole argument that a much smaller party suddenly has more power in negotiations because it is small is – to put it mildly – turning previous experience on its head. The stronger you are the more leverage you have in negotiations. If you are in a weaker position you lose leverage.

And other countries might not be interested in a deal at all. A Daily Telegraph article entitled “Major blow for Brexit campaign as US rules out UK-only trade deal” seems to suggest there might be no trade deals with the most important non-European players.