Trade debate in EU referendum should focus on UK as world leader in services

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Britain runs a trade deficit with the rest of the EU but a trade surplus with the rest of the world. The EU accounts for about half of UK overseas trade but this proportion is diminishing. These are central facts about Britain’s trading relationships with Europe. They will certainly be misquoted and misinterpreted by both sides in the country’s EU referendum campaign.

All statistics require careful interpretation, especially those for trade. The country where imports originate or where exports are destined may not be the one in which the goods were produced or are to be used. This is sometimes called the “Rotterdam effect”: that city is Europe’s largest port and, therefore, a disproportionate fraction of British trade is with the Netherlands, although most goods only pass through. Information about physical flows of oil and precious metals tells us about the location of markets for these commodities rather than the nationality of users or producers.

These facts should be borne in mind when considering British trade patterns, which are distinctive because the country is the world’s leading exporter of services. Only the US sells more in absolute terms but much less relative to the size of its economy. While services account for only a fifth of global trade, they make up almost half of British exports. The UK’s leading position in finance is part, but only part, of the story.

Britain has a trade surplus in transport and in communications; in education and in entertainment; in publishing and in information services; in public relations and in management consulting; in retailing and in engineering services, in law and in accountancy. Cars and pharmaceutical products are the UK’s largest manufacturing export sectors but overseas sales of business services are almost 50 per cent larger than either.

Britain has a trade surplus in almost every service sector except tourism. Even though the scenery is pretty, the UK is cooler and wetter than much of the world, including most of the EU.

Britain has a trade surplus in services vis-à-vis the US, France and Germany, China and Australia. The US is Britain’s biggest customer for services, though Ireland and Saudi Arabia are also large purchasers. Services seem to have their own Rotterdam effect: Switzerland and the Netherlands are both important buyers of UK-produced services but not necessarily the final consumers .

In fact, there is only one country in the world — India — with which Britain has a significant trade deficit in services; the UK is also a modest net importer of services from the Philippines and Pakistan, presumably because these are countries of choice for offshore activities such as call centres.

World trade is not a competition in which sovereign states seek to gain at each other’s expense but it is a mutually beneficial exploitation of their differing competitive advantages.

Rich countries specialise in products that require more skill and knowledge, which may be high-end manufactured goods as in Germany, or services as in Britain. We buy German machine tools and cars, Chinese hammers and toys and Saudi oil. In return, we have sensibly exploited the quality of our higher education system and the advantages of the English language to sell asset management, structural engineering advice and Downton Abbey.

Advanced economies today tend to trade freely in manufactures but retain home-country bias in their purchases of services. As a result, world trade negotiations have not played to British strengths.

The EU has reduced barriers to trade in goods; for most services, however, the single market remains an aspiration rather than reality. If there is an issue to be raised around trade in the referendum debate, this should be it.

 

This article was first published in the Financial Times on February 24th, 2016.

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