UK Trade with the European Union
UK trade in goods and services with fellow members of the European Union has
deepened in the 36 years since we joined the European community. As of 2008 our
geographical pattern of trade was as follows:
Main export markets:
European Union 57%
United States: 15%
Switzerland: 2%
China: 2%
Japan: 2%
Main source of imports:
European Union 55%
USA: 9%
China: 8%
Norway: 5%
Japan: 3%
Keep in mind that the EU is a customs union – a customs union comprises two or more countries
which agree to:
1. Abolish tariffs and quotas to encourage free trade. For example, products that originate in
the EU circulate duty-free. However they might be subject to charges such as VAT.
2. Adopt a common external tariff (CET) on imports from non-members countries. Thus,
in the case of the EU, the tariff imposed on, say, imports of South Korean digital cameras
will be the same in the UK as in France or Hungary. A CET prevents individual countries
imposing their own unilateral tariffs that differ from other in the customs union.
A customs union has trade creation and trade diversion effects.
Trade creation involves a shift in people’s spending from a higher-cost domestic source to a
lower-cost partner-source within the EU, as a result of the abolition of tariffs. UK consumers may
switch spending on car insurance away from a higher-priced UK supplier towards a German
insurance company that has decided to operate in the UK market.
In principle, trade creation stimulates an increase in intra-EU trade and ought to lead to a more
efficient allocation of scarce resources thereby leading to gains in consumer and producer
welfare.
Trade diversion happens when there is a shift in domestic consumer spending away from a
lower-cost world source to a higher cost partner source country from within the EU - as a result
of the elimination of tariffs on imports from the partner. The common external tariff on many
products entering Europe makes imports more expensive leading to higher costs for producers
and rising prices for consumers if previously they had access to a cheaper supply from a non-EU
country. The effect is a reduction in consumer and producer welfare.
Analysis diagrams showing trade creation and trade diversion should be used when discussing
trade relationships between the UK and the EU.
Trade balance with the EU
Euro - Sterling Exchange Rate
UK Trade Balances in Goods and Services with the EU
Value of one Euro, daily closing exchange rate
Annual balance of trade £ billion with selected countries and EU
-5
-5
-10
-10
-15
-15
-20
-20
-25
-25
-30
-30
-35
-35
-40
-40
-45
-45
-50
billions
0
-50
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Pence per Euro1
GBP (billions)
0
1.00
1.00
0.95
0.95
0.90
0.90
0.85
0.85
0.80
0.80
0.75
0.75
0.70
0.70
07
BoP: Current Account: Goods & Services: Balance: Germany
BoP: Current Account: Goods & Services: Balance: France
BoP: Current Account: Goods & Services: Balance: Total Europe
Source: Reuters EcoWin
0.65
Nov Mar
04
0.65
Jul
05
Nov
Mar
Jul
06
Nov
Mar
Jul
07
Nov
Mar
Jul
08
Nov
Mar
09
Source: Reuters EcoWin
Key points:
The UK has seen a growing trade deficit with the EU as a whole
UK Exports of Goods and Services
Average Annual Growth Rate
(% pa) from 2001-2007
Estonia
12.6
Slovakia
11.0
Poland
10.6
Romania
10.0
Bulgaria
9.2
Lithuania
9.1
Latvia
8.6
Hungary
6.0
Greece
4.7
Czech Republic
4.2
Slovenia
4.0
Belgium
3.7
Netherlands
3.6
Irish Republic
3.3
Sweden
3.2
Germany
2.6
Total EU
2.6
Spain
2.5
Austria
2.1
Finland
1.7
Italy
1.4
Denmark
1.4
Portugal
0.1
France
-0.3
Total exports grew from £113bn in 2001 to £139bn in 2007 but
imports grew more quickly from £120bn to £185bn over the
same period.
8 of our top export markets are inside the EU (China and USA
are the other 2)
Export growth:
The table on the left shows the average annual growth rates for
UK exports of goods and services to selected EU countries.
Consider the following questions:
1. Can you explain why the top eight countries for UK
export growth are also nations that joined the EU in 2004
or 2007?
2. Since 2007-8 the value of sterling against the Euro has
depreciated by more than 25%. Analyse how this might
affect trade between the UK and the Euro Area
3. Explain three factors (other than the exchange rate) that
can affect the competitiveness of UK exporters within the
European single market
4. The Euro Area economy is in deep recession in 2009.
Explain how this might affect the UK economy.