One of the most contested aspects of the EU Referendum debate has been the potential impact on trade between the UK and the rest of the EU.
So, what can ONS statistics tell us about the importance of trade with and beyond the EU for the UK? This article is part of a series of UK Perspectives, on topics such as the economy and housing, as well as two new articles; this one and another on contributions to the EU budget.
Q. How important is the EU to UK trade?
The EU is a large market for the UK, particularly for our exports of services and goods, including components and fuels.
In 2015, 44% of the UK's goods and services were exported to the EU, while 53% of our imports came to the UK from the EU.
In the same year, UK exports to the EU were valued at £223.3 billion, while UK imports from the EU stood at £291.1 billion.
For countries outside the EU, UK exports that year were valued at £288.2 billion, while imports were worth £257.1 billion.
UK exports (goods and services) with EU and Non-EU countries, current prices, 1999 to 2015
The percentage of the UK’s imports from the EU has remained largely stable over the last 16 years.
UK imports (goods and services) with EU and Non-EU countries, current prices, 1999 to 2015
UK exports to the EU have risen by 68% between 1999 and 2015 (when relevant trade statistics were first collected), while imports have risen by 101% (these figures are in current prices, so not adjusting for inflation).
Q. Who does the UK trade with in the EU and beyond the EU?
Between 2012 to 2014 an average of slightly more than 50% of the UK’s exports of goods went to the EU and just under 50% to non-EU territories, primarily the USA and China.
Last year, goods exports to non-EU countries pulled ahead, with a 53% share of the total.
In 2014, the United States was the country with the single largest share of UK exports of goods and services, but seven of the UK's main trading partners are from within the EU (Germany, Netherlands, France, Ireland, Belgium and Luxembourg (combined), Italy and Spain).
In 2015, 11% of the UK’s exports of goods went to Germany, compared with 17% to the US, while 15% of imports of goods came from Germany, compared with 9% from the US.
The UK has increasingly been trading with emerging and advanced economies from outside the EU, with the proportion of trade with EU countries falling since 1999.
UK top 10 trading partners in goods and services, current prices, 2014
Business services and finance form about a third of the UK economy, which is a factor driving the UK’s surplus in services.
What is the balance of trade?
The UK runs a trade deficit in goods and a trade surplus in services with the EU.
The UK exports more in services than it imports, which means it runs a trade surplus for services. This is because the UK economy is now dominated by the service sector, rather than manufacturing and other production.
When we look at the UK’s trade in goods, however, we find that we import more than we export, which means we run a trade deficit for goods.
The surplus in the trade in services does not make up for the trade deficit in goods, so overall, the trade balance is in deficit
In 2014, the USA was the UK’s largest trading partner in services accounting for 23% of total UK exports of services and 18% of UK service imports. However, as with trade in goods, more than half of the UK’s top 10 trading partners in services are EU countries, with Germany, Netherlands, Spain and France dominating.
Within the EU, the UK exports the majority of its goods and services to a handful of countries - Germany, France, Ireland and the Netherlands.
This is partly because:
- France and Germany are large economies and geographically close to the UK
- Germany is an EU manufacturing hub that uses UK components
- There are historical trade links with Ireland, and a common language
- The Netherlands is a global gateway, through the port of Rotterdam, that acts as an intermediate destination for trade between the UK and other countries. This is known as the Rotterdam effect.1 It’s also an important financial and business services trading centre.
The UK is also an important part of the EU supply chain, as a relatively high proportion of our exports of goods are components manufactured in the UK for onward assembly elsewhere in the EU.
For example, Airbus aeroplane wings are manufactured in the UK for export and onward assembly in other parts of Europe.
The UK tends to export more components, fuels, food and beverages, and basic materials to the EU than non-EU countries, but export more finished goods and services to non-EU countries than to the EU.
Q. How important is UK trade to the rest of the EU?
While the EU market is an important destination for the UK’s exports and an important source of UK imports, the UK is a smaller player in terms of significance to the EU.
This is partly because the EU is such a large market that any one destination for exports or source of imports will be relatively small compared to the total.
The EU accounts for almost half of the UK’s exports, reflecting the fact it is such a large market, comprised of 27 other countries.
However, the UK, as one of many trading partners, accounts for 4%-5% of all other EU countries’ imports – the other side of the UK’s EU export relationship.
The UK is also a relatively small export destination for EU goods, accounting for 6%-7% of total exports of other EU countries over the past eight years.2
The share of EU exports going to the UK has been gradually declining over the past 15 years, but it has risen marginally in the last four years. This may partly be due to strong growth in the UK economy or the strength of the pound against the euro in recent years, both of which may have led to higher UK imports.
UK share of EU trade in goods, 2000 to 20153
The UK’s importance as an export market for the EU varies across member states, with Ireland and some of the smaller member states having higher export shares to the UK than the bigger, more prominent EU member states, such as Germany, France, Spain and Italy.
UK share of select EU country exports of goods, 5 year average (2011 to 2015)
The higher proportion of exports from Ireland is in part due to historical and cultural links, and geographic proximity.
It is worth noting that although the share of exports going to the UK is similar for Germany, France, Spain and Italy, compared to some of the other smaller members states in the chart, 6% of Germany’s exports to the UK will be a much higher level in terms of value, than 6% of Sweden’s exports.
Q. How important is trade for the UK economy?
The UK buys and sells goods and services across the world, in the form of imports and exports.
Accessing markets beyond our shores helps the economy to grow and supports living standards. The UK is able to sell its goods overseas and in return can purchase goods that might be relatively cheaper, better quality, or offer a wider range of choice.
Exports in 2015 made up for 27% of Gross Domestic Product (GDP), whereas imports are equivalent to around 29% of the UK’s GDP.
What is GDP?
GDP (Gross Domestic Product) represents the total value in £s of a country’s goods and services in a given period of time. It’s a way of measuring how well the economy is doing.
Imports and exports as % of GDP over time
Q. What about investment into the UK or abroad?
As well as trading with other parts of the world, companies also invest overseas.
This is known as Foreign Direct Investment (FDI) and comes in the form of:
- Outward investment - by UK nationals and companies in overseas countries.
- Inward investment - by foreign nationals and companies into the UK.
In simple terms, FDI can attract investment into the UK economy from overseas, while also providing UK investors with market opportunities elsewhere.
In 2014 38% of the total UK overseas investment stock (FDI), was in EU countries, whereas 25% was in North America. (ONS, 2016b).
The EU is also the largest investor in the UK in terms of FDI, accounting for 44% of total investment (FDI), followed by North America which accounted for 25%.
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Notes: This piece illustrates and explains some of the more high-level aspects of the EU trade debate, but does not seek to explain some of the wider aspects of, for example, strategic or trade negotiation arguments, or the impact of trade on jobs, inflation, growth and so on.
1.The Rotterdam effect: It has been argued that the pattern of trade between the UK and other countries has been distorted by the location of big international ports such as Rotterdam.The Rotterdam effect is the situation where goods which are initially exported to one country are then re-exported somewhere else.
An ONS article estimated that 50 per cent of all goods exports to the Netherlands were re-exported to non-EU countries.It also estimated that the Rotterdam effect would account for around four percentage points of the UK’s exports of goods. These effects were calculated to illustrate the possible size of the Rotterdam effect and does not imply that a different data series should be produced or used.