Current Overview of UK & EU Economic Relations

29 March 2016 EU Briefing Current Overview of UK & EU Economic Relations EU standing amidst global markets While the growth in non-eu economies has outpaced the growth of EU economies, mainly due to BRIC growth, the European Union is the largest single market in the world, having bypassed the USA GDP in 2003. Figure: Level of annual Gross Domestic Product, US$, current price 1 In 2014, for both goods and services the EU s share stood at 16.6%, 3.7% ahead of China and 2.9% ahead of the US. Breaking this down, for both goods and services, the UK held 2.4% of world trade during 2014, compared to Germany which held 3.5% and France at 1.8%. 1 Office for National Statistics, How important is the European Union to UK trade and Investment?, 26 June 2015 The Association is registered as a company in England with the number 132142, it is limited by guarantee and has its registered office at the above address

Figure: Percentage share in world trade for goods and services 2 In 2014 the EU s share in world trade for goods stood at 14.8%,.6% ahead of China and 1.5% ahead of the US. Breaking this number down, the UK held 1.9% of world trade in goods during 2014, compared to Germany which held 3.5% and Italy which held 1.5%. In 2014 the EU s share in world trade for services stood at 23.5%, 15.5% ahead of China and 8.2% ahead of the US. Breaking this number down, the UK held 4.4% of world trade in services during 2014, compared to Germany which held 3.6% and Italy which held 1.3%. Figure: IMF representation of main trade partner, shown by colour. 3 2 European Commission, EU Position in the World, 2015 3 International Monetary Fund, Principal Global Indicators, 2016

UK Exports and Imports to/from EU While the growth of non-eu economics means their increased importance in UK trade, in 2014 the EU accounted for 44.6% of UK exports of goods and services and 53.2% of UK imports for goods and services. The proportion of UK exports designated for the EU has fallen from 54.8% in 1999 to 44.6% in 2014, despite the rise in value of this trade. Figure: Share of UK trade with EU(%), Goods and services, ONS The higher growth rate of the value of UK imports from the EU compared with exports to the EU (for goods and services combined) has led to a widening trade deficit (value of imports exceeding exports), at around 61.6 billion in 2014 as compared to 11.2 billion in 1999. Goods dominate UK trade with EU. In 2014 goods comprised ~2/3 of all UK exports to EU, and over ¾ of UK imports from EU. Goods imported by the UK from the EU rose an average of 4.9% per annum from 1999-2014, while exported goods from UK to EU rose an average of 2.5% per year during the same time period, with the UK s trade in good deficit with the EU to stand at 77 billion. Trade is services has been seen more favourable, with a surplus existing since 2005. This surplus in services was at 15.4 billion in 2014. UK exports for goods and services to non-eu countries has increased at a higher rate than imports, creating a trade surplus (exports exceed imports) that was at 27.8 billion in 2014. This surplus is largely the result of services exports. The UK s current account balance with world trade, as a percentage of GDP, in 2014 was -5.9%. Compared to Italy s 1.9%, Germany s 7.4% and France s -.9%. Overall the EU s current account balance is 1.7%.

Figure: UK exports and imports to EU and Non-EU UK Foreign Direct Investment Impact of EU? EY s 2015 survey reveals that in 2014 the UK attracted more foreign direct investment than any other EU country, with 887 new projects compared to 763 in Germany and 608 in France 4. In fact, in 2014, the UK held the highest amount of stock for inward Foreign Direct Investment in the world, trailing behind the US and China. 5 Regarding Foreign Direct Investment, this is best measured using two factors, the stock that is the cumulative value of all past investments, and the flow that is the amount invested per year. In 2014, EU countries accounted for approximately 496 billion of the net stock worth for inward Foreign Direct Investment, or 48% of the total value of Foreign Direct Investments in the UK. From 2004 2013 the net stock of assets held by UK residents and businesses outside of the UK grew by around 5.4% per year 6. The net stock of assets that are held by foreign residents and businesses in the UK, rising by 11.6% on average per year from 2004-2013. Looking at this in regards to UK s net position with the world, found from UK net assets held overseas minus net overseas assets held in UK, this has declined by around 15.9% per year from 2004-2013. 4 EY, European Attractiveness survey 2015 5 UK Trade and Investment, Inward Investment Report 2014/15 6 Office for National Statistics, Foreign Direct Investment Involving UK Companies, 2014

Breaking this down into specifically EU held assets or UK assets in EU, in 2013 43.2% of UK overseas assets were in the EU, while 46.4% of foreign held assets in the UK are attributable to the EU. Both of these percentage of holdings have declined since 2009, though it must be noted that this decline does not account for the value of assets being held. For instance the value of net assets attributed as EU holdings in the UK has risen by 24.8% since 2009. Both the value of EU and non EU holdings in the UK have grown at a rate higher than the value of UK net assets around the world. Figure: UK net stock of assets overseas & received earnings FDI positions as long term cross border investments holding significant influence (equity holdings worth 10% or more) 7 Figure: Foreign net stock of assets in UK & received earnings note: stock of assets refers to FDI positions, long term cross border investments where investor holds significant influence over enterprise (equity holdings worth 10% or more) 8 Looking at overall flow, between 2005 and 2014 the EU accounted for 44% of Foreign Direct Investment flows to the UK. 7 Office for National Statistics, How important is the European Union to UK trade and investment?, 26 June 2015 8 Ibid

Reviewing net value position within the EU, it has fallen from 2010 to 2013, with a surplus of 185.9 billion in 2010 to a deficit of 5.1 billion in 2013. Reviewing the net value position of the UK with non-eu countries, from 2010 to 2013 the surplus declined from 134.6 billion to a surplus of 64.7 billion. This reveals an overall deterioration, as the number of assets held by UK in EU has declined amidst a rise in the value of foreign held assets in the UK. Country by Country EU Trade Breakdown Considering trade in both goods and services with the 27 EU member states, in 2014 the UK had a trade deficit with 17 MS, a surplus with 6, and was generally in balanced trade with 4 MS. Figure: ONS Pink Book 2015 9 9 Office for National Statistics, United Kingdom Balance of Payments The Pink Book: 2015

Rotterdam Impact While the EU as a whole, is a major trading partner, some claim that this is exaggerated by the Rotterdam effect, which is the argument that a share of the trade being conducted with the Netherlands artificially inflates EU trade despite some goods having been dispatched from or arriving in Rotterdam from non-eu countries, and subsequently being traded throughout the EU. This could also work conversely with goods being exported by the UK to Rotterdam, counting as EU trade, whilst the goods end destinations may be outside of the EU. The ONS 2015 study estimates the exclusion of the Netherlands trade from the EU total is charted below, based on 50% exclusion and 100% exclusion of Dutch trade. Even if you exclude all trade with the Netherlands from EU figures, EU trade would still consist of 42% of goods exported and 46% of goods imported, as opposed to 49.7% of exports and 54.1% of imports in 2014 when the Netherlands is included. Figure: Potential Rotterdam effect removing 50% and 100% of trade with Netherlands, ONS 2015 In this regard the ONS has stated that the 50% exclusion of trade figures from the Netherlands as the more realistic assumption. With those figures making UK exports to the EU approximately 45.9% and UK imports from the EU being 50.1%. 10 The Rotterdam effect, brings to light what may or may not be occurring with a variety of UK imports from around the EU, as they may or may not have origins outside the EU. Within this, it is difficult to quantify what trade routes are brought about or altered by UK s EU membership. 10 ONS, UK Trade in goods estimates and the Rotterdam effect, 6 February 2015

UK Jobs Association with EU Trade While frequently stated that over three million jobs in the UK are linked, directly or indirectly with exports to the EU. The explanation of how this is quantified as such is as the following PQ: The estimate of 3.5 million jobs linked to trade with the European Union is based on the assumption that the share of UK employment linked to trade with the EU is equal to the share of total UK value added (GDP) generated in the production of goods and services exported to the EU. The calculation uses data from UK Input-Output tables to estimate the proportion of UK value-added content generated in exports of goods and services and applies this to the values of UK exports to the EU. This is then divided by total UK GDP and the resultant proportion then applies to the total UK labour force to estimate the proportion of the labour force linked to EU exports on a value-added basis. 11 This does not include those jobs associated with imports to the UK from the EU. It is also difficult to quantify the number of these jobs that are linked with EU trade that are in fact dependent upon EU membership existing, as it is believed that trade will still exist with EU countries with or without membership. UK Contributions to EU Budget & EU Funds Received The UK s gross contribution to the EU is composed of VAT receipts, gross national income, customs duties and levies on sugar production, with the UK contributions being calculated in view of the UK rebate or abatement from the EU Budget, in place since 1985. Until around 2009, the UK rebate was able to reduce UK s net contributions to approximately 66% of what it would have been without the rebate. While there have always been some elements of the EU budget that were not included in the rebate, such as overseas air, it was the phasing in of non-agricultural expenditure in new Member States occurring in 2009 and subsequently in 2011 that accounts for the significant increase in UK s net contribution in recent years 12. Within this it should be noted that in the potential situation of a withdrawal from EU membership, the UK is not likely to have this rebate factored in for any EU budget 11 HL Deb 10 February 2014 c96wa 12 HM Treasury, European Union Finances, latest edition published December 2015, Cm 9167

fees needed for several of the scenarios by which UK would retain favourable status with the EU single market. 13 Figure: Documented UK annual net contributions to EU Budget and OBR forecasts for 2016-20 The net contribution of the UK to the EU budget for 2015 has been estimated at 8.5billion, an increase from 4.3 billion in 2009 and down from 9.8 billion in 2014. It is projected to fluctuate between 11.1 billion and 7.9 billion per year from 2016-2020. 14 In evaluating the cost of EU membership and what monetary benefits are received from the EU, it is vital to acknowledge the argument that many times when the UK is eligible for funding, applications for such funding are not made, and in other instances offers of funding for UK projects has been refused. This will ultimately factor into the monetary input versus output analysis. The latest instance in which UK reluctance to apply for or accept EU funds was seen with the strong reluctance to use such funds for UK flood recovery 15 as well as EU funding of UK food banks 16. Attempts to quantify benefit or cost of membership In October 2013 the Government s EU Business Taskforce put forth 30 recommendations 17 to improve economic competitiveness of UK trade with EU through reducing barriers to business. One year later, the Department for Business, Innovation and Skills put forth an update 18, reporting that 10 of the 30 recommendations had been implemented within the year. This reveals an element of 13 European Free Trade Agreement States, 2016 14 House of Commons Library, EU Budget 2014-20; December 11, 2015. 15 Independent, UK weather: U-turn may see David Cameron reluctantly tap EU flood assistance fund, 2014. 16 Guardian, Government under fire for rejecting European Union food bank funding, 2013. 17 EU Business Taskforce, Cut EU red tape; October 2013 18 BIS Press Release, Hancock hails boost to economy as UK cuts EU red tape, November 2014

the difficulties in calculating the costs versus the benefits of EU membership, in that perceived costs or benefits fluctuate as the institutions work for lowered costs. Given the number of assumptions that must be made in order for a cost benefit assessment that previously put forth reports will be described below with no endorsement of any one frame of thought. Institute for Economic Affairs put forth in 2005 that the ongoing costs of EU membership constitutes 3.2-3.7 % of GDP. 19 CBI 2013 study found net benefit to be between 4% and 5% of UK GDP, also claiming that the current economic partnership with Europe is worth 3000 per year per household. 20 Open Europe has put forth in 2015 that the effect on UK GDP in 2030 after leaving the EU could be in the range of -2.2% to +1.55% of GDP. 21 TheCityUK, has put forth a report stating that without EU membership trade costs will increase, requiring companies particularly within the financial services industry, to reduce output and reduce employment levels. 22 Civitas, has put forth a study that analyses UK exports since 1960, finding the UK s trade with other EU members is proportionally similar to its trade with leading economies in 1973. 23 The Centre for Economic Performance at the London School of Economics has put forth that the effects of leaving the EU will be in the range of -2.2% to -9.5% of UK GDP. 24 Department for Business Innovation and Skills provided written evidence to the Lords EU Select Committee inquiry into Re-launching the Single Market, stating that EU countries trade twice as much with each other as they would do in the absence of the Single Market programme and that the amount of increased trade with Europe may be responsible for UK per head income being ~6% higher. 25 19 Institute for Economic Affairs, Should Britain leave the EU?, 2005 20 CBI, Our Global Future Literature Review, 2013 21 Open Europe, The Consequences, challenges & opportunities facing Britain outside the EU, 2015 22 The City UK, Analysing the case for UK membership, 2014 23 Civitas, Trade advantages of the EU are imaginary, 2014 24 Centre for Economic Performance, London School of Economics, Brexit or Fixit? The Trade and Welfare Effects of leaving the European Union, 2014 25 Department for Business Innovation and skills, Lords EU Select Committee inquiry