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The EU’s trade impact – anybody’s guess?

Jonathan Lindsell, 25 February 2013

Last week I examined the claims of Vince Cable, David Lidington and Ed Davey as they heralded the EU’s economic benefits. Their ‘headline’ figures were that 3.5 million British jobs depended on EU membership, and that participation in the Single Market was worth £3,300 every year to every household. They were wrong, their statistics arising from dodgy rhetoric and miscalculation in this 2011 Analytical Paper (BIS, DfID).

The same paper makes an interesting claim: that since the 1980s, Single Market Membership increased UK trade, “[by] around +15 percentage points”. This figure was key to producing the flawed claims already debunked, but seems suspicious in and of itself. The government paper, which otherwise uses footnotes and references aplenty, does not attempt to justify this key 15% claim.  At best, a paragraph later, it refers to three other studies:
– European Commission (2010) “Quantifying the potential macroeconomic impact of the Single Market”, which purportedly shows a 4.8-5.7% rise in GDP since 1987. GDP is not trade.

The Internal Market and the Dutch Economy (Bas Straathof, Gert-Jan Linders, Arjan Lejour, Jan

Möhlmann, CPB Netherlands Bureau for Economic Policy Analysis, 2009) showing a 3-10% rise in trade.

The Economic Impact of European Integration, Boltho and Eichengreen (CEPR, 2008) argues that economic integration in Europe led to 5% additional income gains. Again, this isn’t the same as trade.

 

My initial intention was to do a short blog post looking into these papers, then applauding or criticising how BIS/DfID arrived at 15% trade.  This was easier said than done. The government’s referencing is woefully inadequate, if not deliberately obstructive.  They refer to one Dutch study in a footnote, and an utterly different one in the bibliography. Of the European Commission study, there is no sign on the internet whatsoever, at least not with the given title or factual claims.

What is concerning here is the implications such practice has on public discourse and debate. Few journalists, and even fewer members of the public, would have the time or the stubbornness to check a government study’s facts and figures. Even those who do would likely give up when faced by several 90-page theoretical works whose own assumptions are open to question, and for which the government has provided no page numbers.

If our hypothetical ‘concerned citizen’ did delve into the two studies, she would find a story far more complex than the government’s assumptions acknowledge. The Dutch study (Straathof et al) estimates that the Internal Market increased:
– Goods trade by 8%
– Services trade by 5%
– Foreign Direct Investment flows 11% outwards and 15% inwards (pp.2, 40, 49).

 

The authors note their own optimism, and give another ‘conservative estimate’ in which the Single Market’s GDP effects were only 2% (pp.12, 70). Their figures are further tempered by their admission that, given an EU growth slowdown in the 1990s, the rest of the world was experiencing comparable free trade thanks to “global agreements made under the Uruguay Round of the GATT” (p.31). Therefore their assumption that without the EU, European countries would be operating in near-autarky skews their figures.

 

What does this mean for the government’s 15%? Perhaps they ignored everything except inwards FDI, then forgot to mention it.

This would be a great mistake since, in their discussion of FDI spikes (p.20) Straathof et al. suggest their data is skewed by a few large American purchases of British telecoms firms which do little to prove the unique benefit of the Single Market.

The intrepid reader may then find themselves faced by Boltho and Eichengreen, whose ‘cliometric’ method attempts to imagine ‘what would have happened’ in the absence of the EEC/EU’s development, and the relative prosperity of this alternate universe. This is all fun and games, and undertaken with a serious scholarly bent. However, the exercise is so counterfactual that it is hard to see why the government took it seriously.  The authors are forced to make assumption after assumption, guess after guess. What might 1950s Europe have looked like without Jean Monnet and Robert Schuman? What might have replaced the Treaty of Rome? Could the Single Market have been completed in the absence of Jacques Delors?

It is with tact that they conclude,

“Rough orders of magnitude might suggest that EU GDP is some 5 percent higher today than it would otherwise have been…Whether these are large or small numbers is ultimately for the reader to judge.” (p.35)

This 5% GDP figure doesn’t seem to have much semblance to a 15% trade increase. Oh well.

Neither study goes into the requisite detail to satisfactorily prove the EU had such a marked impact. For the UK especially, it is hard to isolate ‘EU-effects’ from ‘world effects’. Ted Heath brought Britain into the EU just as the global economy suffered twin shocks – the end of the Bretton Woods currency stability system, and the OPEC oil embargo. Domestically, Heath was at the unions’ mercy and had to restrict Britain to a ‘three day week’ to conserve fuel supplies.

Upon the relative stability of Wilson’s government, it is unsurprising that the economy saw an increase in trade and prosperity – this was recovery from a very low level. Attempting to decide what proportion of that recovery was due to EU membership would require something like omnipotence. Neither study even mentions such issues. Likewise, showing the EU’s role in our prosperity through the Islamic Revolution in Iran (which constricted oil supplies) or through Thatcher’s deep monetarist reorganisation, or through the international manoeuvring which accompanied the slow end of the Cold War, is necessarily an exercise in educated guesswork.

The 15% figure, then, seems to represent the government having looked at two educated guesses, then deciding those figures were undesirably low and creating a better one.

15%.

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