How many books have been written on the importance of geography to economic growth? The habitable climate and many inlets of the Mediterranean allowed Europeans to develop powerful naval forces that allowed its nations to dominate the world. But now, geography matters less it would seem, a thought echoed by Brexiteers. America ploughs ahead without a plethora of other superpowers within an arm’s reach. China has been propelled towards the top of the rich list in this digital world. The UK is the 5th largest economy in the world and can hold its own stead outside the EU, they say. But what do the statistics say?
As Figure 1 shows, the UK is indeed the 5th largest economy by GDP, sandwiched by (relatively) near neighbours France and Germany. There are some notable Commonwealth countries (India and Canada) making into the top 30 countries by GDP size worldwide, but by and large European countries make up and significant portion of worthy trading partners for the might of the UK, with the EU as whole almost as large as the United States.
Figure 1: UK as the fifth largest economy in the world by GDP (Source: World Bank 2015
And so it is represented in the UKs trading habits. Figure 2 shows how the EU accounts for approximately 50% of the UKs imports and exports. Where then do all these imports and exports go to? Countries of repute and high GDP standing I suppose? Yes, to a point. As presented in Figure 3, the UKs top trading partners in 2015 were Germany and the USA with China coming a close third. And then what next? France or Italy perhaps? Nope. The Netherlands, a nation of some 17 million people. And then Switzerland whom of course are not part of the EU but as part of the European Free Trade Association and therefore concede to all the free movement rules within the EU. The France comes in but then we have minnows such as Belgium (11 million people) and the Republic of Ireland (5 million people)? This goes against the grain of what we have be told by Brexiteers. Surely it is behemoth economies and populations that matter to the UKs future? But it is important to look at what Britain actually buys and sells to understand where the future may lie.
Figure 2: The UK does a lot of trading with its near neighbours (Source: HMRC – YTD 2016
Figure 3: Top Trading Partners with UK in 2015 (Source: HMRC
Figure 4 breaks down Britains EU and Non-EU imports and exports into the main products. It is predominantly middle to high end products that Britons buy and sell. And therefore you need to sell to rich people. This is confirmed in Figure 5 which takes the same plot as Figure 3 but adds the GDP per Capita of each of those countries. There is slight downward trend in that we tend to do more trade with rich countries and rich people. But the trend is not obvious as Britain mainly deals with rich countries. The worldwide average GDP per capita is ~$10,000 but the countries Britain trades with outside the EU mainly exceed this – the likes of Hong Kong, South Korea. There are a number of poorer countries within the EU – such as Poland and the Czech Republic that fill none of the criteria for trade with Britain, yet remain and important trading partner? Maybe geography does matter. But is there any potential in this commonwealth idea?
Figure 4: UK imports June 2016 (Source HMRC)
Figure 5: UK Top Trading Partners and GDP per capita (Source: HMRC/World Bank)
Figure 6 shows the major economies of the Commonwealth and the GDP per capita of those countries. Only three countries really cut the mustard as potential game changers for trade – India, Canada and Australia. The rest are either too dodgy, small, corrupt or poor. Brexiteers would have us believe that we need to work with up and coming economies in the Commonwealth like India. But India has long been an up and coming economy. India is somewhat like the English football team - constantly being hyped as the next best thing, only to disappoint and leave everyone wondering why it is not better than it is. Plus Indians are not a wealthy bunch. There is limit to how many Land Rovers the upper echelons of the Indian Caste system can take. Plus in reverse, your standard Briton has little interest in driving an Indian made car, but would rather a BMW from Germany. Indeed the Canadians and Australians have sizeable and growing economies with rich citizens who more than live up to the required standard. They even speak English don’t you know. Yet as shown in Fig3 and Fig 5, there are by no means high on the trading hit list. Much lower than the less populous and English speaking Irish Republic who should draw some parallels to New Zealand in terms of population, wealth and products. Yet New Zealand is miles away both geographically and in terms of trading importance to the UK.
Figure 6: GDP of top commonwealth countries (Source: World Bank)
As Figure 7 shows there is not much scope for expansion outside of whom Britain already trades with. China, the US and the EU already make up most of Britain’s trade. If Britain wants to up their trade with the Middle East then it may have to up its arms production.
Figure 7: GDP of important global economic areas (Source: World Bank)
Britain is on the cusp of something. In this case it is not greatness. Nor in reality is it ruin. Britain can of course survive outside the EU and search the wide corners of the world for other trading partners. Or it can continue trading with the Germans and pay the tariffs for no reason other than stubbornness. It is time for Britain to swallow its pride and spit out the bitter pill of Brexit. Not necessarily to reject the democratic vote to leave Europe, but reject the idea getting some sort of deal to stay in the European Free Trade area. The commonwealth was a good idea when coffee, sugar and spices were the hot commodities of the day. Indeed Brexiteers are right to say that the world has moved on and is a much more global environment. But to say geography doesn’t matter is simply folly. To say the UK can thrive outside of the free trade market in Europe is simply folly. Britain is a developed country and needs to buy and sell goods from equally developed and developing countries. There are plenty of those on our doorstep.