How many times have you heard it? The mantra, that is, regularly trotted out by both the true believers in Britain’s EU membership regardless of how bad its disadvantages are, and the uncertain but Brexit-fearful alike, to justify why we shouldn’t ever contemplate leaving? The mantra that something like 40% of our exports go to the EU?
We can ignore for the purposes of this article the Big Lie: the one that tries to hide the fact that the economic issue of trade with individual EU countries is separate from the political issue of membership of the supranational EU itself, and that trade doesn’t depend on membership. The Big Lie that’s rapidly losing its impact, because the conceptual flaw at the root of it is becoming ever more widely known. I’d like to concentrate here on the Little Lie, the one that overstates the extent of the UK’s EU exports anyway.
When have you ever heard whatever figure is being quoted specified in more detail as to what it actually means? If someone says to you “But we depend on the EU for 40% of our exports”, what are they actually referring to? Do they mean exports counted by value? And if so, expressed in what currency? Or do they mean exports counted by volume? In which case, how do you account for intangibles like banking or insurance?
The one thing you can be pretty sure about, though, is that whatever figure is quoted at you, it will be false, and an over-estimate. It will over-state the percentage by anything between 5% and 10%. And the reason is because, with very few, almost no, exceptions, the figure will include two factors which cause the UK’s EU exports to be recorded as higher than they actually are. They’re called, respectively, the Antwerp/Rotterdam Effect, and the Netherlands Distortion.
Take the Antwerp/Rotterdam Effect first. This arises because exports aren’t classified, as regards country of destination, by what you and I would describe as their commercial destination, the country where, if you like, the shipment process stops and the distribution and sale process starts. Instead, they’re country-classified according to the first destination outside the UK that they physically pass through in that shipment process.
It’s easy to see how this distorts export figures for a country like Britain. We tend not to have the extent of huge, modern container ports like Antwerp and Rotterdam, which are more capable of handling the larger size of ships in which manufactured goods are typically shipped around the globe, to benefit from economies of scale. Because of this, a proportion of our exports to non-EU, emerging, markets are shipped first to ports like Antwerp and Rotterdam, there to be consolidated into larger cargoes carried by larger ships.
As an example, let’s say you’re exporting consignments of newly-built Jaguars to both Singapore and Brazil. Your consignments go to either Antwerp or Rotterdam for consolidation and onward shipment. The shipping containers probably won’t even touch Belgian or Dutch soil. The car tyres certainly won’t touch Belgian or Dutch asphalt. But because Antwerp or Rotterdam is their first port of call after leaving Britain, they’ll be counted as exports to either Belgium or Holland, and so included in the percentage of our exports going to the EU, not to Brazil or Singapore. No, I’ve never seen all that many Jags on Belgian roads, either.
Antwerp and Rotterdam are the traditional trans-shipment points quoted as instances of this, but others are emerging. For example, it’s recently been estimated that 20% of the UK’s exports to Ireland are in fact destined for re-export outside the EU. But, like those passing through Antwerp and Rotterdam en route to other, non-EU destinations, they’re officially recorded as EU exports.
You can immediately see this has two statistical effects. Obviously it over-states the percentage of our exports going to the EU – but the corollary of this is that, in doing so, it also under-states the percentage of our non-EU exports, so that the ratio of EU to non-EU exports becomes distorted as well. How many times have you heard EU-philes say that our exports to, say, China, are only x% of our exports to the EU? Bear in mind, though, that some of our exports to China are shipped via Antwerp or Rotterdam, and the ratio starts to narrow, doesn’t it?
Now the Netherlands Distortion. This arises because UK-outwards overseas capital investment, and the UK-inwards income or dividends those investments generate, are often routed via holding companies resident and tax-domiciled in The Netherlands (or, increasingly, Luxembourg).
The EU, of course, keeps making noises about EU-wide corporate tax harmonisation. Mainly favoured mainly by the French, remember, to protect themselves from one of the negative consequences of their own investment-disincentivizing tax rates, namely, competition from other jurisdictions. But meanwhile, The Netherlands and Luxembourg quietly continue offering a tax regime very conducive to the routing of corporates’ capital and income investment flows.
Imagine you’re a British venture capital firm making investments in, say, infrastructure development or renewal in South America’s emerging markets. Or a non-EU venture making investments in the UK. Better to park the funds in your Dutch intermediate holding company, maybe, until they’re deployed into the physical investment. Stream either high amounts of income or, even more, high sale proceeds, back into the UK in too-large amounts, and there can be an adverse tax effect: it may well be better, for tax efficiency, to retain it in the Dutch intermediate holding company, attracting only low rates of tax, and stream it back into the UK over a longer period.
Yet, once again, because The Netherlands is either the first port of call for the outwards investment flows, or the last port of call for the inwards income flows, this all gets recorded as part of the UK’s trade with…..? Yes, you’ve guessed it, the EU. Even though the actual, substantive, business and transaction is with an entity outside it.
So, by how much do these twin distortions over-state the significance of our EU trade? Unbelievably, the Office for National Statistics can’t say. It knows about the Antwerp/Rotterdam Effect and the Netherlands Distortion, and it even discussed them in the 2010 edition of its Pink Book, but it doesn’t attempt to calculate their effect. This of course, helps those with a political interest in over-stating the relative size of the UK’s EU trade, because they can say, somewhat disingenuously, that their assertion is backed by official data.
The campaign group Global Britain had a go about 3 years ago, and estimated the total net over-stating effect at up to 10%. This tends to be backed up by the mountain of detail included by Professor Tim Congdon, in his 2012 research paper “How Much Does The European Union Cost Britain?”. But whatever the precise amount of over-statement, that the “official” figure for the proportion of the UK’s exports going to the EU is regularly exaggerated by at least 8% now seems incontrovertible.
For the full significance of this for the In/Out EU dabate, we need to think, once again, not just the about the deduction that must be made from the official “EU exports” figure, but the secondary, knock-on effect on the relative EU vs non-EU trade ratios. If, adjusting for the Antwerp/Rotterdam Effect and the Netherlands Distortion, our EU exports aren’t 40% of our total exports after all, but only 32%, then the percentage of our total exports that are non-EU commensuratley rises from 60% to 68%. That improves the ratio of non-EU to EU exports from an innocuous-sounding 1.5 (60:40) to a much more substantial 2.1 (68:32), an increase of over 40%.
But that’s something the pro-EU shills like British Influence and Business For New Europe, or their cheerleaders in the media, will never tell you. As I said in the title – smoke and mirrors.