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The Customs Union provides no benefit to UK trade.

In May 2004, the European Union underwent its single largest expansion to date. The “A10 countries”, consisting of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia all became part of EU and all its institutions, including the Customs Union and Single Market.

The addition of these countries to the Single Market and Customs Union was supposed to boost trade between existing member states and these countries, bringing greater prosperity. The A10 countries were fast growing areas of Europe, and their inclusion into the EU’s Single Market structure would, in theory, allow the existing member states to access their markets and boost their own exports. However is there any evidence that this has actually happened?

All the data used in this article is from the UN’s global trade database, Comtrade, and looks at the eleven years before the A10 countries acceded to the EU (1993 – 2004), whilst comparing it with the eleven years after (2004 – 2015).

Firstly, UK exports to the A10 countries has followed a generally increasing trend since 1993:

A10growth
The value of UK exports to A10 nations from 1993 – 2015 ($US). Source: Comtrade 

At first glance, a visible spike in export volumes is visible in 2006, however this can be attributed tVAT missing trader intra-community (MTIC) fraud, rather than any benefit from the Customs Union. This led to imports and exports spiking in 2006, and a subsequent reduction in 2007 as the UK introduced reverse charging for VAT in January of that year.

From the graph alone it is possible to see that UK exports to Poland grew at an increased rate after they joined the EU. However it is difficult to see regarding any of the other A10 nations whether membership of the Single Market and Customs Union has delivered clear, long term boosts to UK exports.

It is possible to take the eleven year period before EU Accession (1993 – 2004), sum the growth in UK exports and produce an annual average growth figure for that period. Doing the same to the eleven years after EU Accession (2004 – 2015) provides a direct comparison in UK export growth between the pre-EU and post-EU environments:

A10Perf
Average Annual UK growth of exports (goods only) to A10 countries in US$ (millions), comparing the period 1993-2004 with 2004-2015. Source: Comtrade

The results are striking. On average, the rate of annual growth of UK exports to almost all A10 countries have fallen since those countries have joined the Customs Union. The standout exception is Poland, which before its EU Accession saw the UK see an average annual growth of exports to that country of $138m per year, but since joining the Customs Union has seen this increase to almost $270m per year. The UK has also exported marginally more per year to Latvia. However all other nations have seen marked decreases in UK growth of goods exports.

The theory that a customs union should boost export volumes is clearly not working as well as pro-EU economists would have us believe. However exports is only one side of the equation. The idea of the EU Customs Union is that goods imports, as well as exports, should become easier to conduct due to less trade friction, and therefore volumes should be expected to increase at a greater rate after EU accession than before.

Like exports, imports to the UK from A10 nations have shown a gently increasing trend since 1993:

A10ImportsGrowth
The value of UK goods imports from A10 nations from 1993 – 2015 (goods only) in US dollars. Source: Comtrade

Unlike exports, growth in imports to the UK see a clear upward trend after 2004, for multiple countries. For some countries, especially Slovakia and Poland, an acceleration in the rate of growth of exports to the UK after EU accession is clearly visible. The same spike in 2006 is seen, which again is attributable to reverse charging for VAT.

Looking in more detail at the average annual change in the value of those imports between the periods 1993 – 2004 and 2004 – 2015 confirms the relative increase in imports:

A10Imports
Average annual growth of UK imports from A10 nations, comparing the period 1993 – 2004 with 2004 – 2015. Source: Comtrade

Immediately it is noticeable that UK import volumes have benefitted more than UK export volumes. Since joining the Customs Union, the average rate of annual growth of imports to the UK from Czechia, Lithuania, Poland and Slovakia have all increased. However in Cyprus, Estonia, Latvia and Malta, the amount of imports have reduced, despite the “frictionless trade” that the customs union is meant to provide.

Subtracting the total value of imports from the value of exports gives the overall trade balance between the UK and the A10 nations. This is shown below from 1993 – 2015:

TradeBalance
The UK balance of trade of goods (value of exports minus value of imports) with A10 nations from the period 1993 – 2015. Source: Comtrade

The results are once again, striking. In 1993, the UK was more or less in balance with all the A10 nations. However since the A10 countries joined the customs union, huge trade deficits in goods have opened up with Poland, Czechia, Hungary and Slovakia. The UK has not managed to open up a substantial trade surplus meanwhile with any of the other accession states.

Comparing the trade volume data of the A10 nations before and after customs union membership does not show any meaningful benefit to UK exporters that were not present before the A10 nations acceded. From 1993 – 2004, the UK increased the value of its exported goods by $5.84bn to all the A10 countries. From 2004 – 2015, it only managed to increase exports by $5.29bn, a remarkable $0.55bn less than the previous eleven year period, even though the Customs Union was supposed to provide “frictionless trade”. Imports show a different story, however. From 1993 – 2004, the UK increased imported goods by $9.93bn from the A10 nations. From 2004 – 2015 the rate had more than doubled to $18.16bn.

Although the Customs Union was supposed to encourage “frictionless” trade that would boost exports and thereby prosperity, the data shows that this hasn’t happened. Instead it shows that the UK has become a captive market for EU producers, with exports stalling whilst imports continue to rise. The data shows that the UK average annual trading deficit with the A10 nations from 1993 – 2004 was ~$0.37bn. During the period 2004 – 2015 under the EU Customs Union, this average annual trade deficit skyrocketed to $1.17bn. This is evidence that the Customs Union environment has created a chronic trading deficit for the UK, damaging domestic business.

Such data confirms that UK exporters have nothing to fear from the UK rejoining the rest of the world outside the Customs Union and Single Market, and conducting its own independent trade policy on its own terms.

This post was originally published by the author on his personal blog:
https://joelrwrites.wordpress.com/2019/03/21/the-customs-union-has-had-no-beneficial-effect-on-uk-trade-with-eastern-europe/

About Joel Rodrigues

Profile photo of Joel Rodrigues
Joel was born and lives in the United Kingdom, and is a geophysicist working for an oil services company. He blogs in his free time about politics, mainly concerning Brexit. He identifies mainly with conservatism and civic nationalism.

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3 comments

  1. Thank you for exposing these figures. We can only hope that the Treasury and Bank of England read this article, their “predictions” for a No Deal Brexit would be massively changed.

  2. Profile photo of Isaac Anderson

    Powerful analysis Joel – I echo John’s comment above…

  3. Fascinating to see. Having looked back at trading patterns, it is fascinating to look at the car industry. Czech Republic can largely be explained by the VW relationship with Skoda. As for Slovakia, both VW and PSA have invested in production capacity. PSA notably closed down its UK plant at Ryton in 2007, around the time that investment took place in Slovakia.

    If any is bold enough, it would be interesting to add investment flows into the analysis.

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