I am not a trade expert or an economist, but a graph I saw recently has been bothering me due to how bad the analysis is. The part that is most frustrating is the mathematical inaccuracy, even though the misleading part is equally baffling.

You can read the article here.

The Economist author poses a very interesting question -

Does membership of the EU single market matter for doing trade with the EU ?

It’s a very difficult question to answer, since we are talking about a set of complex rules being applied to the movement of capital, goods and labor across many countries operating in a global market.

Instead of trying to answer the question, The author compares EU trade volume to GDP and comes to their unsurprising conclusion that Britain cannot significantly trade with the EU outside of the single market.

The absurdity is that GDP has very little to do with trade.

The earth’s GDP is $ 75.59 trillion and its trade with Mars is 0. Does it mean the only thing stopping trade between Earth and Mars is Earth joining the martian single market ?

The graph led me to do my own research, I admit that I do not know all the answers — but its important for the facts to be correct and appreciate just how difficult the question is.

Relative Trade

Instead of comparing trade to GDP. A better comparison is relative trade as shown below.

Figure 1– How much each country is dependent on trading with the EU in 2014

Looking at the figure its clear that the UK is a lot more dependent on trading with the EU then US, China or Japan, however its important to get the magnitude right — the UK is twice as dependent on trading with the EU then the US or China. The UK is not five time as dependent on EU trade, then the US as the original article seems to hint. If someone toiled and climbed x meters on a hill and I told them that the hill is 2x meters, they would probably think its doable to reach the top, but saying its 5x meters would probably cause them to stop climbing.

Absolute Trade

Comparing relative trade values as in Figure 1 also does not provide the full picture.

The US and China are themselves EU sized economies, so comparing them to the tiny British economy is fairly misleading. Even a small amount of their trade represents a major component of global trade ( i.e comparing 1% of martian — earth trade in relation to 90% of Belgium-Holland trade )

If 10% of trade between two large trading blocs like the US and China were effected it would represent a significant global shock. The point I am making is percentages can be misleading when the underlying values are order of magnitude apart.

Figure 2 — absolute trade values

Figure 2 is fairly revealing, it seems a sizable number of American and Chinese business have no issue doing trade with Europe without being part of the single market. An american “exit” from Europe would be much more disruptive to the global market than a British one.

Better Control Group

Comparatively both the US and China do not have any reason to prioritize trade with EU unlike the UK which actively wants to trade as much as possible with Europe. If we truly are interested in answering the question — is the single market important for trade with Europe ? , we need to compare the UK with countries that are :

located geographically close to Europe.

not in the single market.

similar in economical size.

I did not have to look far to find them :

Figure 3 — Only one of them is blessed with the magic of the single market

The country that truly surprised me in Figure 3 was Russia, since the EU has imposed trade sanctions against the Russians, due to the invasion of Crimea and covert operations in the Ukraine and all.

The Turks are in the Custom Union which is not the same thing as single market ( single market includes freedom of movement ), but clearly they also have no issue directing significant chunk of their trade with the EU.

The UK economy dwarfs the Moroccan making them somewhat of an unfair comparison, having said that I added it to just show how little water the argument presented in The Economist’s holds, if we are allowed to point to the US in relation to the UK why not do the same with the UK and Morocco ?

Both the examples of Turkey and Russia are relevant counter points to the simplistic argument The Economist tries to portray. Countries do exist that trade significantly with the EU without joining the single market, and in some cases even sanctions based on political factors cannot stop market realities.

Single Market ?

A simple model we can use to find the value of the single market is by comparing trade within the single market and EU’s external trade.

It seems that the EU trades 20% more within the single market compared to the rest of the world. That 20% advantage includes all forms of geographical, political, cultural advantages, along with single market privileges .

Conclusion

It’s clear from the data that the UK leaving the EU single market is going to be disruptive for British, EU and global trade however the single market is not a mandatory requirement for trading with the EU as The Economist seems to suggest. Historically every major political bifurcation has had significant economical cost ( e.g american independence ) compared to most such shocks the British one is fairly mild. Making it seem bigger than it actually is, is misleading.

References

All the data used were collected from here.