As many of you know, I spend far too much of my (increasingly limited) spare time arguing with eurosceptics on the internet. Some are professional eurosceptics (recent discussions have included ones with Declan Ganley, founder of anti-Lisbon Treaty party Libertas, Nigel Farage of UKIP, and someone from American neocon thinktank the Heritage Foundation), others merely passing concerned citizens.

Most of the time, I can point them to a post on this blog where I’ve already covered their concerns in detail. Sometimes I haven’t covered it yet. In a recent discussion with @ArnieEtc, I asked for suggestions of pro-EU myths. He responded with a classic eurosceptic complaint about a perennial pro-EU claim – one that I frequently make myself, but one which I’ve never explored or justified in any detail:

@ArnieEtc, 3rd Nov 2010: “The favourite [pro-EU myth] of mine is where europhiles insist that 70% of our trade is with the EU, so it’d be suicide to leave. This is a myth for two reasons – firstly, you can have free trade with the EU without being a member (EEA). But more fundamentally, it’s a deliberate manipulation of statistics – a lot of our world wide trade goes via Holland, as you get very good shipping links there. But because that involves goods being moved from the UK, to Holland (even though they only stay there for a few days), some pro-EU commentators use that to bulk up EU trade figures, and make it look like there’s more genuine intra-EU trade than there really is.”

I’ll come back to the EEA in another post, as it’s a far more complicated situation to explain – first, let’s take this claim that official statistics over-inflate the UK’s trade with other EU member states.

Is there any truth in it? Well, as with all the best euromyths, yes. Some.

Manipulation of statistics

First, where did this “deliberate manipulation of statistics to show EU trade as being more important” idea come from? It’s a familiar meme among certain sections of the anti-EU blogosphere, and is increasingly being used by anti-EU campaigners in the real world as well.

It all comes down to a phenomenon known as “the Rotterdam effect” – the existence of which is widely acknowledged (but the meaning and significance of which is equally widely misunderstood).

Oddly, the best explanation I’ve found comes from the Australian Bureau of Statistics:

“exports to the EU are often attributed to the Member State where the port of discharge is located, rather than the Member State of final destination. This particular mismatch is referred to ‘the Rotterdam effect’ because of the importance of Rotterdam as a transit port.”

The argument runs that many UK exports go via Rotterdam (or Antwerp) before heading off to the rest of the world (and vice-versa for imports) – and that as such, the trade for the Netherlands and Belgium are vastly over-inflated, which in turn over-inflates the UK’s trade figures with the EU as a whole.

Does this happen? Yes. But it’s a bit more complicated than that.

The eurosceptic case

So, we’ve established that trade figures are flawed. But *how* flawed?

The usual report used by Eurosceptics keen to use statistics of their own to support their argument against the claim that the EU is vital for British trade was compiled by Eurosceptic thinktank Global Britain (co-founded by former UKIP leader Lord Pearson).

This report (PDF) from Global Britain shows that the the EU accounted for something in the range of 47-52% of all UK trade in the years 1999-2007, yet concludes that, due to the Rotterdam/Antwerp effects,

“the real adjusted proportion is likely to be below 40%”

How does Global Europe come to this “below 40%” conclusion? The report explains in an appendix:

“The official ONS [Office of National Statistics] data significantly overstates the real level of UK exports to the rest of the EU, because of… the Rotterdam-Antwerp Effect… The Rotterdam-Antwerp Effect arises because the ONS and its fellow-bodies, in compiling their geographical registers of exports, record as the destination of the export the country of the first port of discharge of a consignment, even when the consignment is only in transit on its way to a different end-destination country… Even when recorded as exports to the Netherlands and Belgium, British goods may not even touch Dutch or Belgian soil, simply being transhipped in the ports of Rotterdam and Antwerp to container vessels bound for – say – Singapore.”

OK – fair enough. So why the 10% reduction?

Well, their argument for some kind of reduction is simple: The Netherlands accounts for £43bn of UK exports with a population of 16m, and Belgium £21bn with a population of 10.5m, where France only accounts for £47bn with a population of 62m, and Germany only £52bn with a population of 82m:

“Each Dutch or Belgian person apparently consuming three or four times as many British imports as a German or French person… On-the-ground observation suggests that the per-capita propensity of Germans, French, Dutch, Belgians & Luxemburgers to consume British imports is roughly similar.”

What are those “on-the-ground observations”? Where do they come from? Where do they get the 10% figure? No source or explanation is given.

We actually have *no idea* how much Dutch or Belgian trade is inflated by the Rotterdam-Antwerp Effect. The “below 40%” claim is unsubstantiated with any evidence beyond assertion, and appears to be based on little more than a hunch.

Could such small countries really account for so much trade? Well, based on the (unreliable) official figures, the Netherlands accounts for c.7.8% of all UK exports. But Ireland – with an even smaller population (just 4 million compared to the Netherlands’ 16 million) – accounts for 7.5% of all UK exports. And last time I checked, Ireland doesn’t have an equivalent of Rotterdam to allow that vast per-capita consumption to be written off as based on misallocation. (Update: See correction in comments.)

“The US is a more important trade partner for Britain”

It’s not just Global Britain that claims that the importance of EU trade to the UK is overstated. Similar assertions were made in Mark Baimbridge & Philip Whyman’s book Britain, the Euro and beyond, where they also address the argument that the EU accounts for the majority of UK trade:

“a detailed analysis reveals that only 48 per cent of the UK’s current account relates to the EU… Indeed, just as much trade takes place with the USA as France and Germany combined. Thus although the UK is deeply involved in trading to EU member states, it remains a minority of total trade.”

Here it’s necessary to go to HM Revenue & Customs (PDF), which in a 2005 report raised an important point which is often overlooked by eurosceptics who seem to think that the Rotterdam/Antwerp effect is peculiar to EU trade figures:

“The Rotterdam Effect is not confined to trade between EU Member States but can affect trade between any pair of countries where the goods are transported through one or more additional countries… it is not only where the country of transit is an EU Member State that the Rotterdam Effect can come into play and cause asymmetries.”

In other words, this phenomenon is not just confined to Rotterdam and Antwerp, nor just to the EU. Goods that go via *any* third party country before reaching their ultimate destination can be affected by the same phenomenon.

The HM Revenue & Customs report in particular notes a Statistics Canada-Eurostat study from the year 2000, showing that most EU exports to Canada go via the US, which in turn can over-emphasise the importance of the US as an EU (and UK) trade partner:

“For Eastbound trade, the Canadians class the ‘indirect trade’ as exports to the USA, and the ‘transit trade’ as exports to the EU. The EU classes both of these as imports from Canada on a country of origin basis. Similarly for Westbound trade, the EU may record exports to the USA whereas Canada records an import from the EU due to country of origin.”

The report goes on to note a follow-up study by HR Revenue & Customs itself:

“In 2004, HMRC studied asymmetries with the USA and Canada (Terrazzano, 2004). Here it was discovered that crude oil is imported from the UK via Portland, Maine in the USA, and then sent by pipeline to Canada. This is recorded in Canada as in import from the UK, whereas the UK records an export to the USA. The USA do not record either flow, as it is simple transit. Thus the UK records more oil exports to the USA then they record importing, and recorded less oil exports to Canada then they record importing.”

So thanks to the Rotterdam effect, we can’t trust trade figures with non-EU countries either. And, perhaps, particularly not the US, due to the large amount of re-exportation that happens via America’s many major freight hubs.

In other words, the Rotterdam/Antwerp Effect could easily be referred to as the Portland/Baltimore effect (to randomly pick two major east coast US ports). Indeed, considering the importance of the British ports of Liverpool, Dover and Southampton, or the major global air freight hubs of Heathrow and Gatwick, perhaps we could call it the Heathrow/Liverpool Effect? How much does air freight passing through Heathrow boost the UK’s trade statistics with non-European countries?

As far as I can tell, there’s no real way of finding out for certain. Why? Because there’s no international standard for recording trade statistics.

A conspiracy to inflate intra-EU trade figures?

The Rotterdam/Antwerp effect is acknowledged by the EU itself, as well as by the official trade bodies of the various member states (and other countries around the world). The EU’s own official statistical body Eurostat even has a standard disclaimer on pretty much every document dealing with extra-EU trade (e.g. PDF ):

“Dutch imports, and therefore the trade deficit, are over-estimated because of the “Rotterdam effect”, where goods destined for the rest of the EU arrive and are recorded in harmonised EU external trade statistics in Dutch ports. This then has a positive effect on the external trade balances with China of those Member States to which the goods are re-exported, as these shipments would be recorded as intra-EU trade with the Netherlands, rather than extra-EU trade with China. To a lesser extent, Belgian trade figures are similarly over-estimated.”

Is this distorion deliberate? See, for example, that same HM Revenue & Customs report, “Analysis of Asymmetries in intra-community trade statistics with particular regard to the impact of the Rotterdam and Antwerp effects“:

“The aim of this study was to analyse the asymmetries in intra-Community tradestatistics with particular regard to the impact of the Rotterdam/Antwerp effect, and to provide recommendations on improving EU trade statistics and better align them with international definitions.”

In short, if goods are imported or exported to/from the UK via a third, EU country (like the Netherlands or Belgium), they could indeed be attributed to that transitory third-party country rather than their final destination. This could indeed distort the true figures for the UK’s trade, both with the EU and with the rest of the world, potentially over-emphasising the UK’s reliance on her EU partners.

But both the EU and the UK acknowledge this flaw. As that HM Revenue & Customs report shows, the UK has been actively investigating ways to improve the situaiton. So has the EU – see, for example, Decision No 1297/2008/EC on a Programme for the Modernisation of European Enterprise and Trade Statistics (gloriously boring PDF here).

Can we trust *any* trade figures?

To resort to cliche, when you’re asked if it’s a cock-up or a conspiracy, it’s almost always a cock-up. The same applies here.

Are the official statistics for the UK’s trade with other EU member states accurate? No. But then, neither are the official statistics for the UK’s trade with non-EU states – perhaps those relating to the US in particular, thanks to the Portland/Baltimore Effect.

What does this mean for the claim that the EU is vital for UK trade?

Even the lowest percentage for UK-EU trade that I’ve been able to find – Global Britain’s unverified, unsourced 40% figure – is still a much larger proportion than any other trading partner. The next largest, the US, comes in at around 14% of exports and 9% of imports.

Taken as individual countries, EU member states make up 8 of the UK’s top 10 import *and* export partners. Even taking into account the potential distortions caused by the Rotterdam/Amsterdam effect, the UK does a hell of a lot of trade with EU countries. (It would be insane if we didn’t, considering how geographically close and economically affluent they are…)

So even if you deny that the EU accounts for over half the UK’s trade – a claim that is impossible to verify, given the systemic flaws in the available data – it cannot be denied that other EU countries account for a *very* significant proportion of UK trade.

It is, therefore, an eminently sensible move for the UK to try to make trading with those EU countries as easy as possible – because the easier it is to trade with your major trading partners, the lower the costs, and the greater the potential profit margin. That’s just common economic sense.

From the perspective not just of Britain, but of every country in the world, as the EU continues to harmonise its product standards and trading systems via the common market, it becomes increasingly easy to trade with EU member states.

For the UK, being part of the EU, it is even easier – as long as the UK abides by EU standards, both for its exports to the EU (as British manufacturers can produce their products to just one uniform standard, rather than 27 different ones) and its demands for imports from the EU (as EU manufacturers don’t have to bother going to the trouble and expense of producing their goods to a different set of standards just for the British market).

(As an aside, how much money would electronics manufacturers save if they didn’t have to produce special 3-pin, 240 volt plugs for the UK market, or car manufacturers save if they didn’t have to bother with us driving on the left rather than the right?)

The Devil’s Kitchen argument

Finally, we have the ultimate fall-back – something I always think of as the Devil’s Kitchen argument, because British anti-EU blogger Devil’s Kitchen was the first I heard expound it:

“Britain’s trade is overwhelmingly internal, actually. The split is roughly this: 79% internal, 10% EU, 11% the rest of the world.”

Ignore the percentages, which were not intended to be overly accurate – this complaint does have some validity. It can’t be denied that the vast majority of business transactions that UK companies and producers deal with are with other UK-based companies and producers, not with foreign partners.

Why then, runs this eurosceptic train of thought, should *all* UK businesses be bound by EU rules designed to harmonise external trade when they don’t trade externally?

There are multiple answers to this question:

1) They aren’t. There are numerous specific opt-outs for small producers trading locally, where EU regulations don’t apply.

2) Having one set of regulations for both internal and external trade is a lot more cost effective, plus ensures a more efficient market by preventing the creation of barriers to trade (both deliberate and accidental).

3) It is in the interest of the economy as a whole that all businesses should have the ability to reach their full potential – and that full potential includes trading with foreign partners. Anything that makes this more difficult should be removed, anything that makes it easier (such as harmonisation of regulations across a broad geographic area) encouraged.

4) The reason most trade is internal is partly geographical (it’s easier to trade with people near to you, plus Britain is an island, making it logistically harder for a small British business to trade with a neighbouring country than, say, a small Belgian one), but primarily historical: the UK still has its own currency, making trading with other countries a lot more complex than trading with other British towns or villages, which puts off a lot of smaller businesses from even trying. If Britain joined the Eurozone, I’d expect trade with other Eurozone countries to increase dramatically.

(Note: On point 4, see the European Central Bank’s Working Paper No 594, “The Euro’s Trade Effects” (PDF), which concludes that by 2006, intra-euro area trade had been boosted by 5-10%. Though in the interests of fairness, see also ECB working paper No. 941 – “The euro’s influence upon trade: Rose Effect versus Border Effect” (PDF) – which notes that the situation may be a bit more complicated than that.)

The EFTA/EEA argument

When you get this far into a discussion about the importance of EU trade, it’s traditional for Eurosceptics to respond with the “but we could still trade with the EU from outside, like Norway, Switzerland, or the other EFTA countries that are part of the EEA but not the EU” line – as, indeed, @ArnieEtc did way back at the start of this post.

This is also a flawed argument, but one that I’ll have to return to later, as it’s also rather complicated – and at 2,800 words this post is already far, far too long.