Brexit Talk
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Brexit Talk

Commonwealth Trade v EU Trade

Is the Commonwealth Really our Substitute for EU trade?

Throughout the last year there has been a lot of talk about the rest of the world having more growth than the EU. I’ve covered this before, as I watched people who should know better clearly pull the wool over the eyes of the UK public.

TL;DR

Answer: No!

Commonwealth trade levels mean it overtakes the EU in 106 years at best. That’s if it maintains double the EU’s growth rate.

Analysis

Intra-commonwealth trade, that is, trade to other commonwealth nations, including us, is valued at €480 billion in the latest year, of which the UK accounts for €39 billion. The highest it has ever been.

Compare this to the EU’s intra-bloc trade, that is, with other EU nations, of €6.156 trillion. That is almost 13 times as much trade within the EU versus the commonwealth.

Counting external trade as well, the numbers are better, but still bad. With €9.6 trillion of internal and external EU trade against the Commonwealth’s €3.4 trillion. But this includes the UK, India and Canada.

But things aren’t as simple as that. These are not two distinct sets. The Commonwealth trades into the EU already. Albeit that only the UK and Canada have totally friction-less trade. When you exclude the double counting, the EU and Commonwealth €380 billion of a total €3.8 trillion of trade, some 10%, is traded with the EU in any event.

Leaving the EU, the UK will lose access to the commonwealth FTA’s the EU already has. Including Anything but Arms.

EU FTA’s: Present and under negotiation, including commonwealth nations

Relative Growths

The EU’s latest figures show that despite the UK’s stagnant growth in 2017 after the Brexit vote, the EU’s growth has been solid. Global projections are expected to put the EU on par with pretty much anywhere else in the world.

World Global Growth Outlook — 2017–2018

However, this in itself, doesn’t answer the claims that the majority of growth is outside the EU.

What would, is a direct comparison of EU to Commonwealth trade. In particular, examining the point in time when Commonwealth trade is a greater proportion of world trade overall, than EU trade is. That called for a back of a napkin calculation.

Assumptions

I wanted to give the claims the best possible chance. So I assumed the UK contributed to both economic contexts and the EU bought as much from the commonwealth as it did now. The key was to find the crossover point. Since this is where the total value of EU trade is then smaller than Commonwealth trade. Basically, chase down the green circle.

looking for the green sweet spot. From 2017, when will we see Commonwealth Trade values overtake EU trade values?

From the previous map, I decided to assume that EU growth was half commonwealth growth. Seems like a fair assumption on average. What you can do is then map out a pair if present value equations. One for the Commonwealth the other for the EU. These are the same equations you’d use for calculating compound interest. You can then equate the values of the two and solve them for t, to determine the time they cross over. As above.

I also assumed that world wealth continues to grow, so each party doesn’t saturate. In the event they do, regardless of economic context, the graph starts to become sigmoidal, like example shown below and as has happened with China, albeit for different reasons. This elongates the time to the cross-over point in any event. Not shortens it.

The net result is there isn’t a point in trading that far away over the EU even with tariffs, because transportation and wasted costs then approach the total EU Trade costs, including the EU’s Common Customs Tariffs.

Results

With the UK in each bloc, which currently affects the EU negatively and the Commonwealth positively, Commonwealth trade will overtake EU trade in around 106 years. Likely more. Indeed, it would take 54 years just to reach the level of trade value the EU is at now!

However, that assumes the UK remains in each bloc. Take the UK out of the EU, and the difference becomes much greater! Since the EU’s growth isn’t then hampered by the UK’s economic stagnation. Those figures [updated with latest figures for intra-bloc trade] come out at just over 400 years [last year’s answer was 493 years].

The Why: Percentages are Relative Measures

I’ve made no secret about the UK Education Systems’ ability to create large swathes of mathematically and analytically literate folk.

If you’ve watched all the reports of these numbers, they have one crucial thing in common. They attempt to reason with, and only present, percentages. Never actual trade values. It’s an obfuscation.

Most people forget that percentages of growth are relative to the value of an underlying indicator. By themselves, they tell you nothing about absolute value.

For example, a company earning £110,000 in 2018 reporting a 10% growth on the previous year, means they had £100,000 in revenue the previous year.

This gets worse when comparing two companies and the relevant information is in absolute amounts. Percentages never give you absolutely amounts. Something you can relatively compare. Since you need an absolute amount to use as a comparison. This applies equally well to regional comparisons.

For example, company A reporting a 10% growth on the previous year, as compared with company B reporting a 7% growth on the previous year.

That sounds better right? 10 is bigger than 7.

Except there is a missing piece of information. We can only gauge if it is truly better when we add the actual values for the first year, for both.

Company A having a 10% growth on £100,000 revenue is better than company B having a 7% growth on £100,000. Growing £10,000 and £7,000 respectively.

Or…

Company A having a 10% growth on £100,000 revenue is worse than company B having a 7% growth on £10,000,000. Growing £10,000 and £700,000 respectively.

Both those cases have different outcomes when you are leaving a gig which gives you £4,000,000 a year. Only one of those is a good deal. The other is very, very bad.

Biggest in the Commonwealth

The other problem is most Commonwealth economies are tiny. Only 4 have a GDP above $1 trillion. The UK, Canada, India and Australia. The rest are tiny.

Top 14 Commonwealth Economies by GDP

If Manchester was a country, it would be 13th on that list. London would be 5th. That shows how small the ‘market potential’ is.

As we’ve seen from the WTO exchanges last year, both Canada and the USA have rejected the proposed TRQ split that both the UK and the EU proposed. In addition, India has rejected a Free Trade Agreement on the grounds the UK wouldn’t offer freedom of movement. Russia and Brazil have falling economies. That leaves just Australia as a large economy to trade with.

Conclusion

So the claims that the Commonwealth is growing faster than the EU is immaterial. It will take 56 years just to reach what we have now, with 106 years to reach the EU’s level of trade with us in it. The UK does import more than export to the EU, by some way. However, the loss is small enough that the EU can make up for that with a 1% increase in inter and extra-EU trade.

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Ethar Alali

Ethar Alali

EA, Stats, Math & Code into a fizz of a biz or two. Founder: Automedi & Axelisys. Proud Manc. Citizen of the World. I’ve been busy