It is high time Britain left the ailing EU and its burdensome regulations and embraced trade with fast-growing emerging economies. That was the argument put forward by Nigel Farage at his keynote speech this morning at the Ukip conference. It’s an argument that also chimes with a growing body of opinion about the EU’s diminishing importance for British trade, with recent trading statistics showing that Britain’s non-EU exports have risen to their highest levels since records began in 1998 while exports to the beleaguered eurozone continue to fall. However, the idea that Britain’s economic prospects would actually improve were it to leave the EU is deeply misguided.
Significantly, the EU remains the favoured export destination for the small and medium-sized enterprises that form the backbone of the British economy, and which are essential for an export-led recovery and a move away from Britain’s over-reliance on the financial sector. A report by the Federation of Small Businesses found that 87% of its members export to the European Economic Area, compared to less than 13% exporting to each of the Bric economies. Meanwhile the British Chambers of Commerce’s annual survey found that it is overwhelmingly large firms who are expanding trade with major emerging markets, while smaller businesses see the EU as providing the best opportunities for export growth.
This is because most small firms lack the financial and human resources required to overcome the many challenges presented by emerging markets: language barriers, foreign legal systems, high tariffs and intellectual property theft. More fundamentally, low transport costs and rapid, visa-free travel make exporting to Europe far more manageable. A business employing fewer than 10 people can’t afford to send an employee out to China for a week to meet potential partners, let alone come to grips with the Chinese bureaucracy and legal system. Exporting to the Brics therefore remains largely an elite affair, available only to those truly global firms who can afford the necessary armies of lawyers, accountants and translators.
While small firms have made some inroads into emerging markets, notably in India, they have tended to remain reliant on government assistance or costly intermediaries. The EU thus remains vital as an affordable and hassle-free export destination.
Undeniably, we are seeing a profound restructuring of the global economy, and as the relative importance of Europe diminishes it is natural that British firms will increasingly seek to exploit new opportunities in emerging markets such as the Brics.
Importantly though, the EU can often act as a stepping stone for smaller firms, allowing them to expand the scale of their business in a secure and open environment before attempting to enter more difficult markets. The single market also allows firms to easily forge links with businesses on the continent, which can then be used as a springboard to open up new prospects elsewhere. For example, one small consultancy firm I spoke to has helped micro businesses from the north-east of England pair up with their counterparts in Poland and Lithuania to then penetrate the Russian market. Similar opportunities abound, for example through the close trading relations between Spain and Mexico or Portugal and Brazil, and the significant expansion of small German firms into China. By forging partnerships with European businesses and learning from their successes, British firms will be better placed to overcome existing barriers and expand into emerging markets. Instead of perceiving there to be a stark choice between trading with the EU or with the rest of the world, we should be seeing Europe as complementary to our global trading strategy.
Tariff barriers remain one of the biggest concerns for small businesses, meaning the negotiation of free trade agreements is one of the most important opportunities for future growth. The EU already has free trade agreements in place with 45 countries, including a new deal signed with South Korea in March which will bring an estimated £500m a year to the British economy. Further trade agreements are currently being negotiated with India and Canada, with potential trade deals with the US and Japan in the pipeline. If the UK left the EU, we would have to start negotiating these trade deals from scratch. Moreover, without the weight of the world’s largest common market of 500 million wealthy consumers behind us, we would end up with far less favourable terms when negotiating with the world’s economic superpowers.
There are many other benefits accrued to small businesses from EU membership, including access to credit from the European Investment Bank, as well as foreign investments which are often motivated by the UK’s proximity and access to the single market. Indeed, some studies estimate foreign direct investment into the UK could fall by over a third if it leaves the EU.
On the one major aspect of EU membership which is a significant burden on small businesses, cumbersome EU regulations and red tape, there has been some much-needed progress, and there are further plans to exempt small businesses from all EU regulations unless they can be proven beneficial. There are also significant benefits to be gained for small firms from plans boost e-commerce in services by expanding the single market to digital sector.
So despite the ongoing problems in the eurozone, Britain’s future prosperity continues to be inextricably linked to our trading relationship with Europe. Tellingly, a recent poll found that while largely opposing further political integration, almost 90% of UK businesses continue to support EU membership. As conference season begins and an eventual referendum on EU membership draws ever closer, it is these pragmatic businesses we should be listening to, not the irrational voice of Ukip.