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17 March 2017

The New Geography of Global Economic Power

When the United Kingdom voted on 23 June 2016 to leave the European Union, most people focused on immigration as the root cause. Some said it was xenophobia or even racism. And certainly immigration, xenophobia and racism were major issues in the referendum. But the ultimate cause of the Brexit vote was not immigration. It was economics.

Around 3.2 million non-British EU citizens live in the UK. Two thirds of them are working there. Only 1.2 million British citizens live in the rest of the EU. Most of them are retired. More British citizens work in the United States than work in continental Europe.

Imagine if the Franco-German core of the European economy were like the North-eastern core of the North American economy. In terms of GDP per capita, France and Germany are roughly on the same level as the UK. The North-eastern US is 50 per cent richer. If France and Germany were 50 per cent richer than the UK, instead of 2 million Europeans working in Britain, there might be 2 million Britons working in Europe.

If that were the case, would there have been so many European immigrants in the UK? Would there have been so much anti-immigrant sentiment? Would there have been a vote for Brexit? Britain’s Brexit vote is merely a reflection of larger global economic patterns that create little incentive for Britain to tie itself to the second-rate Western European economy.

Britain’s finance industry has long been more closely tied to New York than it is to Frankfurt or Paris. The rest of the economy may soon follow. Even before Brexit, British investment in continental Europe was declining. British investment in North America is rising.

With Donald Trump promising to fast-track a trade deal with Britain, the UK will hardly be isolated once it leaves the European Union. But the whole idea that trade deals integrate economies is outdated, if it ever made sense at all. Countries are integrated into international networks by the actions of companies. In the contemporary world, countries do not trade with countries. Companies transfer goods within value chains, and when these transfers cross national boundaries they are recorded as “trade”.

From an economic standpoint, Brexit boils down to a question about where British companies most want to do business. Is it in Western Europe, or in North America? Despite nearly half a century of strong institutional pressure to integrate with Western Europe, the EU still takes less than half of the UK’s exports. But exports are really beside the point. These days trade deals – like the EU itself – are really about economic governance. The UK could govern itself, like Australia does. Or it could choose closer integration with the world’s leading economic region: North America.



Between 1995 and 2008 global levels of merchandise trade increased from around 20 per cent of global GDP to around 30 per cent. The world globalised as goods (and services) traversed the world as never before in human history. The previous 1913 peak in international trade was dwarfed as new transportation technologies – from leviathan container ships to just-in-time air freight – reshaped global production networks. Now nearly one in three things bought on earth (by value) comes from somewhere else. The era of globalisation has arrived.

And departed? Global trade as a per cent of GDP has been flat since 2008, and an increasing proportion of that trade is trade in intermediate goods. On average around one quarter of the value-added embodied in the world’s exports actually consists of intermediate goods that are then incorporated into products for re-export. But intermediate goods tend not to be sourced globally. They are overwhelmingly drawn from countries’ close regional neighbours.

For countries that are highly integrated into regional production networks the foreign-origin component of exports can be even higher. For many export-processing economies it is nearly one third. The foreign-origin component of exports by value is 32.4 per cent for Poland, 32.2 per cent for China, and 31.7 per cent for Mexico. For smaller countries on the edges of Germany and Japan the numbers are higher still: 41.7 per cent for Korea, 45.3 per cent in the Czech Republic, 46.8 per cent in Slovakia, and 48.7 per cent for Hungary. Only the city- states of Singapore and Luxembourg score higher.

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