25 April 2017

The UK’s commitment to leave the European Union requires a new international trade and commercial policy. For decades these policies have been decided at the EU level, via the EU institutions, and requiring – in the case of Free Trade Agreements (FTA) – approval by member states and the European Parliament. Soon the UK will be able to determine its own policy.

Previous Open Europe research has analysed the potential economic impact of leaving the EU. This paper suggests that there is enough untapped UK trade potential to offset the effects of Brexit on exports to the EU. In this scenario, an ambitious, outward looking UK trade strategy could complement a deep and comprehensive deal with the EU and contribute to delivering increased UK prosperity.

What trade policy for the UK after Brexit?

Should the UK liberalise its tariff regime to ensure cheaper imports for consumers and businesses? How does our trade in services differ from that of goods? Should the UK seek to agree FTAs with the world’s biggest economies, including the US, China, and Japan – with which the EU has so far failed to reach agreement? Should the priority instead be emerging markets in Asia, or Latin America? Should the UK focus on the Commonwealth or what some have (offensively) termed Empire 2.0? Should the UK pay special attention to countries with which we share ‘soft power’ assets a common legal system, the English language, a shared history, and a large ‘diaspora’ community?

For this report, Open Europe has developed a quantitative analysis to help inform the crucial decisions on trade and commercial policy. The framework will allow the UK Government to prioritise the non-EU trading relationships that the UK must seek to upgrade. It will show the implications that these developing relationships could have for improving the UK’s export performance. The gravity model, which we have used to build our framework, predicts how much trade the UK ‘ought’ to be doing with other countries based on various factors, including their economic geography. This model is developed by observing that countries trade more with bigger countries that are closer to them. Other factors, such as diplomatic representation and soft power connections are also considered. By running historic trade data through the model, our framework was tested and improved.

There’s little point making policy looking at just today’s world. According to projections, Germany’s GDP will grow by 14% between 2017 and 2030. Over the same period India’s is expected to more than double. So we have modelled how the data will appear in 2030, using predicted growth figures.

There are some surprising findings. According to the model, UK exports to India, Canada, and Israel consistently under-perform. By 2030, the UK would, we predict, under trade with those three countries by nearly £10 billion of goods a year. When services are specifically considered, China joins those three countries and together the four have significant untapped potential of over £17 billion of services trade. Other underperforming markets include Nigeria, Bangladesh and Pakistan.

The top ten under-performing markets for goods, and those for services, represent together untapped UK export potential of just over £41 billion in 2030. These figures are relative to the UK’s established level of export capability to all markets.

In this paper, we only consider export growth – not imports. A holistic UK commercial and trade policy must also consider the UK’s ability unilaterally to liberalise access to its market. This could have significant benefits for UK consumers, business and the economy. And the UK should also take further domestic action to support its economic growth and prosperity, some of which will be easier outside of the EU. This includes regulatory reform, addressing infrastructure and transport problems, education reform, and supporting – rather than interfering with – UK universities.

The UK will not ‘automatically’ realise this untapped potential. There are complex and varied reasons for trade under-performance in each country. In some cases there are simpler fixes but India, for example, remains a difficult prize. There will also be public pressure to consider the moral aspects of trade, and Government cooperation, with countries whose governments pursue repressive and autocratic policies – Bangladesh, or much of the Gulf, are obvious examples.

Key recommendations

Open Europe recommends that, after the forthcoming General Election, the UK Government:

  1. Pursues a careful strategy of intensive engagement with under-performing countries, but above all India, Canada, Israel, and China. Government must develop a coordinated strategic approach with careful priorities including by considering a combination of the size of the prize and the ease of reaching it. The approach should not exclude any significant economy but must be effectively prioritised. Equally, it will be important to protect UK share of trade in high-growth markets, even if trade levels are already over-performing.
  1. Does not focus too much on FTAs. Although FTAs can be important, including because they serve to symbolise governmental commitment to support trade, the EU’s FTAs of which the UK is party have so far proved far less important for facilitating trade than could be expected. The UK already trades effectively with the USA and other major economies without an FTA. There do remain barriers to trade to address, but agreeing an FTA with – say China or USA – will be tough to achieve. In contrast, the UK significantly under-trades on services with the EU, despite the Single Market. The UK should avoid an all or nothing approach. Even if a full FTA remains difficult to achieve, there are various possible agreements including bilateral investment treaties or targeted agreements to address particular trade issues. And, while the UK should ‘grandfather’ existing EU FTAs over once it leaves, those FTAs were often a one-size-fits-all, lowest-common-denominator and there may be a potential for a deeper bilateral agreement after Brexit.
  1. Effectively exploits UK soft power assets – the UK’s deep, historic connections with many countries, the UK’s nationals many of whom have family links with other parts of the world, the reach of UK universities and importance of R&D. It is important that the UK remains open to business travellers and to international students, but also that this openness is promoted abroad, to counter perceptions of any closing including as a result of Brexit or migration limits.
  1. Develops deeper connections with priority countries on areas not directly related to trade, such as on innovation, R&D, higher education, development, defence, and so on. This needs to be a priority for the whole Government. This will require a major, coordinated effort from all Government departments with ministers and officials visiting priority countries, and the appointment of appropriate trade envoys, ambassadors and representatives. Possible projects include new scholarship schemes for students from target countries, jointly-funded university research programmes, defence and security cooperation, development expenditure to support infrastructure, and so on. The more that the UK can work closely with countries across a host of issues, the easier it is to also address barriers to trade.
  1. Prioritises UK service exports as, while growth in global goods trade is slowing, service trade is expanding. The UK is already a strong trading nation, but while we run a trade deficit on goods, it’s a surplus for services. Services trade has been poorly supported by the EU, not least because of the limitations of the Single Market, and because of linguistic and legal differences. Some services companies, for example in the insurance industry, have said that EU membership provides them with little advantage, and even that Brexit will be a positive advantage. To support services trade, the UK needs travel regimes for businessmen and women that are not overly burdensome – with security checks, as far as possible, carried out in advance of travel.

The UK is already a great trading nation, which exports to well over 200 nations. In recent years, the proportion of UK non-EU trade has grown to be a majority. Our research reveals that the UK’s EU membership cuts against the grain of our overall comparative advantage – which is services industries. All three of our top priority countries share strong historical ties – Canada and India remain in the Commonwealth, Israel looks fondly on the country which allowed it to be created. All share our legal system. And, while Canada speaks English, English is a lingua franca for India, and widely understood in Israel. The task of the Government is to seize the opportunity of Brexit to draw fully on our comparative advantages, the English language, the common law system, the status of the UK judiciary and legal system, the UK’s security, development and defence reach, our world-class universities, our innovation and science.

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