27 April 2017

Since joining the European Economic Community (EEC) in 1973, the UK’s overall trade policy has been primarily determined by the institutions of the EEC and later EU. Leaving the EU customs union, which Open Europe has recommended in “Nothing to declare: a plan for UK-EU trade outside the customs union,” necessitates the UK to develop its own trade strategy for the future.

This is both an opportunity and a challenge. Leaving the EU will give the UK greater trade policy freedom but EU membership alone cannot explain why, since 1970, in constant terms, exports as a share of GDP have doubled in the UK, but trebled in France and the United States, and grown four-fold in Germany. Brexit must spur the UK to improve the overall performance of its export game.

Since the referendum, there has been much debate about the future UK-EU relationship but far too little about how to realise Theresa May’s ambition to establish a truly “Global Britain.” Whatever government is formed on 9 June, it must establish UK priorities for trade policy beyond the EU as part of a wider reset of British foreign policy.

What should that policy be? Open Europe’s new report “Global Britain: Priorities for trade beyond the EU” has developed a quantitative analysis to examine the UK’s export performance and help answer this question. 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, and compares this against the UK’s actual performance. The model observes the fact that countries trade more with bigger countries that are closer to them but other factors, such as diplomatic representation and soft power connections are also considered.

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 projected how the data will appear in 2030.

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 under-performing markets include Nigeria, Bangladesh and Pakistan. When goods and services markets are combined, the top ten under-performing markets represent untapped UK export potential of just over £41 billion in 2030.

These are the markets where the UK must look to offset any effects of Brexit on exports to the EU. But it is not a case of either/or. An ambitious, outward looking UK trade strategy should complement a deep and comprehensive deal with the EU to contribute to delivering increased UK prosperity.

Improving on its existing under-performance and realising untapped export potential will not be automatic. The UK will need to pursue a careful strategy of intensive engagement with under-performing countries, but above all India, Canada, Israel, and China. There are complex and varied reasons for trade under-performance in each country which needs to be investigated closely. In some cases there are simpler fixes but India, for example, remains a difficult market to crack. A strategic approach should consider a combination of the size of the prize and the ease of reaching it.

The UK also needs to maintain and build on markets where it ‘over-performs’ so that it can safeguard, and potentially further boost, its market share in those countries or regions. Investigating ‘what works’ in over-performing markets may help provide examples of initiatives that could be deployed in markets where UK exports currently under-perform.

While growth in global goods trade is slowing, service trade is expanding and demand is likely to increase in the world’s fastest growing economies. Therefore, prioritising services exports works to the UK’s natural comparative advantage. With some exceptions, 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.

Free trade agreements (FTAs) can be an important trade policy tool, and they serve as an important symbol of governmental commitment to support trade, but they are only one of a range of instruments. Others include bilateral investment treaties, visa waiver programmes or science and technology cooperation agreements. The UK already performs relatively well in the major overseas markets where it has no FTA: the United States, Japan and China – although there is still major room for improvement for UK services exports to China. All three represent tough negotiating targets, but bilateral negotiations could further boost trade. And, while the UK should seek to ‘grandfather’ existing EU FTAs as it leaves, many of these deals neglected UK interests in services and there will be potential for deeper bilateral agreements after Brexit.

However, just as important as formal trade agreements will be ensuring the UK effectively exploits its soft power assets – the UK’s deep and historic connections, the UK’s many diaspora communities, and the reach of UK universities. It is important that the UK remains open to business travellers and to international students, but also that this openness is promoted abroad.

The task of a truly “Global Britain” is to seize fully the opportunities to exploit Britain’s 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.

A version of this article first appeared on the CapX website.
https://capx.co/how-to-build-a-truly-global-britain/