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New Open Europe research reveals that there is enough untapped UK trade potential to offset the possible effects of Brexit on exports to the EU. The report argues that an ambitious, outward-looking UK trade strategy could complement a deep and comprehensive deal with the EU and contribute to delivering increased UK prosperity. This report is published in conjunction with the Prosperity UK Conference, to which Open Europe is an adviser.
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.
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.
Open Europe recommends that, after the forthcoming General Election, the UK Government:
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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