For many Leave campaigners, part of the appeal of Brexit was that once the UK had left the EU, it would be able to determine its own international trade and commercial policy, set its own tariffs and negotiate its own bilateral free trade agreements.
As well as being an opportunity, this is also 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 plenty of debate about the future UK-EU relationship but far too little discussion of how to realise Theresa May’s ambition of 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? A new Open Europe 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. It then 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 important.
There’s not much point making policy looking only at the world as it is today. Germany’s GDP is set to grow by 14 per cent between 2017 and 2030. While, over the same period, India’s is expected to more than double. So we have modelled 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 worth of goods per year. When services are specifically considered, China joins those three countries. Together the four constitute untapped potential to the tune of £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.
This suggests that there is enough untapped UK trade potential to offset the effects of Brexit on exports to the EU. But it is not a case of either/or. An ambitious, outward looking UK trade strategy would complement a deep and comprehensive deal with the EU to contribute to delivering increased UK prosperity.
The UK will not “automatically” realise this untapped potential. 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. The UK will need to pursue a careful strategy of intensive engagement with under-performing countries (above all India, Canada, Israel, and China). A strategic approach should consider a combination of the size of the prize and the ease of reaching it.
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.
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 “grandfather” existing EU FTAs over once it leaves, 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 global 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.
This report is released as part of the run-up to the Prosperity UK Conference on 26 April 2017, for which Open Europe is an adviser. Further information available here.