Brexit and the worst-case scenario: What future for the UK’s international trade?

Brexit and the worst-case scenario: What future for the UK’s international trade?

The triggering of Article 50 will leave the UK several options with regard to its future trade relations with the EU. In the worst case scenario that the EU and the UK cannot come to a new partnership agreement, where could the UK turn to boost its exports?

The greatest unknown of the unfurling Brexit soap opera surrounds the future of trade between the UK and the rest of the world. 44% of UK trade is with the European Union – a consequence of having no tariffs on its exported goods and services. In comparison, the UK’s closest trade partner after the EU is the US, which only takes up a meagre 16% of trade. On the face of it, the wisdom of a Brexit is questionable: while the EU is  beset with crises, it remains the world’s largest trading bloc, accounting for 20% of global trade.

In the likely scenario that the UK refuses to accept the free movement of people, the EU could force the UK to adopt the same WTO rules that govern the bloc’s trade relationships with non-EU countries – at least pending the signing of a more comprehensive FTA. Should the tariffs go back up and quotas be put in place, it is safe to say that UK-EU trade will plunge as the UK loses its preferential access to the EU market. Trade will no doubt continue – but at what cost?

In this worst-case scenario, what could Britain do to soften the blow?

Increase trade with the Commonwealth?

The Commonwealth currently accounts for 10% of UK trade – a far cry from the EU’s 44%. Putting aside (perhaps deliberately) the fact that being a EU member and stimulating trade with the Commonwealth are not mutually exclusive, Brexit campaigners were adamant that this approach could make up for shortfalls in trade with Europe.

The premise that the Commonwealth could serve as a growing market for British products is somewhat flawed. Out of the 53 member countries, just six (Canada, Australia, Malaysia, India, Singapore and Britain) make up 84% of Commonwealth trade. To add to the banality of the Brexit camp’s argument, Australia openly advocated for the UK to stay in EU. India, the most significant emerging market, is currently negotiating an FTA with the EU.

Despite these assertions, the main flaw in the pro-Commonwealth argument is that most of its members are small countries (with correspondingly small GDPs) who would struggle to purchase British goods, even if they wanted to. When the Brexit camp argued for boosting trade with the Commonwealth, there is little chance they were referring to Belize or Kiribati. This is not to say that trade with these countries is impossible, but their developing nation status would push the UK to negotiate preferential trade agreements, similar to what the EU has done in other developing countries.

If anything, the Commonwealth trade vision is only viable as a long-term perspective. The Commonwealth’s developing countries will continue to grow; by fostering closer trade ties, Britain could position itself to benefit from these emerging markets and reap the rewards several decades down the road.

Approach the MENA region?

With China’s economy looking ever more unstable and Asian markets suffering as a consequence, the UK’s new approach could be to look towards the Middle East as the next-best investment destination.

To put this into perspective, UK – UAE bilateral trade has grown exponentially over the last few years and the Emirates are now the UK’s 12th largest trade partner. Over 5,000 British companies operate in the region, and that number only continues to grow. As part of a new economic reform program, Saudi Arabia is increasingly working on making itself an attractive investment destination as technocratic officials push to diversify the economy away from oil and court foreign capital. The Kingdom is London’s largest trade partner in the Middle East, with the UK operating 200 joint ventures that employ some 30,000 nationals and are collectively worth $17.5 billion.

Any hope of keeping London positioned as Europe’s financial hub also requires bringing cities such as Dubai on board. Expanding and strengthening the ties between the two could help turn London into a gateway to the MENA region.

Pursue bilateral FTAs?

Finally, the UK could aggressively pursue bilateral FTAs with countries it already has good trade relations with. One example is the US where, notwithstanding Barack Obama’s quip that Brexit would move Britain to “the back of the queue” in trade negotiations, a number of senior Republican voices have expressed their interest in pursuing a deal.

On a positive note, a UK-US bilateral FTA would be a lot easier to negotiate compared to the ongoing TTIP negotiations between the EU and the US. The TTIP has proven controversial at just about every level in both camps. Competing agendas within the EU make trade deals an extremely lengthy and complicated process to hammer out, with negotiations often taking years to come to fruition. The benefits of a UK-US trade deal would also mean that the two countries could achieve greater integration in sectors where the UK enjoys an advantage over the Continent in terms of similarities to US standards – most notably in finance.

What next?

A World Bank study has shown that trade costs between the UK and the EU are 11% lower than with the rest of the OECD and the eight biggest trade partners Britain conducts most of its trade with. Whatever option Britain chooses to pursue, it is difficult to see how the UK will completely make up the drop from its EU exports.

Categories: Europe

About Author

Nicolas Jenny

Nicolas Jenny specialises in European and Asian political risk analysis. He has lived extensively throughout the region and speaks English, French and Mandarin. He holds a double master's from Sciences Po Paris and Fudan University and a BSc in politics from the University of Bristol.