On Tuesday, the PM said that Britain should "strike trade deals with old friends." But Commonwealth countries are either far away, relatively poor—or bothby Paul Wallace / April 21, 2017 / Leave a comment
Theresa May got her way this week as MPs overwhelmingly endorsed her decision to call a snap election. When making that surprise announcement after the Easter break the prime minister said the early poll was needed to strengthen her hand in negotiating a Brexit that will include the freedom “to strike trade deals with old friends and new partners all around the world.” That strategy has been dubbed Empire 2.0 in Whitehall, an irony always likely to get lost in translation given Britain’s chequered colonial past. Even so, the economic notion it encapsulates is worth exploring. Can Britain make up for lost access to European markets by dusting off its ties with the Commonwealth or is this no more than a forlorn exercise in economic nostalgia?
The idea turns the historical tables. When Britain first applied to join the Common Market in 1961 under prime minister Harold Macmillan it still retained strong commercial ties with the Commonwealth not least in importing cheap food. Indeed, those links were an important reason why French president Charles de Gaulle vetoed British membership, which he feared would disrupt the agricultural protection that France had won at the Treaty of Rome in 1957. The rationale for Britain joining the European club then and now was economic as much as strategic. Britain was falling behind other fast growing European countries in part because its industries relied too much on sluggish markets in the Commonwealth.
Inside what became the EU Britain did eventually manage first to arrest that relative decline and then to reverse at least some of it especially in the decade or so before the financial crisis. But that improvement in economic performance is apparently of no consequence any longer. The advocates of Empire 2.0 believe the pastures are greener after all in the Commonwealth, the economic substance of which was abandoned in 1973 when Edward Heath realised Macmillan’s ambition and took Britain into Europe.
Proponents of Empire 2.0 say that the world has changed since it is now the emerging economies that are thriving. Research from the IMF in its latest World Economic Outlook spells this out. Whereas as recently as the 1990s over 60 per cent of world growth came from advanced countries, now around 70 per cent derives from emerging economies, double their share two decades ago. Those figures are based on market exchange rates; if purchasing-power parities which strip out price differences are used, the current share of emerging markets in global growth is now even higher, at 80 per cent.
That may be so but the starting point is one where Britain relies heavily on the EU, which buys almost 45 per cent of its exports of goods and services. Seven out of Britain’s top ten trade partners are members of the EU. Members of the Commonwealth are a long way behind. Australia and Canada rank 11th and 17th respectively for services and 19th and 18th for goods. India is just ahead of both for goods at 17th but lags behind at 23rd for services. Altogether British exports to Germany, the UK’s second most important partner (after the US), are seven times as high as they are to India.
The reason is that for the most part Commonwealth countries are either far away or relatively poor, or both. Distance as well as economic size matters for trade. The bigger and closer economies are the more they trade with one another whereas the smaller and more distant they are the less they trade. This “gravity” model does a surprisingly good job in accounting for the intensity of trade, in services as much as goods, which explains why the EU’s big and close economy is in effect Britain’s home market.
In any case British exporters already have plenty of opportunities to sell from within the EU into Commonwealth markets. Germany for example sells far more in goods to India than does Britain. That alone casts a shadow over a supposed sunny future through resurrecting an economic Commonwealth.
But could exporters do better if Britain could strike its own bespoke deals as Brexiters hope rather than relying on the EU’s overall trade policy? After all, British strengths lie in services especially in business and finance whereas Germany’s forte is manufacturing, especially of capital goods. That is why German exporters have reaped such rich rewards in China’s long investment boom.
There are several reasons to doubt a cornucopia of new trade arising from new deals. Britain alone lacks the same clout as the EU in negotiating free-trade agreements. That bargaining power won a substantial liberalisation of South Korea’s services market benefiting for example British legal firms in a trade deal in 2011 that Britain would have struggled to achieve on its own. Indeed the immediate priority will be to safeguard British access to some 60 economies covered through EU agreements—many of which are with Commonwealth countries including the recent one with Canada. Reaching new deals will be the work of several years and achieving good deals will be hard. Though Britain may have more scope to seek better terms for its exporters in services they are the most intractable to open up because they are so often defended by powerful vested interests.
Beyond its offensive whiff Empire 2.0 is a misconceived conceit. The overwhelming priority for the UK is to strike as good a trade deal as possible with the EU, which will remain easily our biggest market. There is nothing wrong in seeking to enhance trade with fast growing Commonwealth countries but it cannot undo the folly of Brexit.