Associate Research Director,
National Institute of Economic and Social Research,
At the most recent General Election the Conservative Party had pledged that it will take the UK out of the EU and establish an ‘independent’ and outward looking trade policy that will prioritise the needs of ‘British firms and the British economy’. The centrepiece of this policy is an ambitious goal of striking new free trade agreements (FTA) over the next three years with countries that account for 80% of UK trade. The Conservative Party won that election with a decisive majority and it is this manifesto pledge that will guide UK trade policy in the years ahead. Achieving such a large number of FTAs within three years is challenging at the best of times and more so now when the tide is turning away from globalisation and multilateral frameworks. It is against this backdrop and one of competing geopolitical interests between the US and China that the UK will look to navigate an independent trade policy.
After much delay and uncertainty, the UK finally left the EU on 31st January. The UK is now in a transition period until the end of this year during which it remains a member of the EU single market, customs union and also party to all EU international agreements. The immediate focus for UK trade policy is the EU. After all, the EU is its largest trading partner, accounting for total trade (exports plus imports) of around £1,300 billion in 2018 or 60% of GDP. Put differently, just under half of UK’s total trade is with the EU and companies on both sides are locked in complex and integrated supply chains that could unravel if negotiations fail and trade frictions are introduced as a consequence.
The negotiations will build on the Political Declaration that was agreed in October last year where both sides agreed ‘to work towards a comprehensive and balanced Free Trade Agreement’ that respects, for the UK, its internal market and the development of its new independent trade policy and from the point of the EU, its customs union and single market. The FTA will look to establish tariff free trade for goods. The goal for services trade, which is particularly important for the UK, is a lot more measured. It is to deliver a level of trade liberalisation well beyond WTO commitments and other FTA’s struck by the EU such as the recently concluded trade deal with Canada and Japan. As it happens, the WTO commitments on trade in services and the recent EU FTA trade deals fall well short of the freedoms enjoyed in the EU single market which implies that the UK has prioritised the trade in goods over services even though the UK has a competitive advantage in services.
An FTA is likely to be agreed, but the road to agreement will be bumpy. The first round of discussions between the UK and the EU concluded on 5th March and the second round, which was the take place between 18th-20th March, was postponed because of the Covid-19 pandemic. The pandemic is almost certain to lead to an extension of the transition period. Government departments, the health service, businesses and many others across the EU and the UK are wholly focussed on efforts to contain the human and economic cost of the virus. The EU chief Brexit negotiator, Michel Barnier, has tested positive for the Covid-19 virus and David Frost, his UK counterpart, was in self-isolation because of symptoms. The British Prime Minister has also tested positive. What is more, European economies are likely to suffer a deep recession in response to the lockdowns and other restrictions and many UK and EU businesses will be substantially weakened by this crisis. Imposing additional Brexit related costs so soon after (or even during) the pandemic could prove to be debilitating for some businesses.
The government has also launched trade negotiations with non-EU countries. So far, the UK has managed to roll over trade deals covering 50 countries/territories with which the EU had FTAs in place. Although this covers the vast majority of EU FTAs, UK’s total trade exposure to these regions is just 8%, which implies that a meaningful shift in trade policy will require the UK to strike FTAs with other large economies. The priority target list includes US, Canada, Australia, NZ and Japan and the government is also keen to forge stronger trade links with Commonwealth countries such as India by leveraging on its ‘deep historical and cultural connections.’
An FTA with Japan is of utmost importance for both countries given the scale of Japanese investment in the UK, but a trade deal with the US will serve to exemplify success of the Brexit project at least at the political level. Achieving a comprehensive and balanced trade deal with the US will be challenging for at least two reasons. To start with, size matters for trade deals and the US economy is around 6 times the size of the UK economy. Next, US trade policy has different priorities. Its overarching concern is China and in all likelihood trade negotiations with the UK will be influenced by its broader objective which is to restrict imports from and technology transfer to China, something that the UK will look to resist given its economic interest which is to attract investment and broaden its export markets.
For a medium sized economy such as the UK, maintaining an open and balanced global trade policy is the sin qua non for a competitive economy because trade tends to foster technology adoption, business creation and productivity. The UK will need to navigate these troubled times with skill and speed to strike deep and balanced FTA’s with the EU and others to mitigate the loss from exiting the EU.
Expert article 2735