Many people in Britain believe that the country joined the European Community in 1973 at the expense of its global ties with countries like Australia. The argument goes: since membership of the EEC/EU, the common external tariff (customs union) of the European Union, and with it, the inability therefore for Britain to strike trade deals independently, holds Britain back. With the result of the referendum however, this changes. Now, they say, Britain can break free of the shackles of the European Union and return to a period of Pax Britannica.
That so many who voted to leave believe commonwealth trade will replace EU trade should worry economists and observers. Britain is right to try to expand its trade reach beyond Europe, but this argument runs into serious difficulties.
European trade still dwarfs that of the Commonwealth
It is true that the percentage of Britain’s trade with previous commonwealth countries is increasing rapidly, and this is to markets such as India that are likely to continue growing substantially into the future.
UK Goods export growth 2006-2016
Many Brexiters also pointed to how Britain’s trade with Europe has declined in recent years. This is not wrong, but it is only because much of Europe itself was in crisis. As the Eurozone started to improve, so too did its share of trade with Britain.
UK goods exports by destination 1998 – 2016
Most importantly, however, the EU still remains by far and away Britain’s largest trading partner. However much trade is growing with markets such as India, that still remains a drop in the ocean.
UK goods export 2016
A phrase which will be difficult to forget was uttered to me during the referendum campaign:
“Britain trades more with the Netherlands than with the entire commonwealth.”
The commonwealth is not one market
Easy to overlook is the fact that the EU is in fact one, integrated, single market. Across this, supply chains are deeply integrated and goods often cross borders multiple times before becoming a finished product.
The previous commonwealth, however, represents many, fragmented markets. To compensate for the loss of EU trade, the former colonies and commonwealth nations would have to unite as one single market, spread across the world, from India to Jamaica. The probabilities of this were assessed by British Influence, a pro-European, think tank in Britain, in a report from June 2016. In short, the achievement of this goal would be the most significant accomplishments of free-trade in history.
Such deals will not cover service industries – the mainstay of the British economy
Trade deals, for the most part, exclude services but services happen to represent 79.7% of the British economy, whilst industry (which trade deals do include) totals only 18.8%.
In short, such deals will not be of much use then, to 79.7% of the British economy. Economies such as Germany and Spain have much stronger industrial/export economies than Britain. In Germany, industry represents 24.6% of the economy and in Spain farming and fishing represent a particularly strong 4.5%.
Brexiters’ argument would be valid if Britain was an industrial/export-orientated economy such as Germany’s or Spain’s and one that was being held back from free trade deals around the world by the European Union.
Yet in both these cases, the opposite is true: Britain’s economy is service-heavy and the EU was satisfying Britain’s hunger for free trade – with 53 trade deals with other countries around the world, such as Mexico and Canada. Ironically, Germany also trades more with former British colonies such as India, from within the EU, than Britain does.
A lack of proper understanding of Britain’s imperial past would also suggest that Britain was more of a conqueror than a resourceful and dynamic trading nation. Britain’s East India Company went to war when its trading privileges were threatened. Again, Britain went to war with China for trying to stop the opium trade in the 19th century. Such plunder is not an option in the 21st century. Dangerously, this has led to a misplaced sense of complacency of what can be achieved in the post-Brexit Empire 2.0 – there is no “great trading nation” to go back to.
Trade deals bring down tariff barriers whilst generally leave non-tariff barriers up. The European single market which we have walked away from (and which Margaret Thatcher’s administration helped to create) brought down these non-tariff barriers and included financial services. Given the steady erosion of British industry and the move towards financial services, this has made the European single market even more important to Britain.
British politician Lord Peter Mandelson, who was the European Commissioner for trade 2004-2008 put it succinctly:
“There is no trade agreement in the world that will give us the same benefits in trade that we have now.”
Loss of sovereignty
For Many Brexiters, reclaiming sovereignty remains a key goal. Yet trade deals epitomise a harsh reality of international relations; the bigger side wins. This is well summarised by globalisation professor, Ngaire Woods:
“The essence of these trade deals is, how much market can you offer the other side?”
She elaborated, explaining that a trade deal signed quickly is often a bad deal, with power asymmetry. Exemplifying this was the China-Switzerland deal in which the much larger China had access to the Swiss market for 15 years before Switzerland had access to the Chinese market.
Looking to the US, Mrs May’s cosying up with Mr Trump was more a sign of weakness than strength. A rushed Britain-US trade deal would be on Washington’s terms as the US is seven times larger than Britain and this would mark a large loss of British sovereignty because regulation would be harmonised to US preferences. Many rightly fear it would result in Britain being converted into a US satellite state.
Trade deals take a long time to negotiate
A complaint of many Brexiters was that having to reach the consent of 28 member states made signing trade deals less likely. While this is not wrong, the controversial issues often boiled down to agriculture for example, because France and Spain did not want to open their markets to Argentinian beef, which in turn, held up an EU-MERCOSUR deal.
Such are the hold ups in signing trade deals which focus on bringing barriers to trade down, that in a post-Brexit Britain, consent will need to be obtained from British beef producers to open home markets if, for example, an attempt was made to bring in Argentinian produce, in a Britain-MERCOSUR trade deal. The result could be that loud agricultural lobbies in Britain would do all possible to prevent this.
It seems that Britain’s top representative in the EU, Sir Ivan Rogers understood this and his high-profile resignation of in February this year raised eyebrows and upon leaving, he wrote a letter to his colleagues in which he stated,
“Contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities”
The real end result?
During the referendum, Brexiters took advantage of images of a struggling Eurozone and convinced Britons that a more prosperous future lay outside the European Union. A voyage of self-rediscovery was surely one of the many reasons that had Britons voting to leave the European Union in the summer of 2016.
No louder an advocate of this was the likes of Daniel Hannan, who stated during the referendum that:
“This is the age of the internet… It is as easy to do business with a company in New Zealand than with a company in France, in fact, easier, because the kiwi company will be English-speaking and have common law… Why do we tie ourselves to the one part of the world that is not experiencing significant economic growth?”
Followed by an applause, statements like these captured the imaginations of many without spelling out the detail.
Perhaps a conversation I had with friends on the topic communicates the situation in a more easy-to-understand way. One friend claimed that all will be fine because “we’ll get a trade deal with Australia.” The other responded, “What good is that? Australia is on the other side of the world. I don’t want Kangaroo skins. And they are asleep when we are awake.”
All graphs courtesy of the Finacial Times