Brexit Opportunities

Last week’s post itemized the delays and uncertainties surrounding Brexit that will likely weigh against Britain’s economic potentials for some time.  But even in the worst case, matters eventually will find a resolution that will allow the economy to move forward more confidently.  Britain will have even more potential if in the interim it can free itself from the European focus built into EU membership, its bias toward seeking business on the continent, to dealing with third parties as a member of a European unit, to selling itself as a place of access to that trade zone, to conducting itself as a member without the benefits of membership.  The county has other options.  Britain can, even as it still tries for the best deal possible with the EU, also use its new separate status to pursue a more global approach to trade and economic association, one that little of today’s commentary has considered and one that union membership would have made impossible.

Such a broader approach would seem promising.  After all, Europe, as important as it will remain to the United Kingdom, is not the world, and certainly not its most dynamic part.  The EU has grown only 1.2 percent a year in real terms during the past three years and an even slower 1.1 percent if the calculation excludes the UK economy.  Contrast that to the United States, which has grown almost twice as fast at 2.1 percent a year. Canada, growing at 2.0 percent a year during this time, and Australia, growing at 2.4 percent, have also outpaced Europe, and all three countries have shown a willingness to reach agreements with Britain.  India, though less vocal, looks like a promising partner.  It grew at a 7.0 percent annual rate.  China grew 7.3 percent a year during this time.  And these are only the larger players.  Many smaller countries, all of which could trade more with Britain than they do presently, are showing considerable economic dynamism.  Indonesia, for instance, has averaged a growth rate of 5.1 percent a year, Malaysia 5.2 percent, Singapore 3.8 percent, and Vietnam 6.0 percent.  The European Commission itself forecasts that in the next 15 years fully 90 percent of the world demand will emerge outside of Europe.

Britain might also do better negotiating for itself with these alternative, fast-growing economies than EU negotiators have done for it.  Brussels, after all, has failed to sign treaties with most of these important economies.  It has also followed something of a muddled approach that has almost surely set back progress.  It claims to have pursued its free trade agreements (FTAs) as a substitute for the failed general efforts at trade liberalization, most particularly the stalled Doha round of negotiations overseen by the World Trade Organization (WTO).  But then it admits that it has as big a political as economic agenda.  Unlike the United States, for instance, which has kept trade negotiations on trade, modelling them on the North American Free Trade Agreement (NAFTA), the EU, by its own admission, has pursued FTA negotiations more to encourage stability and regional integration along the lines of Europe’s union. According to its own literature of trade, it has followed this guiding principle in regions as diverse as Eastern Europe, the Mediterranean, the Balkan, Latin America, and with South East Asia.  Though such objectives do not necessarily contradict the objective of trade liberalization, neither are they particularly well suited to the interests of each EU member.

In addition to muddling matters with mixed objectives, the EU has failed Britain in two areas especially, agriculture and financial services.  Though the EU claims that its FTAs seek the removed of tariffs on some 90 percent of trade among signatories, they nonetheless have protected agriculture.  The treaty signed with South Africa, for instance, excluded tariff reductions on 280 agricultural lines.  Since farming is a small part of the British economy — a mere 0.7 percent in fact — the country has hardly benefited from such protections, certainly less than France, for instance, where agriculture is almost three times as important.  What is more, EU insistence on agricultural concessions has certainly made it harder to get concessions from these other countries in other areas that matter more to Britain, such as financial services.  One is the crucial financial services sector.  To be fair to the EU negotiators, agreements on investments and financial services are notoriously difficult.  But the EU’s insistence on protecting agriculture can only have impeded headway in this area.

On its own, Britain could alter the balance of these FTA negotiations.  A greater British willingness to make concessions on agricultural trade might have great appeal to these fast-growing developing economies many of which depend on agricultural exports.  And for such concessions, these potential British trading partners might well make concessions of their own in areas of important to Britain, most notably financial and business services.  Canada, Australia, and the United States, though each has a fully-developed financial sector, might well accommodate Britain anyway because agriculture exports remain important to each of them.  Of course, the UK, by leaving the union, would give up the EU’s major negotiating advantage, size.  At one-sixth of the EU, its offer of access is much less compelling that such an offer from Brussels.  Still, as one of the largest ten economies in the world, interaction with Britain is hardly something any potential trading partner would lightly dismiss.

Now that its people have voted for exit, the country would seem to have more room to maneuver than most recent commentary admits.  If it fails to use that room, if it maintains the European economic focus that its former EU membership effectively imposed on it, it will pay an economic price for the sovereignty that its voters have demanded.  But if it takes a more global approach, it can make trade arrangements that enable it to gain from the more rapid growth in the Americas, Asia, and Australia.  Since London can pursue European arrangements at the same time as it looks further afield, it is only a lack of imagination, energy, or will that could cause the country’s leadership to ignore non-European vistas.  History suggests the additional effort should come naturally.  Britain has long sought economic strength outside Europe even while pursuing active interests on the continent.

 

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