How difficult will it be to establish new trade with non-EU countries after a hard Brexit?
If you think that there is an easy solution with a ‘No Deal’ Brexit, and that as Jacob Rees Mogg and others have claimed, that it is only a question of some new trade deals to replace what we lose with the EU, then please read this article.
It makes it abundantly clear that trade with other world economic powers will go nowhere near replacing what we stand to lose with the EU and that the impacts on the British economy will be enormous.
The UK’s trade with the EU and the other countries with which the EU has trade agreements and which will be lost to the UK post Brexit, is so large (69%) that the UK will find it very difficult to find new trade deals to compensate for the fall in EU-related trade that results from Brexit.
It will be particularly difficult to compensate for any lost trade in intermediate goods with the EU. It will also be difficult to land any new trade deals with other countries quickly, except perhaps the rolling over of existing EU trade agreements with smaller countries.
To illustrate the scale of the trade challenge facing the UK, only 7% of UK exports go to the BRICS (Brazil, India, Russia and China) while 44% go to the EU. This means that a modest 5% drop in trade with the EU as a result of Brexit would require a 31% increase in trade with the BRICS, just to stand still.
It is not just a matter of arithmetic. It is a lot easier for the UK to trade with neighbouring European countries than other countries. Distance is the biggest and most obvious barrier to trade but it is not the only barrier. For example, in developing (and some developed) countries, there are often bureaucratic or political hurdles to overcome, which can include onerous customs requirements, cultural differences, language barriers, legal uncertainty and discriminatory tax. In some countries, negotiation of trade deals may involve risks of bribery and corruption. It can also be a challenge just to get paid on time: credit risk is often higher.
It is also a question of the UK’s relative competitive strength in trade. Those markets which are attractive to the UK are likely to be attractive to other countries and trading blocs. China and India are attractive because of their scale, but the UK has been losing market share in India to Germany and France; in China, Germany does 4 to 5 times more trade than the UK. Similarly, the UK’s stated target countries may find other partners more attractive. For example, Australia has demonstrated that its first priority in Europe is a trade deal with the EU27 trading bloc.
The attractiveness of overseas markets to the UK depends on a combination of factors including size of trade, proximity and comparability of legal system, language, culture and, of course, historic ties. Taking these factors into account, the FT analysed future market potential for 2050 using detailed trade analysis from a specialist trade consultancy, Ciuriak Consulting, and long-term economic forecasts from PwC. The FT concluded:
The EU27, US, China, India and Canada are the most attractive markets for the UK today and remain so in 2050.
The top five risers, which are expected to be more attractive in 2050, are Russia, Nigeria, Turkey, Pakistan and Malaysia.
The top five fallers, which are expected to be less attractive in 2050, are Saudi Arabia, Japan, Australia, Brazil and South Korea.
The government’s own impact assessment says that the economic impact of UK trade deals with other countries would be SMALL compared to the benefits of EU membership. A trade deal with the US would only benefit GDP by about 0.2% in the long term. Trade deals with other non-EU countries and blocs, such as China, India, Australia, the Gulf states and Southeast Asia would add, in total, a further 0.1- 0.4% to GDP.
The US is the UK’s main trading partner outside the EU, however a trade deal with the US seems very unlikely. In May 2018, an authoritative study published in association with Harvard Business School explained why in careful detail. The study concludes:
“We discuss the key potential upsides, possible risks and principal negotiating issues from both US and UK perspectives. We conclude that it is highly unlikely that a free trade deal between the US and the UK will be secured in the near term and that the likely potential benefits for British businesses are less than often suggested.”
Source: FT, The post-Brexit trade deals that Britain needs to prioritise, 3 January 2018
Ciuriak, Dan and Siauw-Soegiarto, Fanny and Sun, Sharon Zhengyang, Quantifying the UK’s Post-Brexit Export Potential: A Gravity Model Analysis (April 22, 2017). Available at SSRN.
PwC, The World in 2050, February 2017
EU Exit Analysis, Cross-Whitehall Briefing, January 2018 (published March 2018)
On the Rebound: Prospects for a US-UK Free Trade Agreement, Peter Sands, Ed Balls, Mehek Sethi, Eleanor Hallam, Sebastian Leape, Nyasha Weinberg, May 2018