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Trading Places: Britain’s Future in Global Trade

Following Brexit, Britain’s future in international trade is uncertain. The EU was Britain’s largest trading partner but with access to the single market potentially being revoked where can UK businesses turn to compensate? There are numerous opportunities the UK can exploit and this article will evaluate the various benefits and drawbacks of the top contenders.


Outside of Europe, the UK’s top five trading partners are the US, China, Japan, Hong Kong and Canada in terms of the value of exports and imports combined (see Figure 1). India, which is a member of the Commonwealth of Nations, was the sixth largest trading partner of the UK in 2016. This makes it clear that the UK has strong trading relationships in Asia and within the Commonwealth.

However, this relationship in terms of figures is miniscule when compared with the EU. In 2016, 43% of UK exports went to the EU and 53% of imports into the UK came from the EU. The absence of tariffs due to EU membership meant that the EU could cement itself as the UK’s major trading partner, but following Brexit this is set to change. This should not necessarily be seen as a problem for the UK, which could instead be an opportunity to re-evaluate the country’s trade strategy.

Looking elsewhere, the US has dominated much of Britain’s trade as a single entity. This relationship has been positive for the UK and it has run a trade surplus with the US since 1999. But this dependency is precarious for the UK. If trade with the EU is removed from the scenario, then the US accounts for a third of the UK’s total exports and almost a quarter of its total imports.[1] This trade dependency places a huge amount of economic power in the US. Whilst an arguably protectionist president is now in office, it is important for the UK to look to spread its trade amongst other countries and not so heavily rely on a country which is increasingly seen to be waning in power and influence on the world stage.


Figure 1 — Major Trading Partners of the United Kingdom (Billion GBP, 2016)

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As previously mentioned Britain has strong trade links in Asia, especially with China. The current bilateral trade agreements between the two nations has encouraged trade between them which is why China features as a key exporter and importer. In recent years, for example, the economic talks that have taken place as a part of the UK-China Economic and Financial Dialogue series have heralded a Golden Era for UK-Chinese relations. These talks have focused on many areas, including the relationship between the two nations’ financial sectors, leading to a plan to connect the stock exchanges in London and Shanghai.[2] These kind of initiatives may grant a big opportunity for UK businesses to grow in Asia with a billion more consumers on their doorstep. Outside of these formal talks there are also some arguably more concrete connections. Recently China’s ‘Belt and Road Initiative’ has allowed goods to be transported between China and the UK in only 16 days, for instance.[3]

Yet Asian countries also suffer from their own problems and it would not be ideal for the UK to replace one potentially dominating country with another as its main trade partner. It is therefore important to look at alternatives. One of the key areas Britain could turn to is the Commonwealth.

It can be argued that the UK is currently experiencing something of a reversal in its pattern of trade compared with the years leading up to 1973, when Britain first joined the European Economic Community (EEC). In the early 1950s the Commonwealth accounted for nearly 40% of British exports and imports. The equivalent figure for the six countries in the EEC was only around 15%. By 1962, the Commonwealth area accounted for just 30% of UK imports and exports and Britain traded more with the EEC than the Commonwealth for the first time (see Figure 2).[4] However, more recently, total British exports to the EU have decreased from 54% in 2000 to 43% in 2016.[5]


Figure 2 — UK Trade in Goods (Commonwealth vs Total)

figure-2


That being said the Commonwealth still makes up a relatively small part of UK trade. Around 9% of total UK exports went to the Commonwealth in 2015, against 44% to the EU. The EU also accounted for 53% of UK imports, versus just 8% from the Commonwealth.[6] But the size and growth potential of the economies in the Commonwealth could suggest that there is scope to increase this. Although Australia has a GDP of around $1.3 trillion and India nearly $2.6 trillion, for example, they currently do not play a major role in UK international trade. Similarly, many members of the Commonwealth have high GDP growth, such as Malta (9.0%), India (8.2%), Tanzania (7.0%), Bangladesh (6.6%), and Grenada (6.4%).[7]

This situation may present the UK with great opportunities to establish fruitful trade links. Yet it is often the case that small economies with high GDP growth are reliant on a small selection of goods and services. Nigeria’s reliance on oil is a recurring problem, industrial metals make up 75% of Zambia’s exports, similarly South Africa depends largely on metals and fuels, particularly coal, which is becoming a more volatile good. Consequently these countries have been some of the worst affected economies of the recent decline in global exports.[8] Nevertheless, this can be turned into a positive for the UK as its trade is becoming increasingly focused around services, which many of these developing countries lack. In fact, UK services exports to the Commonwealth almost tripled from £8.5 billion in 1999 to over £22.3 billion in 2015.[9]

Concluding remarks

One of the main areas highlighted in this article is the strengthening of UK links with Asian countries. As previously stated, the UK and China have a good trading relationships and China is keen to build on this. On a macro level, more needs to be done to open the Chinese government up to foreign businesses. Strict regulation, anti-monopoly laws and strong state-owned competition make it very difficult for businesses to enter the Chinese market. Creating a free trade agreement will obviously remove many of these barriers and is a far simpler task outside of the EU. On an individual basis, British businesses and the government need to encourage greater links with Chinese people, which for example can be done by offering more accessible language courses. Again, this can partly be achieved through a free trade agreement, encouraging international co-operation between countries and their citizens.

Creating a Commonwealth Trading Bloc could be another option. The UK has strong links with these countries sharing language, familiar legal systems and historical ties. Trade amongst the Commonwealth countries is on the rise and expected to reach 1 trillion USD by 2020 and currently these states trade on average 20% more with one another and trade costs are 19% lower than with non-Commonwealth countries. All of this is often without any kind of agreements or preferential trade deals. Interestingly, 76% of trade between the Commonwealth countries is in goods but trade in services is growing at a greater rate, about 12.6% per year. The UK has dominated the Commonwealth trade in services and provided over 30% of service exports from 2000 to 2009.[10]

This links back to the earlier point about UK specialisation in services and shows again the potential for the UK to capitalise on the global opportunities available to it. Another benefit of creating a Commonwealth trade bloc relates to the second recommendation of forging ever-closer links with China. Many Commonwealth members also have strong trade links with China and other Asian countries. These relationships would benefit the UK in negotiations with China, had a Commonwealth trading bloc been established, allowing the UK greater access to Asian markets.

Importantly, the UK is the largest economy in the Commonwealth ensuring a great deal of influence over those who join the trading bloc. That being said, the UK should look to build mutually beneficial relationships and be wary of acting in a domineering manner. Britain needs to work with the Commonwealth on mutual terms for a potential trading bloc to succeed.

There are many options for the UK to consider for its future outside of the EU, all with their pros and cons. It is important that the UK considers as many alternatives as possible if it wants to succeed on its own. Whether it turns to other emerging markets in Asia, specialises in service trade or puts greater focus on the Commonwealth links, the UK will not be hard up for options. The execution of these options will be the main challenge. The UK needs to have a long-term vision as well as short-term solutions, and crucially must also make sure that it is able to thrive from its future trading deals.

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[1] [5] Office for National Statistics (3 Jan 2018) Who Does the UK Trade With?
[2] HM Treasury (10 Nov 2016) Factsheet: UK-China 8th Economic and Financial Dialogue
[3] Foreign Policy (4 Jan 2017) All Aboard China’s ‘New Silk Road’ Express
[4] Grahame Allen (6 Dec 2012) UK Commonwealth Trade Statistics. Note: SNEP 6497
[6] [9] ONS (9 March 2017) Commonwealth Trade in Focus as UK Prepares for Brexit
[7] World Bank Data (2017) GDP (Current $) & World Bank Data (2015) GDP Growth (Annual %)
[8] George Friedman (21 Jan 2016) The Export Crisis: The 10 Worst Hit Countries and the 5 Most at Risk
[10] Commonwealth Secretariat (2016) Commonwealth Trade Review 2015 (Part 02)

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Jonathan Bayliss is a recent graduate from the University of Exeter, currently working in the financial services sector.

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Jonathan Bayliss is a recent graduate from the University of Exeter, currently working in the financial services sector.

The views and opinions expressed in this article are those of the author(s).

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Inquisitive university students and recent graduates are welcome to collaborate with our team to produce insightful articles.