Blog: ‘Tilt to Asia’ no panacea for UK’s ailing post-Brexit trade – The Australian Financial Review

The UK’s “new” agreement with Japan – basically copied and pasted from the EU-Japan accord – has been disappointing in its early trade effects.

Since then, Britain has signed trade agreements with Australia and New Zealand and a digital agreement with Singapore. Each offers some benefits and lifts UK commercial presence in the Pacific. But the first has stirred significant opposition from agribusiness and environmental groups and probably persuaded the government that signing trade agreements is not quite the free ride it had imagined.

Liz Truss appears to be comfortable muddling through on trade policy. AP

In the UK, FTAs are signed under the royal prerogative and are almost solely under the control of the executive. The government has offered a somewhat more active role for parliament in developing FTAs, but has had difficulty delivering its side of the bargain.

Civil society opposition to the Australia deal is likely a harbinger for future agreements with Asia, since the latter is geographically, culturally and politically distant from the UK. But it is difficult to say how the new government will react.

Truss dislikes scrutiny as much as her predecessor, wants quick results and appears to be comfortable muddling through on trade policy, so the political returns on negotiating new trade agreements may not seem worthwhile. On the other hand, she may relish a high-profile fight with “woke” civil society organisations.

The big tactical plays now are accession to the Comprehensive and Progressive Trans-Pacific Partnership and FTA negotiations with India. The CPTPP has accepted the UK’s candidature and negotiations are now focused on market access.

In addition to the usual mercantilist tensions that such negotiations entail, the UK is likely to have to change its policies on digital trade, investment and food standards.

The commercial benefits will be slim since the UK already has trade agreements with nine of the 11 CPTPP members. The government predicted that the CPTPP would increase UK trade by an eventual £3.3 billion ($5.6 billion), from a base of £109 billion, or 8 per cent of total UK trade in 2019. But its accession to the bloc is more geopolitical than commercial, so the government is expected to see it through.

India seems like a good partner

The negotiation of an FTA with India is also geopolitical, but offers potential commercial benefits too. With its rapid growth, high trade barriers and different economic structure from the UK’s, India seems like a good potential partner.

The UK government estimates that UK-India trade will grow by £10 billion over 2019-35 anyway, but that an ambitious FTA would offer a further £28 billion, building on a total two-way trade of £23 billion in 2019.

But around 40 per cent of that increase comes from trade diversion – the reduction of UK trade with other partners. Parliament has already noted the challenges of a UK-India agreement and raised concerns that the government is putting speed above substance.

The striking thing about the tilt towards Asia is that it entirely misses China. If Truss follows through on her pledge to deem China – the UK’s third-largest trading partner – a national security threat, she will not be able to turn to the world’s second-largest economy to improve UK trade performance. While accession to the CPTPP will help, it is no substitute for developing a China trade strategy.

A natural question is whether FTAs with Asian nations will offset the Brexit-induced decline in trade with the EU. The latter stood at £673 billion in 2019, and research predicts it will decline by 11.4 per cent by around 2035.

It is estimated that the partial implementation of Brexit from January 2021 reduced UK exports to the EU by 14 per cent in the first half of 2021 compared with 2017-20, and imports by 24 per cent. The situation has probably improved since then, but not by much.

Asia, on the other hand, is geographically distant, which reduces trade and the potential benefits of FTAs. It will struggle to replace the flexible and just-in-time supply chains that characterised trade between the EU and the UK.

L. Alan Winters is professor of economics at the University of Sussex, co-director of the Centre for Inclusive Trade Policy, and former chief economist at the Department for International Development. This article is part of a series from East Asia Forum (www.eastasiaforum.org) at the Crawford School in the ANU’s College of Asia and the Pacific.

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