United Kingdom’s tilt to Asia no panacea for ailing British trade

L Alan Winters

Despite initiating the largest change in trade policy in 50 years — leaving the European Union — the UK government still has no trade strategy.

The United Kingdom’s development since the 18th century has relied heavily on its global trade links and its instincts are still fairly open. One might have expected a leadership competition in the Conservative Party would offer some clarity.

Not so — the candidates barely mentioned trade, except for Liz Truss’s occasional boasts about signing 34 trade continuity agreements, which merely roll over many agreements that the United Kingdom was previously party to via the European Union.

The closest the government or the leadership candidates have to a strategy is that anything to do with Europe is to be avoided wherever possible. The United Kingdom’s budding relationship with Asia is essentially a matter of grand rhetoric and tactics.

‘Global Britain’ was coined just after the Brexit referendum, but given the political stresses over what kind of Brexit was to be sought, it was entirely devoid of content. The government’s strategic Integrated Review ‘Global Britain in a Competitive Age’, published in March 2021, encouraged a ‘tilt towards Asia’ and was generally greeted favourably. Despite including a section titled ‘Putting trade at the heart of Global Britain’, the idea has not progressed past mere platitudes.

The United Kingdom’s new agreement with Japan — the first that the government claimed as new, albeit incorrectly as it was basically copied and pasted from the EU–Japan agreement — has been disappointing in its early trade effects.

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

In the United Kingdom, free trade agreements (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 immediately 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.

New Prime Minister Liz Truss dislikes scrutiny as much as her predecessor, wants quick results and appears to be comfortable with 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 (CPTPP) and the FTA negotiations with India. The CPTPP has accepted the United Kingdom’s candidature and negotiations are now focused on market access.

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

The trade effects will be slim since the United Kingdom already has trade agreements with 9 of the 11 CPTPP members. The government predicted that the CPTPP would increase UK trade by £3.3 billion (US$3.8 billion) in the long run, from a base of £109 billion (US$125 billion), or 8 per cent of total UK trade in 2019. But the United Kingdom’s accession is much more geopolitical than commercial, so the government is expected to see it through.

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 (US$11.5 billion) over 2019–2035 anyway, but that an ambitious FTA would offer a further £28 billion (US$32.2 billion) in growth, building on a total trade value of £23 billion (US$26.5 billion) in 2019.

But around 40 per cent of that increase arises 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 China 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 European Union. The latter stood at £673 billion (US$775 billion) in 2019, and research predicts that it will decline by 11.4 per cent (£77 billion or US$89 billion) by around 2035.

It is estimated that the partial implementation of Brexit from January 2021 reduced UK exports to the European Union in the first half of 2021 by 14 per cent relative to 2017–2020 and reduced 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 European Union and the United Kingdom.