Post Brexit trade deal fantasies

If we lose 5% of our trade with the EU we’ll have to increase our trade with BRICS by 25%.

One of the key aspects of the argument to leave the EU is that it will allow the UK to go “global” again, to sign new trade deals free of the constraints of the EU. However, a quick analysis of the figures shows that it would be nearly impossible to match our existing trade position, much less exceed it. The details are below but to summarise:

We will lose significant trade when we leave the EU, a 25% reduction is not unrealistic. To compensate for this we would need to sign beneficial trade deals with 10 or more of our largest non EU trade partners AND more than double our trade with those partners, just to match our existing trade position.

Almost all of these trade partners are on the far side of the globe and it is unlikely they will buy exactly the same goods & services that we currently sell to the EU & associated countries.  Therefore this massive shift of trade will also likely require a huge realignment of the UK economy. This means job losses and significant disruption.

This kind of shift and growth in trade with distant partners is unprecedented and likely impossible.  11% of our trade markets will need to compensate for losses in up to 61% of our existing available free trade areas.

losses

As the UK is already in deficit and has high levels of public debt, there is simply no slack in the UK tax base to absorb this kind of realignment.  Public services, the NHS, social security, the Police, in fact anything financed through taxes will suffer significant cuts OR the UK will have to undertake yet more borrowing.

The following provides details on the above. Figures are taken from these 3 posts:

Commonwealth trade in focus as uk prepares for brexit

European Union free trade agreements

Will new free trade deals soften the blow of hard brexit?

 

UK Trade, WTO & Trade agreements

It’s a common misconception that being in the EU prevents the UK trading with other non EU countries.  It does not, and over half of our trade occurs outside the EU.

Trade pie

Note that although we are in a trade deficit with the EU, we already export more to non EU countries than we import and in fact there is nothing stopping us selling to anywhere in the world, as long as our widgets & services are compelling enough.  However, that trade is generally under World Trade Organisation rules and so Free Trade Deals (FTAs) are usually needed to “oil the wheels” in order to increase trade.

That said:

  • We can trade with anyone whilst in the EU, there is nothing stopping us increasing our trade levels with countries inside or outside the EU.
  • The one thing we cannot do is negotiate new trade deals by ourselves in order to improve that trade.
  • However, not only are there 31 countries in the Single Market, the EU has 50 odd existing trade agreements with other countries in place and several more close to completion.
  • We will lose some level of access to the Single Market, Customs Union & these additional FTAs when we leave and consequently significant trade.
  • Therefore, from a purely trade point of view, the value of any new FTAs (and subsequent increased trade) must be greater than the losses we incur from leaving the EU.
  • If we cannot negotiate sufficient new FTAs AND grow our trade significantly then there is no point, and significant risk, in leaving the EU from a purely trade point of view.

That’s the essential trade point, that there is sufficient ability, will & scope to deliver significant new trade deals as it is inevitable that there will be greatly reduced trade with the EU.

The key question however is, is there sufficient trade available?

Existing UK/EU Trade position

  • The UK trades with approximately 192 countries World Wide
  • The EU has existing Free Trade Agreements (or single market membership) with 53 of these countries.  This represents 57% of our existing trade.
  • A further 41 countries are close to finalising FTAs with the EU.  Added to the above this represents 61% of our total trade.

This map illustrates the reach of the EU’s existing trade agreements:

trade

Admittedly the US/EU agreement has been killed however as can be seen, there’s not a lot of space left on the map.

Although we will hopefully get some kind of deal with the EU it won’t be as good as it is now and as for the other 50 odd agreements, they were negotiated with the EU, not the UK.  It’s unlikely that they will all simply be ratified on the day we leave as each partner country will now be trading with just the UK and not a market of 500 M people.

Given the above, we have no idea how much trade we will lose once leaving the EU however 25% of that 61% seems reasonable (note that findings in this research piece indicate that a 25% estimated loss may be conservative).  This represents 15% of our total world trade.

How easily can we replace that 15%?

New Trade Deals

We must then look to our existing trade partners with whom we do not yet have a significant trade deal in place to see if we can sign trade deals of sufficient value to replace this lost trade.

However, our 3 next biggest partners are the US, China & Japan, representing 24% of our trade.

japan

The United States already has a massive trade deficit with the UK at nearly 40%.  Given the new administration’s hostility to trade deals of any size (it has canceled TTIP, the US EU deal, and pulled out of TTP, the Trans Pacific Partnership.  It is also taking a look at NAFTA, its North American Trade Agreement)  it is extremely unlikely that we will grow our exports to the US under a new trade deal anytime soon.

China conversely already does very well out of our existing trade relationship, and has far more clout than the UK.  They have no reason to negotiate a deal that will correct that imbalance in favor of the UK.

Finally, Japan has already highlighted in the strongest terms it’s concern around the UK leaving the Customs Union & Single Market.  It is very much opposed to Brexit as it made clear.

That isn’t to say an FTA with these 3 countries is impossible however its difficult to see how the UK can negotiate a deal that is beneficial to us in the time needed.  This leaves our next 10 largest trade partners, they represent 11% of our existing exports.

top10

Why 10? As mentioned, only new FTAs can increase trade for the UK outside of the EU, so the assumption is being made that no more than 10 significant new trade deals could be negotiated in parallel given the lack of trade negotiation expertise in the UK.

Of course the likelihood is that 10 in parallel, alongside continuing “transition” negotiation with the EU and also alongside reaffirming the 50 odd existing EU FTAs, is impossible and that only 2 or 3 can run alongside each other.  However we’ll use 10 as an upper number.

This 11% would need to replace the potential 15% of losses from leaving the EU.

To put that into perspective, 10 separate comprehensive FTAs must be negotiated and signed in as short a time as possible, and those FTAs must grow exports to those countries from £54 Billion to £129 Billion per year, a growth of 130%.

Furthermore, most of these countries are on the far side of the world and it is extremely unlikely that they will buy the same goods & services in the same mix as we currently sell.  Therefore there will be massive upheaval in the economy as it shifts to meet this new mix.

This is unprecedented and likely next to impossible.  A mature economy cannot disengage itself from one huge market whilst growing 10 separate ones on the other side of the world by 130%.  The reality is that an FTA does not create instant trade, it only oils the wheels.  Companies then have to work within the new FTAs to establish new trade relationships, all of which takes time and whilst they are simultaneously dealing with the fallout from leaving the SM/CU.

Quite simply there is no easily untapped trading “pot of gold”.  Yes there are some big economies out there but they are established & are also focused on their own trading blocs (TPP in the Pacific is still going ahead, just without the USA).  This isn’t about the size of those markets, it’s about our ability to insert ourselves into those markets via beneficial trade deals in order to massively grow our “market share”.

There is a reason why Liam Fox is in the Philippines, there just aren’t that many untapped markets of any size left.

Finally, there will be those who say “it’s not all about the economy”, and that’s fair enough.  However, the UK is currently in deficit & has a very large national debt.  This loss of trade means a loss of jobs & taxes and that in turn will put additional pressure on public services, the NHS and many of the things Brexit supporters care about.

We cannot simply shrug our shoulders and say goodbye to 15% of our trade, nor can we expect 10 countries in distant lands to pick up the slack. Leaving the EU and its existing network of existing and planned network of Free Trade Agreements is an immense act of national self harm.

 

Note. This blog offers some insights into why losses from leaving the single market could be even higher than 25%, and why growing trade volumes outside the EU will be problematic

http://www.niesr.ac.uk/blog/will-new-trade-deals-soften-blow-hard-brexit

This blog talks about the relative losses the UK & EU would suffer under a “No deal” scenario and why the UK needs a deal far more than the EU does.

Brexit Fantasies – they need us more than we need them

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7 comments

  1. Excellent post. A simpler summary (for twitter) is this: If we lose 5% of our trade with the EU we’ll have to increase our trade with BRICS by 25%.

    Like

    1. Thanks Huw. I don’t think these are complex concepts but it can be a struggle to simplify them down. Lines like the above are excellent, I will use the next time I post this (or be my guest if you want to post the blog yourself).
      Unfortunate but it seems like we need to speak in soundbites to get message across.
      Anyway, thanks for your comments.

      Liked by 1 person

      1. Agreed not particularly ideas – particularly when well expressed by people like you – but does need distilling for the soundbite generation. Will certainly reshare.

        Like

  2. […] However, the EU also has existing FTAs with 53 countries and is close to completion on an additional….  Existing FTAs cover approximately 13% of our trade and the new 41 FTAs a further 4%. […]

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  3. typhoon2000 · · Reply

    Excellent breakdown. However, we all know that the average leaver on the street simply does not give a damn about these figures or whatever any ‘expert’ says. As long as they “get back their sovereignty” and get rid of the immigrants that’s all that matters. Very sad.

    Like

  4. Great article…It seems that I have been saying for years that because most countries in the world are now in trading communities (usually very like the EU) we may have to give away a lot more then the Brexiteers think, in order to persuade them to buy from us, but they don’t answer. Very refreshing to read your article that clarifies what we may be up against after Brexit.

    Like

    1. Thanks Huw, comments much appreciated.

      Like

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