The question of international trade has been the central tenet of several leading Brexiteers. Theresa May herself qualified Brexit as an opportunity to transform Great Britain into a “great, global trading nation”[i], although she did not campaign to leave the European Union (EU). These Brexiteers often argue that the regulatory framework that allows the functioning of the European single market is too stringent, and holds British businesses back. They also remark that some developing countries have been growing faster than European countries, making them attractive trading partners. They conclude that leaving the EU and the single market would make it easier for the United Kingdom (UK) to strike bilateral trade agreements with the rest of the world and to become a champion of free trade. It is also not unusual for them to argue that the history of the UK as a colonial power, and the existence of the Commonwealth, would be an asset after leaving the EU.[ii]
This article will not discuss how colonial nostalgia sometimes shapes conservative thinking in the UK or in Europe[iii]. It will instead focus on the economic and political reasons to believe that it is only illusionary to expect the Brexiteers’ view of the world to lead to a bright (trading) future.
The fundamentals of International trade
In the present context, it might be important to start with a simple description, or reminder, of the forces that actually drive international trade today. This is easy to do because it concerns one of the most robust empirical findings in economics. Bilateral trade between two countries is proportional to their respective sizes (measured by the wealth they produce, i.e. their gross domestic product), and inversely proportional to the geographic distance between them. This observation is widely known as the Gravity Model.[iv] It is also well known that countries tend to simultaneously import and export similar goods. Paul Krugman earned his Nobel Memorial Prize in Economics in 2008 for explaining this observation.[v] If we are to sum up the essential features of modern international trade in a few words, we can say that similar countries trade similar goods with their close neighbours. It is therefore not surprising that roughly half of the total trade of the UK is done with EU countries. The narrative according to which the UK could become a champion of free trade by turning its back on the single market is thus in direct contradiction with the economic forces that shape international trade today. Irrespective of how romantic the idea of sending ships to former colonial and exotic territories can be to some people, Antigua and Barbuda, South Africa or Australia will not replace the single market as a trading partner.
Unsurprisingly, the Brexiteers have tried to call into question the robustness of the Gravity Model, and also tried to argue that the trade of services could be different from the trade of goods, but the evidence is strong.[vi] And this is only one of the many reasons to be sceptical of Euroscepticism.
Developing countries are no cornucopia for the UK
The claim from Brexiteers that several developing countries have, on average, been growing faster than the EU is factually correct. But the interpretation they make of this fact is very questionable. The group of countries known as the BRICS (Brazil, Russia, India, China and South Africa) have experienced impressive growth since the 2000s. But this does not mean that they are destined to become trading partners of the same importance as the EU, and certainly not in the short term. The economic health of Brazil and Russia is highly dependant on world commodity prices (gas and oil for Russia, iron ore and agriculture for Brazil). Brazil is in the midst of a political crisis that has damaged its economy. Russia is under international sanctions. China faces at least two major challenges that the government sees as priorities to access the full rank of a major world economic power. Firstly, it is operating a necessary, but very delicate, change of economic regime (from a model based on mass exports to a more balanced model with a stronger domestic market). The new regime will inevitably be associated with a weaker growth if it is successful. Secondly, China wants to internationalize its currency, and thus needs to open itself to the international flows of capital. This last objective includes major risks for the stability of the domestic and global financial system. The Indian government is persuaded (with good reasons) that further development will only be possible if the country can improve the technological content of its production and trade. So, whoever wants to trade with India (and have easier access to its 1.3 billion potential consumers) will face Indian negotiators asking for technologies and intellectual property rights to be transferred to their country. Overall, in contrast with the enthusiasm the BRICS have generated until recently, the prevalent opinion about their economic performance is now more moderate.[vii]
The conclusion is that even if these countries have, or had, impressive levels of growth, they also have their weaknesses, their own priorities and their own interests. They are not simple trade reservoirs, idly waiting for the UK to exploit their potential. It is certainly in the best interest of the developed economies to have trade agreements with the BRICS. And for once, the Brexiteers share a common opinion with the other European countries since the EU already has an agreement with Russia and South Africa, and is currently negotiating with India and Brazil. But the process of trade negotiations is far from straightforward and not the panacea that would transform the UK into a champion of international trade.
Bilateral agreements do not rule iternational trade, regional agreements do.
In any case, trying to multiply bilateral trade agreements after leaving the single market is hardly a viable strategy at all, for at least two reasons.
Firstly, the UK joined the European Economic Community in 1973, and as such, has not negotiated any trade agreement on its own for 45 years. All the trade agreements in which the UK participates today were negotiated by the EU, to the benefit of all its members. This fact has a concrete and very serious consequence: the UK administration is left without experienced international trade negotiators. Crawford Falconer (a former New Zealand ambassador to the World Trade Organization) has been hired by the Department for International Trade to address this shortage of competence. However, in a response to a written question in the Commons in October 2017 (16 months after the result of the referendum), the department’s minister could not cite the name of any other official employed in the department with « substantial experience of international trade negotiations »[viii]. This should be a particularly worrying observation given that the UK will lose the benefits of the more than 100 trade agreements (already in place or being negotiated) that the EU has with third countries,[ix] irrespective of the result of the Brexit negotiations. According to the data collected by the Peterson Institute for International Economics it takes on average 45 months for a team of experienced American negotiators to start the implementation of bilateral free trade deals after the opening of negotiations.[x] How many bilateral trade agreements would be necessary to the post-Brexit UK to become a champion of free trade? How long would it take for the UK to form a team of experienced negotiators ? How many negotiations could be held in parallel ? All these questions are crucial to determine how long it would take to achieve the Brexiteers’ stated objective of becoming a champion of free trade. But these questions are virtually totally absent from the current debate. “A long time, certainly” is the best answer we can reasonably give.
Secondly, no single country can pretend to be a major world economic power without being part of a trading bloc. There are no less than 420 regional trade agreements in place in the world today[xi], and every continent, or even sub-continent, has its own major trade area. Some Brexiteers cite Singapore as an example for the future of the UK after leaving the single market. However, they conveniently forget that Singapore is already part of the Association of Southeast Asian Nations (which is one of the world major free trade areas, and attracting new members) and is also part of the negotiations for the Trans-Pacific Partnership, which is deemed to become an even bigger trade deal. In the modern world, it is simply impossible for any country to consider itself as the centre of international trade, and to expect its economic interests to prevail by occasionally striking simple bilateral trade agreements. The economic world is organized in large, wealthy, and politically influential blocs. Any country which refuses to see this reality is doomed to remain at the margin of world affairs. The EU is by many measures one of these major blocs.[xii] It is for instance the world’s first exporter and importer. It is also the top trading partner of about 80 other countries (the United States in comparison are the top trading partner of about 20 countries). The irony, of course, is that it is precisely in this context that the UK has decided to leave the EU, without a clue about how to retain its place in the world after that.
And let us not forget the domestic political aspect
There are many more reasons to be doubtful about the promises of the Brexiteers, in particular for those interested in more technical aspects of the question. But among all the points neglected so far, there is one consideration that deserves everyone’s attention far above all the others. The consensus among economists, and also among the political class, is that, overall, international trade can be beneficial to every country. However, at the individual level, some agents in the economy do suffer from adverse effects when their country is open to trade. In other words, the gains from international trade are not equally distributed in the economy. Those who lose are dissatisfied with the economy and become easy targets for populist politicians who never waste an opportunity to point at foreign scapegoats. Then, when the populists are getting started with scapegoating, they inevitably reach an even wider audience of people beyond their core target of “economically dissatisfied” people. Irrespective of any other consideration, the UK cannot be a “great, global trading nation” if this project is not supported by the overwhelming majority of the British electorate. Obtaining this support requires paying much more attention to the distribution of the gains from trade, and depriving the populists of any room for manoeuvre.
Date of publication: December 2017
Author: Mallory Yeromonahos, Post Graduate Researcher in Economics at the University of Birmingham and member of the GCfE’s committee. I am studying the role of household debt in the economy and the consequences for monetary policy, with a mostly theoretical approach.
Links to references and articles of interest:
[ii]This view is often expressed in The Telegraph. For instance:
[iv]You can find here an academic paper with a presentation of the Gravity Model. It is not the most recent on the question (2010), but it is relatively easily readable for the most part, and it gives a good overview
[v]Find P. Krugman’s Noble lecture on this question here: