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Global macro & geopolitics from a small economy perspective

Global Britain in a multipolar world?

David Skilling
24 November 2017

The costs of the Brexit vote are becoming increasingly apparent as the UK moves into a period of intensive negotiations with the EU. The UK Budget delivered on Wednesday painted a grim picture of the UK’s economic and fiscal outlook. The UK is under-performing a strongly-recovering Europe by a margin, with the structural growth outlook also marked down, suggesting that ‘global Britain’ is set to get off to a slow start.

Also this week, decisions were taken to relocate two London-based EU bodies (employing about 1,000 people) to Amsterdam and Paris. The UK looks like it has accepted the need to significantly raise the amount of money it will pay to the EU as part of the divorce proceedings. And the complexities of outstanding issues, such as the nature of Irish border arrangements, are becoming more obvious.

A view from Asia should also remind the UK of the serious strategic challenges ahead. Brexiters have frequently mis-read the Asian experience: I have written previously on the strange argument that a post-Brexit UK can become the Singapore of Europe (here and here). Recent economic and political developments in East Asia underline that this is a particularly bad time for a relatively small, open economy to be separating from a regional body.

In particular, it is increasingly clear that meaningful bilateral deals will be difficult to strike. For example, in recent bilateral meetings in Japan and also at the APEC Summit in Vietnam, Mr Trump reiterated his America First policy. He stated that ‘We are not going to let the United States be taken advantage of anymore… We will no longer enter large agreements that tie our hands, surrender our sovereignty’. Instead, the preferred US approach is bilateral deals. But as I observed in my last note, this bilateral approach is not attractive for Asian countries relative to regional arrangements like the rules-based TPP.

In this context, the UK will find it deeply challenging to negotiate large bilateral FTAs. Indeed, even in good times, high-quality trade deals including services are time-consuming and politically sensitive (particularly between developed countries and emerging markets). Of course, there are countries in Asia that will be happy to sign FTAs with the UK, such as Singapore, Australia and New Zealand. But it will be politically difficult to negotiate acceptable FTAs with larger countries, particularly with an ‘America First’ US.

The fall-back option of relying on WTO rules is not straightforward – and also risky, given that the growing commercial tensions between the US, China and the EU are increasingly playing out at the WTO. The strategic environment is complicated by the potential for great power rivalry around trade and investment, particularly in sectors deemed strategic. The UK by itself would be less well-placed to respond to this strategic competition relative to being a member of the EU. At a minimum then, Brexit is ill-timed.

Because of the low odds of the UK building a portfolio of meaningful trade agreements on satisfactory terms, there is a low opportunity cost to remaining in a customs union with the EU. The main Brexiter objection to staying in a customs union is that this option would not allow the UK to strike trade deals with other countries, which is central to the global Britain agenda.

But the low likelihood of securing these trade deals has implications for how the UK approaches the important negotiations over the next few weeks. Staying in the customs union would preserve some of the EU market access that the UK currently has, as well as going some way to resolving the Irish border issue. And better still, negotiating an extended transition period that would preserve current access to the EU single market for a period after Article 50 expires. In the first instance, a two year transition period to March 2021 is likely; but this could perhaps be extended further (possibly indefinitely). The argument that a hard Brexit, with no transition period, is required in order to provide space for the UK to start negotiating FTAs with other partners has little content.

Lastly, a view from East Asia shows that EU membership is not a constraint on the UK’s global economic engagement – a common complaint of the Brexit community. It is striking, for example, that Germany, France – and Switzerland – all export more to China than the UK. And Ireland, a country less than 10% of the UK’s size, exports about one third as much as the UK to China.

The reason for the absence of global Britain has little to do with the supposed constraints of the EU. Rather, it is to do with the economic structure of the UK, the lack of firm-level export performance, as well as the absence of government support for firms engaging in Asia. The key constraints are domestic in nature, and could be addressed from within the single market or a customs union.

Looking from Singapore, the decision to exit the world’s largest single market and the UK’s largest economic partner remains an act of economic vandalism. The UK is a relatively small open economy in an age of giants. The response of Singapore and other East Asian economies to these realities is to intensity regional integration. Brexit on the other hand significant reduces the strategic options available to the UK, rather than expanding them. In an increasingly multipolar world Brexit will lead to Little England rather than to Global Britain.

twitter: @dskilling
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