A recent International Monetary Fund (IMF) paper warned that after decades of increasing global economic integration, the world was now seeing global economic fragmentation.
Following what it described as a “shallow and uneven recovery” from the global financial crisis, a series of global events and policy shifts have slowed or reversed economic integration. The events the IMF highlighted included the pandemic, Brexit and the invasion of Ukraine but they also noted a levelling-off in global trade flows since the financial crisis, the rise of US-China trade tensions and a growth in trade protectionism around the world.
According to the IMF’s analysis, the slowing or reversal of global economic integration has brought with it reductions in trade and economic activity which is likely to mean lower economic output.1 In short, global economic trends suggest that globalisation has plateaued or even declined and this – in the view of the IMF – will make us all poorer.
But while some would contest the views expressed in the IMF paper – it could also be argued that the current evidence of a slowdown in the world economy is the result of a various inter-related factors of which a decline in economic integration is only part – that report is just one of many indicators that the global economy (and with it world trade) is going through a period of upheaval, change and fragmentation.
The purpose of this paper is to look at UK trade policy in this period of undoubted change. There are particular trade risks for the UK. These include the fact that one of the clear trends is towards greater protectionism by the three big blocs (US, EU and China) and the UK is not in any of these blocs. The UK could be squeezed (for example) between the US and the EU in a developing subsidy war between them. This risks further disinvestment from the UK and a worsening tendency to fail to attract new investment on top of a period of declining foreign direct investment since 2016.
Trade is also changing. Trading in goods across borders where the barriers were (and often still are) import duties, import quotas and regulatory requirements still matters but the export of services has become as or even more important for many developed countries (including the UK) over the last 30 years. Digitisation now affects all trade (goods and services) and means further change in trade policy and practice and a degree of mismatch with traditional trade rules.
The adoption by many countries of sustainability policies and net zero targets are driving further significant changes in both trade policy and practice with impacts that are not yet fully realised or understood.
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Time for a new direction in UK trade policy?
After a period of exceptional economic and political upheaval, the UK has an opportunity to redefine its economic priorities. The current cost of living crisis is particularly difficult because it has followed 15 years of low growth, meaning the financial position of UK families and businesses are less robust than those in several competitor countries. The UK has to do better in future and further political turmoil could follow if governments fail to improve the current economic situation.
Across the political spectrum, politicians need to ask what could the UK do to improve its economic and trading position in the medium to long-term? A series of measures would help:
- adopting a clear, credible, stable economic policy with sustainable medium-term and long-term goals – this means policies that reflect the UK’s comparative and competitive advantages and which go beyond the political cycle of three to five years, preferably seeking a degree of consensus so policies endure;
- establishing a clearly defined relationship between trade and investment policies and linking those to other related policies, such as sustainability and net zero;
- pushing a revival of multilateralism in the WTO – the WTO is going through a difficult period but the world would be worse-off without it and while plurilateralist agreements could improve things, multilateral agreement would be more powerful;
- building on its current limited trading agreement with the EU starting the existing TCA framework – the UK has to accept the facts of its geography and recognise that a positive relationship with its largest trading partner is essential;
- making itself a powerful voice for open trade and investment in Europe and the world – which would appeal to many EU countries (g. the Nordic, Baltic and Eastern European members in particular), the European Commission and beyond;
- continuing to contribute to the debate around the digitalisation of trade – so that the UK is a leading participant in a developing policy area;
- integrating sustainability and net zero in to trade policy – so that, again, the UK is a participant in the global debate about this and so that it has fully articulated policies on issues such as CBAMs;
- addressing key supply chain issues – this is partly a matter of security (in energy and food as well as semi-conductors and other key components) but it also means recognising that outside the big trade blocs the UK is vulnerable in key sectors and that there are supply chain choke points.
This is an edited extract from a much longer paper by the European & International Analysts Group on UK trade policy post-Brexit
Featured image of UK/Australia trade deal via UK Parliament
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