Trade truths for Theresa May’s vision of a ‘Global Britain’

Theresa May has laid out a vision for a “Global Britain” that will, post-Brexit, reprise its historical place as an international trading hub thanks to a web of new trade agreements that her government plans to negotiate in the coming years.

But with her decision to abandon the EU’s single market and its customs union to boot, Mrs May is also opting for what is arguably the most complicated path. Moreover, if everything does not go to plan, it is one that risks significant disruption for the UK economy and businesses.

Here are five sober trade truths worth keeping in mind about Mrs May’s plan for the UK’s future:

The UK is asking the EU to do something it has never done before, at a pace it has never managed before

At the crux of the plan is Mrs May’s idea of negotiating a trade agreement with the EU during the same two-year period as the UK’s exit from the union. EU officials quickly rejected that idea after the prime minister’s speech on Tuesday. Michel Barnier, the EU’s top Brexit negotiator, tweeted that the UK would have to agree to the terms of an “orderly exit” before any discussions could begin on the future beyond that.

But even if the EU’s 27 other member countries agree to negotiate a trade deal at the same time as the divorce, the reality is that concluding such a pact in two years would be unprecedented for the EU. And, as EU officials point out, it would also require a legion of trade negotiators that the UK simply does not have.

“That is totally unrealistic,” one senior European trade official told the FT. “I think she is in cloud cuckoo land.”

Mrs May’s answer is to seek a transitional agreement that would avoid the UK economy falling off a cliff if a trade deal is not concluded in time. Even that is likely to come at a price, however.

The laws of economics say the EU is likely to remain the UK’s biggest export market after Brexit, whatever Mrs May’s global ambitions

Last November, UK exports to fellow EU countries accounted for 48 per cent of total exports and, in the 18 months before that, the figure ranged from 38 per cent to 51 per cent. The reasons for that go beyond the privileged access to other EU countries that UK businesses enjoy thanks to membership.

One of the biggest is geography. “We know that in trade, distance matters,” says Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “You can negotiate all you want with Australia or New Zealand and even the US. But we know that in the end the most important trade relationship will always be with your neighbours.”

That is not just an EU truth. In the first 11 months of last year, the US exported twice as much to both Canada and Mexico as it did to China.

It is likely to take years to replicate the various EU trade agreements from which the UK economy now benefits

The UK’s trade relationship with the EU goes beyond Europe. Britain benefits from dozens of trade agreements the EU has negotiated with countries around the world. But that is the result of decades of negotiating and it will take years for the British government to replace them after Brexit.

If all goes to plan, experts say, the UK as a major economy could indeed end up in an enviable position and attract plenty of interest from other countries, particularly if it is seen as an undemanding negotiator that is not interested in protecting sectors such as agriculture or key manufacturing industries.

“If they play their cards right, they have the potential to be the single most attractive free-trade agreement partner in the world,” says Susan Schwab, the top trade negotiator for former US president George W Bush.

The problem is that the UK is technically not allowed even to negotiate trade agreements while it is a member of the EU. Even if it flouts that rule by opening informal discussions with other countries, it will struggle to hold talks on multiple fronts because of its shortage of trade negotiators.

The best option may be for the UK to start off by negotiating a template agreement with a country such as Canada (with which the EU recently completed a deal).

Even that will take significant preparatory work. Most modern trade deals are complicated affairs and the UK would quickly have to establish its priorities, and how all-encompassing it wants its trade agreements to be. Would they tackle issues related to ecommerce and data privacy? Would they address topics such as labour and environmental rules? Or include what in other trade deals have been controversial arbitration provisions to allow disgruntled foreign investors to get around local courts?

Do not pin too much hope on Donald Trump

The incoming US president has promised a quick trade deal with the UK. But experts are already warning that even a rapid deal could take years to conclude.

Moreover, Mr Trump is a dealmaker. He won the presidency in November partly on the back of an “America First” trade and foreign policy. Were it to govern talks with the UK, it would be unlikely to lead to Washington taking a charitable negotiating position.

“Theresa May will be desperate beyond belief to get a deal with the US because it’s the only deal that will get her some kind of economic meat for her vision of a ‘Global Britain’. And [Mr] Trump will know that,” said Mr Kirkegaard. “Let’s see what kind of deal they can get. But I suspect it will be a deal that is beneficial to the US and may not be so beneficial to the UK. She seems to have an awful lot of eggs in Donald Trump’s basket and that strikes me as pretty dangerous.”

The UK still needs to negotiate the terms of its fallback option — membership of the WTO

Advocates of Brexit have long claimed that in the worst-case scenario it could always fall back on World Trade Organisation rules and its membership in the global trade body. The problem is, that safety net does not actually exist.

The UK’s current membership in the WTO is governed by EU-wide tariffs and other trade provisions. So it still needs to negotiate its own tariff schedule with the WTO’s 163 other members.

Some of that process could be relatively straightforward if it chooses to copy and paste the WTO-approved EU tariffs now in place for thousands of categories of goods and services. But there are other complexities, such as agricultural quotas, that could cause difficult negotiations.