Post-Brexit (and post-coronavirus) Britain will give businesses the opportunity to go beyond established markets to increase trade in rapidly developing economies.
International trade and foreign direct investment are the lifeblood of the economy and, for the UK, a stronger export performance will provide the oxygen for GDP growth. Ranking second globally in the export of services with a 2019 surplus over imports of £100.3bn, the UK’s major challenge is trade in goods, where the deficit was £129.6bn. As British business prepares for ravages to the economy by the coronavirus pandemic and whatever terms are negotiated with the EU following Brexit, reality checks for exporters and companies preparing to embark on export programmes are now urgent.
With or without tariffs, there will be customs formalities on trade between all EU members and the UK. It may be that there will be a more relaxed regime for components involved in cross-border supply chains regulated by digital technology (in particular for the automotive industry) but UK exporters of goods must expect routines similar to those applying to exports elsewhere. ‘Wait and see’ policies of Trade Associations have done no favours to members who are now scrambling to prepare for life after January 2021. Uncertainty since 2016 has already caused trade with the EU overall to flatten – even before Covid-19 struck.
Now, let’s start thinking of exports of goods to specific countries and forget about the EU as a single entity. The UK’s biggest export market is the US, where a trade surplus of £12bn in 2019 on exports of £58.6bn represented almost 16% of UK world trade. With China accounting for a further £26.4bn (7%), the combined value of merchandise exports to these two high-growth economies balanced sales to the first three slower-growing EU markets. Exports to Germany, France and the Netherlands accounted for 20% of UK exports, totalling £85.9bn. Moreover, the combined £27.9bn trade deficit of these three exceeded the deficit of £23.5bn with China.
The logical conclusion is that the UK should shift the focus of its export drive to the high-growth economies of the US and major Asian economies while nurturing trade with the key players of Western Europe and only those other EU markets where there is more than a foothold. Among the major Asian markets where penetration is weak, including China, the government is already working to roll over EU Free Trade Agreements (FTAs) with Japan, South Korea and others to the UK post-Brexit. Sovereignty and freedom to escape from stagnant EU economies were core reasons for Brexit endorsement. Although Covid-19 will have distorted the pattern of international trade in the short term, it is unlikely that the shift towards China and the Asian Tiger economies of recent decades will be reversed.
At first sight, the UK has made good progress in Asian markets. DIT statistics for exports of goods and services from 2010 to 2018 show that total exports to China grew 123% and to South Korea by 206%, but the reality is less encouraging. In 2017, the UK gained only 1.4% of China’s imports against 6.2% from Germany and 8.7% from the US, and achieved the same percentage penetration in South Korea against Germany’s 4.2%. In the more mature Japanese market the UK’s share was less, at 1.1%, with Germany taking 3.6% of imports. Of course, the dominant trading partners in these economies are fellow members of the ASEAN Group and the US has also achieved relatively high penetration from 6 to 10%, but doubling UK sales to these markets alone would add $35bn or 10% to total exports.
How then shall the UK address the challenges of climate change, digitalisation and Covid-19 in 2020 as it strives to grow exports to its priority markets? As Chris Southworth, secretary general of ICC United Kingdom says in his foreword to Global Innovation: “We need to be working side by side with the developing world to stand any chance of success.” Innovation in research, communications, marketing, supply processes, customer service and end-products will be critical.
Global Innovation, edited by Jonathan Reuvid, launches on 30 April through University of Buckingham Press