Brexit and Commonwealth Nations The Urgency for a Future Trade Framework

Cover Story By Mahmood Abdulla

Brexit and Commonwealth Nations The Urgency for a Future Trade Framework

It was a shock to me that a mere thirty kilometres could separate two different worlds. I discovered another side of Catalonia: very few people spoke Catalan, it was mostly working class, truly modest proletarian people I had never seen before, a culture that has never been given fair representation in the Catalan media

More than a year after the United Kingdom’s vote on June 23, 2016 to leave the European Union (EU), the topic of trade remains one of the country’s most pressing issues. The UK needs to negotiate new trade deals with its economic partners and ensure that these deals help benefit the country’s post-Brexit future. From a global perspective, initiating such deals will send a message to international markets that the Brexit vote was not a vote of closing off Britain completely from the rest of the world but rather, in the topic of trade, being selective in trade deals and terms.

One opportunity, arising during this time of increased uncertainty, is increasing the volume of trade between the UK and Commonwealth nations. These countries have historic ties with the UK and could provide a quick win in the area of post-Brexit trade deals.Reaching such a win in this field will ease the pressure on other difficult topics such as the size of the country’s Brexit bill.

From the perspective of the UK, any step of minimizing uncertainty surrounding the Brexit process is not only welcome, but greatly needed. Recent resignations from UK Prime Minister Theresa May’s government as well as disagreements between the UK and EU on the estimated size of the Brexit bill are some examples of the pressure on the country during its period of Brexit negotiations. Some recent official visits seem to indicate that the UK has already identified the potentially important role that the Commonwealth nations can play in achieving some wins in beneficial trade deals.

Earlier in November, HRH Prince of Wales, Charles Philip Arthur George accompanied by the Duchess of Cornwall conducted a ten day, four nation tour to India, Singapore, Malaysia, and Brunei. All these countries are members of the Commonwealth of Nations and the timing of these visits could suggest increased future cooperation between the UK and these countries. In Malaysia, HRH Prince Charles stated that the Commonwealth can play a pivotal role in tackling global challenges.

Looking at India, where the previous visit by the Prince of Wales was in 2013, India-UK trade currently stands at $12.2bn and India is the third largest investor in the UK. Both trade and investment are areas of potential growth in a post-Brexit era.

Currently, the UK represents only 2 percent of India’s merchandise trade, 3 percent of India’s service trade and 2 percent of India’s foreign direct investment (FDI). These figures show that there is room for increased cooperation between the two countries in order to raise the level of trade and investment between the two. Doing so within a framework of UK–Commonwealth cooperation will allow for a more diverse pool of traded goods and services between the UK and members of the Commonwealth of Nations.

While the formalization of trade policies between the UK and Commonwealth nations is needed, the current trajectory of cooperation is already encouraging. Total merchandise trade flows between the UK and Commonwealth nations grew to $91bn in 2015 from $57bn in 2000, marking an increase of 60 percent over the period of 15 years, or an average annual growth of around 4 percent.

The ability to achieve such strong growth was underpinned by the UK’s membership in the European Union Single Market. Under that framework, the EU accounted for roughly 16 percent of exports from Commonwealth developing countries with the UK being a final destination for 18 percent of these exports. Therefore, now the challenge will be achieving similar levels of trade after Brexit.

Not only has trade been growing significantly, but for some countries, the EU and UK are vital trade partners. For eight of the 52 Commonwealth nations, the UK represents at least 10 percent of those countries’ total exports, with Sri Lank and Bangladesh at exactly 10 percent.

It is worth noting that the speed of achieving these deals is as equally important as the deals themselves. Failing to act quickly could result in a ‘crowding out’ effect where other countries and trading blocs finalize trade deals with the UK before Commonwealth nations do so. Therefore, Commonwealth nations are recommended to act swiftly, albeit prudently and diligently on securing a trade framework that will allow for increased trade, and as a result, increased economic growth within them.

Without efficient trade deals between Commonwealth nations and both the EU and UK, in a post-Brexit era, these figures could witness some downward pressure, not least during the initial transitional period during which uncertainty is at its highest levels.

In a paper published by the Commonwealth Secretariat, it is calculated that if no post-Brexit trade framework is put in place, then Bangladesh, Pakistan, Sri Lanka and India could be some of the most affected economies, in descending order of scale of potential effect. This effect is expected to be in the form of possible tariffs if no deal is in place.

Moreover, the current climate of general uncertainty has been resulting in downward pressure on the British pound which fell by about 9 percent since the referendum on June 23, 2016 to reach $1.32. The two effects of this drop work in opposite directions as it makes importing from the UK less expensive but exporting to the UK will be more competitive as other currencies are expensive relative to the Sterling.

Uncertainty of what type of trade deal the UK will be able to secure with the EU and the rest of the world is leading to delays in investment, both locally as well as in foreign investments. On a local level, firms are delaying large capital investments to first understand how their export markets will change following Brexit negotiations. For foreign investors, the risks are multiplied as any potential trade deals could include their home countries and hence multiply the effect on their investments in the UK.

While putting in place the most efficient and beneficial frameworks is necessary, we must also remember that this will not completely eliminate uncertainty surrounding Brexit. On November 16, Goldman Sachs CEO Lloyd Blankfein called for a second vote and said that many people want Britain to have a “confirming vote”. Nonetheless, countries such as Commonwealth nations must not wait and take the steps needed to prepare itself for a post-Brexit world. Moreover, negotiating and implementing trade agreements is a lengthy and complex process. Therefore, it is beneficial to start early.

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