UK Trade Policy and Its Departure from the EU

In June 2016, the UK voted to leave the European Union (EU). Commonly called "Brexit," the decision has raised a number of questions regarding Britain's current trading arrangements as well as possibilities and obstacles that await the UK post-EU (Hatzigeorgiou, Lodefalk, 2016). From a trade theory and policy perspective, this paper will assess the UK's current trading arrangements along with the potential advantages and difficulties it will likely face as a result of being outside the EU.

From a mercantilist trade theory perspective, Britain's current trading arrangements are based on what is good for the EU member states (Britain formerly being one of them). It is less protectionist from a nationalist point of view and the idea that a country might import less than it exports and thereby have a trade surplus. In the EU, the UK had a 24 billion pound trade deficit at the end of the first quarter 2016 (Elliott, 2016). Mercantilism is the trade theory that flourished from the 1500s to the end of the 19th century, as countries emerged from the Middle Ages by concentrating on storing wealth gained from colonies around the world (Carpenter, 2015). Other trade theories have emerged, such as Smith's and Ricardo's theories of absolute advantage and comparative advantage (Smith, 2005; Costinot, Donaldson, 2012). However, with the rise of the market state in the 20th century and the new nationalist push now in the 21st century, the mercantilist idea can be seen below the surface of motivations: a "crisis of legitimization" has given way to protectionist concepts and a desire by leaders to reduce trade deficits (Bobbit, 2011, p. 213). The current trading arrangements of the UK with the EU do not facilitate this protectionist desire.

Those arrangements consist of the EU signing off on all trade deals first and foremost. In abiding by this transfer of authority from its own national capital to the centralized governors of the EU, the UK is given access to 1/3 of the world's markets by value and "preferential market access to over 50 countries outside the EU -- from South Africa to Colombia to South Korea" (CBI, 2016, p. 1). This is more than either Switzerland (a country with which the UK is frequently compared in terms of how its trade arrangements should look) or Canada (CBI, 2016, p. 1). Currently the EU negotiates tariffs for the EU member-states and as such the UK benefits from the EU's quick ability to eliminate nearly all tariffs associated with South Korea (compared to the much longer process that Australia takes in negotiating tariffs with the same country (CBI, 2016, p. 1). This type of arrangement has enabled the UK to increase trade with South Korea by nearly 60% equaling 6.3 billion pounds in exports in the year following the deal's implementation (CBI, 2016, p. 2). A similar arrangement is in place between the EU and Canada, which accounts for 1.3 billion pounds of the UK economy (CBI, 2016, p. 2). Moreover, were the UK to stay in the EU and the EU to complete all its current negotiations, nearly 90% of all trade for the UK would be covered (CBI, 2016, p. 2). These trade arrangements provide numerous incentives for Britain; the downside of these arrangements, however, is that sovereignty of the United Kingdom is not front and center and the danger of centralized forces in the EU voting for a trade deal like the TPP in years to come is a persistent threat that could seriously undermine national sovereignty by placing multi-national corporations above the rule of law in the countries where they do business.

The potential advantages of the UK leaving the EU are evident in the fact that Britain will be in a position to negotiate its own trade agreements. While these may take time, the positive side of this type of situation is that the UK is no longer represented by a foreign body but rather by its own national leaders who can put forward the type of nationalist interests that have become popular in recent years.

Thus, outside the EU, the UK hopes to take more power over its trade agreements and policies rather than have them dictated by the EU. However, as there always is in economics, a trade-off is inevitable and the other side of this move towards autonomy by Britain is the possibility of further destabilization across Europe. As Dhingra, Ottaviano and Sampson (2016) point out, the EU is Britain's "most important trade partner, accounting for half of all UK exports and imports" -- that is, 15% of the UK's GDP (p. 2). However, with the European economy flailing and nationalism rising in many countries from the U.S. to Italy to the Netherlands to Russia to the Philippines to France and so on, there is a major economic incentive to adopt a policy that is to some degree mercantilist-protectionist and to another degree based on mutually beneficial terms that enable both sides of the trading table to prosper (Pabst, 2010). The zero-sum game of the past century played by world powers has not ended well (debt is at never-before-seen levels for many nations) and a new approach is deemed necessary by those rejecting the current system.

A positive-sum game may be possible via Brexit and a re-negotiation of trade deals with other countries as the consequences of a surge in nationalism are made clearer around the world -- however, a balancing act will be needed that promotes a positive-sum objective -- i.e., "cooperation among nations" -- while simultaneously steering clear of the fixed-sum game which bleeds into the zero-sum game (Dorobat, 2015, p. 111). Mercantilist philosophy runs under every sum game, no matter which, but the degree to which mercantilism overrides other considerations -- such as the need for cooperation -- will decide the extent to which trade policies are effective. The foundation of any working economic theory is common sense -- and the idea currently presented the world by Russia and China is that a multi-polar world is much more beneficial to all than a uni-polar world wherein one major power controls all the levers of economics, trade, finance, etc.

Simply between the UK and the EU there will be some constraint in terms of policy. For instance, internal tariffs will be eliminated when the UK leaves the EU and an external tariff will be placed on all trade. Determining the tariff relationship that the UK will have with Europe as well as other countries around the world will be a top priority as it will set the tone of Britain's trade and economic policy. A protectionist stance will have consequences just as not adopting a protectionist stance will have consequences. The simple operations of customs will have to change unless the UK chooses to maintain a customs union with the EU. Questions of whether to pursue ideas like multilateral trade liberalization, bilateral trade, or mega-regional trade agreements will need to be answered -- but by being outside the EU, the UK is able to answer these questions on its own instead of being beholden to central powers in Europe.

Tariffs are not necessarily bad, especially if a nation is seeking to promote investment in its own country, as the U.S. is now currently doing under President-Elect Trump. While tariffs may be hurtful for certain companies and nations seeking to sell goods in a nation that has a high-tariff on their products, the other side of the situation is that investment in that nation becomes an option that was not considered -- especially if tax incentives are provided to the company that is otherwise facing stiff tariffs. This type of situation can be an outgrowth of a new stance on trade, and with the UK taking back its authority to negotiate agreements on its own behalf, the playing field widens, the parameters of investment, taxation, tariffs, and exchange all become fluid, and a more positive and mutually-beneficial (positive-sum game) can be initiated.

Should the UK favor market forces over protectionist policy, it could settle upon a cost-benefit ratio that supports its own economy while reducing its trade deficit and boosting exports. By embracing world prices on both ends, exports and imports, the UK could potentially reverse its economic trends and take part in the multi-polar economic world currently being promoted in the East.

In conclusion, Brexit offers a new perspective on global trade and economic policy not just for the UK but for all countries engaging in trade. The EU offered a centralized approach to trade that allowed it clear many several hurdles that take individual countries longer to clear; however, it also meant that the UK would have to abide by policies adopted by the EU and give up a degree of its sovereignty in the process. Essentially, leaving the EU places the UK in a better position to negotiate on its own behalf -- and other countries see this as well. Therefore, the need to work with the EU as a negotiating partner become less pressing over time, especially as the threat of a domino-effect is felt and other EU member-states consider leaving the EU. The rise of the multi-polar world, wherein a positive-sum game is open to all countries willing to cooperate becomes appealing to those nations that seek to maintain their own autonomy, their own sovereignty, their own nationalist interests while at the same time taking part in an exchange that is beneficial to both sides of the table.

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