So much for ‘getting Brexit done’. We are back pretty much where we were a year ago, still up against the clock trying to do a deal with the EU. It turns out the withdrawal agreement counted for nothing without a trade deal.
As for the withdrawal agreement, the government this week introduced a bill to parliament which it says is desperately needed to protect the country against provisions in that agreement. So just what was the turmoil of autumn 2019 all about?
The immediate future is not looking good for businesses which rely on open trade with EU countries. But on the other hand, we have just had a free trade deal agreed with the Japanese – disproving those who asserted that it would be impossible to negotiate rapid deals with any country outside the EU.
Negotiations with the US seem promising. There is an obvious conclusion to draw from this: that in the future we can expect much more trade with non-EU countries and perhaps less trade with EU countries. This would, in fact, continue a trend which is already evident. UK exports to EU countries have grown on average by 1.6 per cent a year since 2012, while trade with non-EU countries has grown exactly twice as fast, by 3.2 per cent a year. Back in 2012, exports to EU and non-EU countries were roughly level: £149 billion with the EU and £152 billion with non-EU countries. By 2019, there was a £28 billion gap: £169 billion worth of trade with the EU and £197 billion with non-EU countries.
Historically, it has been easier to trade with countries closest to your own – most obviously because it costs less money to ship a load of goods across the Channel than it does to the Far East. Yet the argument that the proximity of the EU makes it our natural trading partner is losing force because a declining proportion of our exports are in the form of physical goods. As this graph shows, over the past half century there has been a remarkable divergence in the UK’s trade balance in goods and that in services.
Looking at current trends it makes sense for UK trade policy to prioritise the opening up of trade in services with countries outside the EU. That is where the fastest growth is, and where trade deals can be expected to deliver the biggest dividends. That is not to say, of course, that trade with the EU is not extremely important and that it is important we forge a trade deal with the EU, too. But a policy demands a more international approach. We have to stop thinking of trade in terms of shipping beef and Scotch across the Channel and see it more in terms of UK companies performing services for businesses and governments all around the world. In this trade, distance matters little.
From the investor’s point of view, any satisfactory conclusion to the long stand-off between Britain and the EU ought to be good for UK export-focussed businesses. The UK market has underperformed others over the past four years in large part because of the uncertainties created while trade deals are negotiated. But the businesses which are likely to prosper the most in coming years are those which sell their services around the world – and which can hope to increase those sales as Britain takes advantage of its new-found freedom to negotiate its own trade arrangements with non-EU countries. In other words, sell apples and buy accountancy software.