Where will the UK's post-Brexit trade come from?

Pratik Dattani is the Managing Director of boutique economic consulting firm EPG, based in London and Bangalore

A relationship that started in 1972 after a year of negotiations between Britain’s Conservative prime minister Edward Heath and European leaders, embarked on its formal demise on 23 June 2016, when 51.9% of the United Kingdom voted to leave the European Union.

One of the major arguments made by the Leave campaign was that after Brexit, Britain would be unshackled from the bureaucratic chains of Europe to pursue its own free trade policy with the rest of the world. In times that were becoming increasingly protectionist, this was to be a clarion call for free marketeers.

And after Brexit, this tone has continued. Theresa May’s first trade visit outside the EU after becoming Prime Minister was to India. In the same way that her predecessor David Cameron accorded great strategic importance to the country’s relationship with India, so has May.

In addition, she was just in China at the beginning of February, where she struck a more pragmatic tone than some of her predecessors, focusing on post-Brexit trade rather than concerns around human rights or the Belt and Road Initiative.

But both visits showed how Britain had only a few cards to play. The recently concluded India-UK bilateral trade ministers’ Jetco meeting in London explored various avenues of greater economic cooperation. The sense was that Brexit had focused minds to make Jetco into more of a deliverables-focused meeting.

Most areas in which the countries can increase economic ties do not need a post-Brexit free trade agreement. They need common-sense, a willingness to create a shared vision, and a humbling acknowledgement that India ‒ as is true with China as well ‒ holds more of the cards than Britain does.

When David Cameron visited India as prime minister for the first time, his ambition was to double bilateral trade within five years. Instead, bilateral trade has been flat since 2011 – while Indian exports to the UK have consistently increased, UK exports to India have fallen, albeit with a recent uptick after sterling’s depreciation.

Still, ahead of the Commonwealth Heads of Government Meeting (CHOGM) in London later this year, Westminster is abuzz with the Commonwealth becoming the UK’s new best friend.

Some county councils in England – for the first time in many years – are including a focus on improving non-EU trade in their core future strategy. This is commendable, but many lack the budgets or intra-council coordination to do this in a meaningful manner. Where they do so, it is with India or China in mind. Ironically, some of the largest attempts by these councils to internationalise opportunities for their small and medium-sized enterprises post-Brexit is being achieved through EU-funded grants.

Today, the UK is the 17th largest trading partner for India, while India is the 18th largest trading partner for the UK. A recent paper by the Commonwealth Secretariat rather generously found that, if all tariffs for goods and services are reduced to zero under a free-trade agreement, India-UK trade could increase by up to 26% per year. The UK’s exports to India could increase by 33% per year while the UK’s imports from India could increase by 12%. Germany and France would stand to lose.

One can hear many diplomats quote these figures to evidence the substantial post-Brexit potential. However, the chance of all tariffs falling to zero on the first day after Brexit is fanciful. 54% of Britain’s imports are from the EU, and 43% of exports land there. Germany, Spain, the Netherlands and Belgium run the largest trade surpluses in the EU with the UK, which means the UK buys much more from them than it sells.

The top eight Commonwealth countries make up 8% of the UK’s exports. All Commonwealth countries make up 9%. British exports to Germany are, roughly, more than the whole Commonwealth combined.

While the EU is a trading bloc, the 52 Commonwealth countries are not. The only thing that links them is an erstwhile British hegemony. According to a 2013 report by the International Trade Centre, intra-Commonwealth exports as a share of total export figures show that only six countries benefit less from intra-Commonwealth exports than Britain does.

In other words, Britain is saying to the Commonwealth: we didn’t really want to buy what you sold before, and we couldn’t sell you what you wanted, but after Brexit it will all be different.

The marketing in the build-up to the CHOGM is in full swing, with attempts by Britain to place India at the heart of the Commonwealth leadership. Given India’s Prime Minister Narendra Modi is due to attend this time (Indian PMs have skipped several of the last few CHOGMs), India may be able to build something on the basis of shared long-term values with Britain.

Intra-Commonwealth trade will increase after Brexit, as it has been doing for many years. But even a cursory look at the numbers suggests it will not replace intra-EU trade.