Steve Peers

The UK is part of many international organizations: the EU, NATO, the UN Security Council, and the Commonwealth are just a few examples. Out of these, the Commonwealth, which recently held its latest summit, has the strongest ties to British history and culture because it primarily consists of former British colonies. (There are some Commonwealth members that were never colonies, and certain former colonies like the US opted not to join. A complete member list is available here).

Like many Britons, I have friends and family in several Commonwealth nations: Canada, India, New Zealand, Australia, Singapore, and South Africa. However, I also have friends in other EU countries and a professional interest in EU law. Personally, there’s no conflict: we can all savor both poutine and paella or enjoy films starring Antonio Banderas and Hugh Jackman. But does this hold true for the UK’s trade relations?

When the UK entered the EU over four decades ago, it broke off unique trade connections with most Commonwealth countries, replacing them with trade relations with what is now known as the EU. One argument for the UK leaving the EU in the upcoming referendum is the potential to undo this shift and revitalize Commonwealth trade.

However, much has changed in those forty years. I believe what’s true for individuals also applies to the UK as a whole: the UK doesn’t have to pick between the Commonwealth and the EU for trade but can engage with both, which it’s increasingly doing. This blog post will clarify why. (A future post will address EU trade with non-Commonwealth nations).

Background

In 1973, the UK had to abandon its special trade arrangements with the Commonwealth because the EU operates as a customs union. As defined by international law, this means having standardized trade regulations with the rest of the world. The EU has the authority to negotiate specific trade agreements on behalf of its Member States, though these typically require unanimous consent. However, the EU’s authority doesn’t cover all types of ’trade deals’ in the general sense. It applies to border taxes (tariffs) and other economic regulations on international trade but not to commercial agreements for buying British products. For instance, the UK and India were free to strike £9 billion worth of trade deals during the Indian Prime Minister’s recent visit, as these fell under this broader category.

Some argue that trade agreements are insignificant because ‘businesses trade, not governments.’ While it’s accurate that businesses handle a large portion of trade through contracts, governments remain influential. They are major purchasers of services and goods and regulators with the power to impose tariffs or regulations that could impact trade volume.

When the UK joined the EU, the EU was primarily interested in special trade agreements with neighboring countries (though this included Commonwealth members Cyprus and Malta). At the time, the EU generally favored trading with other nations under multilateral rules. However, the EU did expand its existing special trade agreement for former sub-Saharan African, Caribbean, and Pacific (ACP) colonies of France and Belgium to encompass most former UK colonies in those regions. However, it didn’t provide any special treatment to more affluent Commonwealth countries like Canada and Australia or Asian Commonwealth states like India or Malaysia.

This approach has since shifted. In recent times, the EU has become more open to negotiating bilateral trade agreements with various countries, relying less on the multilateral trade system established by the World Trade Organization (WTO). This has significantly altered the EU’s trade relationship with Commonwealth countries and many other nations. While not all of these agreements explicitly use the term ‘free trade agreement,’ their content includes free trade regulations, and they are registered as such with the WTO.

EU/Commonwealth trade today

This policy shift has resulted in the EU establishing free trade agreements (FTAs) or actively negotiating them with the majority of Commonwealth states – a considerable 90% of the 50 Commonwealth nations outside the EU. This includes the six Commonwealth states that constituted 84% of Commonwealth trade in 2011, along with numerous others.

Specifically, FTAs are already in effect between the EU and 18 of these 50 Commonwealth states (36% of the remaining Commonwealth). The EU has concluded FTAs with 14 others (28%), pending the completion of the ratification process. Additionally, it is engaged in or about to commence FTA negotiations with 13 states (26%). This leaves a mere 5 Commonwealth states (10% of the non-EU total) with which the EU has no planned FTA discussions. (For a detailed breakdown of the EU’s trade relationship status with each country, including links to more information, refer to the annex at the end of this post).

Naturally, the Commonwealth encompasses a diverse range of economies. However, the EU has secured FTAs with two of the most prosperous Commonwealth nations (Canada and Singapore) and recently committed to discussions with two more (Australia and New Zealand). It also has agreements with or is in negotiations with most of the larger developing Commonwealth members (India, Nigeria, South Africa, and Malaysia).

There’s a notion that EU trade deals with other nations don’t benefit the UK. However, UK exports to Commonwealth countries have been growing at a rate exceeding 10% annually, with increases (over two years) of 33% to India, 31% to South Africa, 30% to Australia, and 18% to Canada. Notably, British exports to India have surged by 143% since 2004. This growth in trade with the Commonwealth (while an EU member) has undoubtedly created or sustained numerous jobs in Britain.

Criticisms of the EU’s trade policy

The EU’s trade policies face criticism on three main grounds. While these arguments might have some validity, the crucial question in the approaching referendum is whether exiting the EU would genuinely address these concerns.

Firstly, there’s a common argument that EU trade agreements are unfair to developing nations. Interestingly, the EU’s pursuit of FTAs with developing Commonwealth countries over the past decade stems partly from WTO rulings. These rulings stated that the EU couldn’t solely enact one-sided trade deals that only benefited access to EU markets. Such agreements must liberalize trade in both directions, a concept the EU initially opposed. The EU does propose less generous unilateral trade preferences as an alternative to two-way agreements, and some Commonwealth countries, like Bangladesh, find this preferable.

If the UK were to leave the EU, it could choose not to engage in trade deals with certain developing Commonwealth countries that the EU has agreements with. It could also offer more favorable unilateral trade preferences. However, the UK wouldn’t have the freedom to sign one-way trade liberalization deals as it would be bound by the same WTO regulations on trade agreements that the EU violated with those agreements. Additionally, while opting out of replacing the EU’s trade agreements might benefit the economies of the poorest nations, it would likely lead to a decline in UK exports to those countries.

The second argument posits that the EU’s trade deals negatively impact the environment, public services, and grant excessive intellectual property protection to industries. This, in turn, leads to issues such as inflated prices for essential medications due to extended patent protection. However, this argument is also leveled against numerous trade agreements that don’t involve the EU, such as the recent Trans-Pacific Partnership agreement.

Therefore, while the planned EU/US trade agreement, TTIP (stepping briefly outside the Commonwealth), has drawn criticism for its potential impact on the UK’s healthcare system (among other concerns), these issues wouldn’t vanish if a post-Brexit UK sought its own trade agreement with the US. The controversial elements of the draft deal likely appeal to both the US and the EU. It’s not as if the EU holds a position to impose non-negotiable demands on desperate, impoverished Americans.

The third argument suggests that the EU lacks sufficient interest in pursuing trade agreements. However, as the previously mentioned facts demonstrate, it’s inaccurate to claim that the EU isn’t interested in trade deals with Commonwealth countries or that the UK’s EU membership hinders British businesses from expanding exports to those nations. Could it be argued that a solo UK would be more effective and faster at negotiating such trade deals post-Brexit?

It’s true that EU trade agreements often take years to negotiate, with some stalling or progressing at a glacial pace (as with India). However, this isn’t unique to the EU. For instance, over two decades ago, the Clinton administration envisioned a ‘Free Trade Area of the Americas,’ but it never fully materialized, and discussions eventually collapsed. There’s no assurance that the UK alone would be more successful in swiftly securing agreements than the collective EU.

Moreover, as highlighted earlier, the EU has already established trade agreements with 64% of Commonwealth countries and is in negotiations with another 26%. Some of these ongoing negotiations will likely be finalized by the time Brexit occurs, which would likely be two years after the referendum, placing it around 2018 or 2019 (for further analysis of the EU withdrawal process, see here).

Consequently, the UK would need to approach roughly three-quarters of its Commonwealth partners for trade deals to replace existing agreements with the EU. These partners might readily agree to extend a similar version of their EU arrangements to the UK, maintaining the status quo. However, they might not be interested in negotiating further trade liberalization. If they are, they’d likely seek concessions in return, prolonging negotiations.

For the remaining quarter or so of the states, the UK would need to start negotiations from scratch, potentially playing catch-up with ongoing EU negotiations in some instances. Additionally, there’s no guarantee that these states would be open to discussing FTAs or that negotiations would yield successful outcomes.

Overall, there’s no certainty that UK exports to the Commonwealth would benefit from Brexit. They might even decline if some Commonwealth countries are unwilling to replicate the EU’s trade agreements. Alternatively, they might increase, but it’s difficult to envision any substantial growth in British exports given the multitude of existing FTAs between the EU and Commonwealth countries and the uncertain willingness of these states to renegotiate those agreements.

Could this hypothetical rise in exports to the Commonwealth compensate for any potential losses in UK exports to the EU after Brexit? This evaluation hinges on how Brexit might affect UK/EU trade relations. This is a complex topic that merits further discussion in the future, but suffice it to say that while a post-Brexit UK/EU trade deal is probable, it’s far from guaranteed. It’s also highly unlikely that such a trade deal would preserve 100% of the UK’s access to the EU market. Numerous reasons cast doubt on this possibility, but the most significant is this: why would the EU send the message that a Member State could leave and retain all its trade benefits? Doing so would be akin to the EU signing its own death warrant.

The crucial point is that the UK’s trade with the Commonwealth represents less than a quarter of its trade with the EU. Therefore, to offset even a 10% drop in exports to the EU, the UK would need to boost exports to the Commonwealth by over 40%. How realistic is this when the majority of trade between the EU and the Commonwealth would already be governed by FTAs?

In conclusion, it’s evident that the UK can maintain its EU membership and continue trading with the Commonwealth. This trade is poised to expand as more EU FTAs with Commonwealth nations are implemented or negotiated. Conversely, leaving the EU risks diminishing trade with the remaining EU members without any credible indication that trade with the Commonwealth would increase enough to compensate.

Annex

Canada: FTA agreed. Pending formal ratification process.

Australia: FTA negotiations to commence soon

New Zealand: FTA negotiations to commence soon

South Africa: FTA in force

India: FTA under negotiation

Singapore: FTA agreed. Pending formal ratification process.

Malaysia: FTA under negotiation

Pakistan, Bangladesh, Sri Lanka, Maldives: No current plans for FTA

12 Caribbean Commonwealth states: FTA in force between EU and 15 countries including Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Saint Vincent and the Grenadines, Saint Lucia, Saint Kitts and Nevis and Trinidad and Tobago

Brunei: No current plans for FTA

2 Pacific Commonwealth states: FTA in force with Papua New Guinea and Fiji

7 more Pacific Commonwealth states: FTA under negotiation between EU and 12 more countries including Kiribati, Nauru, Samoa, the Solomon Islands, Tonga, Tuvalu and Vanuatu

3 West African Commonwealth states: FTA agreed with 16 West African countries including Nigeria, Ghana and Sierra Leone. Pending formal ratification process. (Note that Gambia left the Commonwealth in 2013; however, it remains part of this agreement).

Cameroon: FTA in force

4 East African Commonwealth states: FTA agreed with 5 East African countries including Kenya, Tanzania, Uganda and Rwanda. Pending formal ratification process. (Update: the Commission proposed the signature and provisional application of this deal in February 2016)

2 Southern and Eastern African Commonwealth states: FTA in force with 4 Southern and Eastern African countries including Mauritius and Seychelles (and also Zimbabwe, a former Commonwealth country).

2 other Southern and Eastern African Commonwealth states: FTA under negotiation with 7 more Southern and Eastern African countries including Malawi and Zambia.

5 Southern African Commonwealth states: FTA agreed with Botswana, Lesotho, Namibia, Swaziland and Mozambique. Pending formal ratification process. (Update: the Council decided on the signature and provisional application of this deal in June 2016; it will be signed and enter into force provisionally in mid-June).

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