Making social science accessible

09 Feb 2017

UK in the world

Theresa May has set out her vision of a “Global Britain” outside the EU, as “the strongest and most passionate advocate for free trade right across the globe”.  This vision assumes that the UK will be able to agree new trade deals with countries outside Europe, and that these deals would reap new economic benefits for the UK.  How realistic are these assumptions?

Table 1 shows some of the main measures of global trade.  With or without the UK, the EU is the world’s second largest economy, and together the USA, EU27, and China command 48% of the global economy, 42% of global trade in goods (excluding internal EU trade), and 43% of global trade in services. The UK outside the EU would be the fifth largest economy, but would only command 2.4% of global GDP, 2.1% of global trade in goods, and 4.3% of global trade in services.  In short, the UK would not be in the global trading “premier league”. This is not to say that the UK could not be a successful economy outside the EU, but does suggest that the UK will not be in a strong bargaining situation when negotiating free trade agreements, particularly with the world’s dominant trading powers: the US, the EU, and China.

To shed more light on the UK’s prospects, let us consider the situation from the perspective of South Korea, which will be a similarly-sized trading power to the UK.

South Korea already has an FTA with the EU, which hence currently covers the UK.  The EU-South Korea FTA entered into force on 1 July 2011, and is the most ambitious of the 30 or so trade agreements the EU has signed so far, in that it covers a larger volume of bilateral trade than any other agreement between the EU and a third country.  It is also one of the most comprehensive trade agreements signed between any two partners anywhere in the world.

From the UK’s point of view, a comprehensive FTA with South Korea would be attractive.  As Table 2 shows, South Korea is the UK’s 11th largest trading partner (treating the EU27 as a single bloc). In fact, apart from Norway and Turkey, South Korea is the UK’s third largest trading partner outside the EU with which the UK currently has a trade status as a member of the EU.  The US, China, Hong Kong, Japan and India will be high on the UK’s priority list, but any negotiations with these states would need to start from scratch, whereas potential agreements with Switzerland, Canada and South Korea could start from the terms of the current EU agreements with these three countries.

At face value, a cut-and-paste of the terms of the EU-South Korea FTA into a new UK-South Korea FTA seems the least disruptive option. However, this is not as simple as it sounds.  The precise terms of the EU-South Korea FTA were a delicate compromise between the EU, and an economy and trading power less than one-tenth of the size of the EU.  South Korea will expect a more equal ‘partnership’ with an independent UK, which has an economy only twice its size.

Two other issues will also be significant in any new UK-South Korea agreement.  First, in terms of services trade, under the current EU-South Korea agreement, each party is required to extend to the other any market liberalisation that it may grant in any future FTA with a third country. So, South Korea cannot agree any further services market access to the UK without also extending it to the EU. And, if South Korea extends market access to the UK, the US may demand a similar level of access under its agreement with Korea.

Second, even if the UK and South Korea could agree to apply the terms of the EU-South Korea FTA, the “rules of origin” mean that this would not be as beneficial for the UK outside the EU.  Under the EU-South Korea FTA, a product is considered as “originating” in the EU or South Korea if either it has been wholly produced in the EU/South Korea or it has been “sufficiently processed” in the EU/South Korea.  For instance, a car is deemed to “originate” in the EU if at least 55% of the value of the inputs is made in South Korea or the EU.

Once the UK leaves the EU, any components from the EU will be considered to be from outside the UK.  Currently, the percentage of UK components in British-built cars is 41% on average, which is lower than a 55% local contents requirement if the terms of a UK-South Korea FTA replicate the EU-South Korea FTA.  This would mean that UK-built cars exported to Korea would suddenly be subject to an 8% tariff (the current WTO most-favoured-nation level).

In short, Global Britain does not look quite as attractive from Seoul as it might initially seem from London.  The UK outside the EU will be a ‘second tier’ player when it comes to negotiating free trade agreements, considerably weaker than the ‘big three’: the US, the EU, and China.  It will be easier for the UK to sign trade deals with the 53 countries with which the UK already has free trade agreements, via its current EU membership, and one of the countries high on this list will be South Korea, which has a comprehensive FTA with the EU.

But, South Korea will be reluctant to replicate the terms of the EU-South Korea FTA for the UK, because it would expect a better deal with the UK than it managed to negotiate with the EU.  And, even if South Korea and the UK could agree to replicate the terms of the EU-South Korea agreement, the “rules of origin” in the deal could mean tariffs on many manufactured goods from the UK (such as cars) as a result of the large content of parts from elsewhere in the EU.

Simon Hix is Harold Laski Professor of Political Science, in the Department of Government at the London School of Economics and Political Science.

Hae-Won Jun is Assistant Professor, in the Institute of Foreign Affairs and National Security at the Korea National Diplomatic Academy. The views expressed in this article are those of the authors and are not to be construed as representing those of Korea National Diplomatic Academy.


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