Emily Fry and Sophie Hale discuss the opportunities the UK has to set its own trade strategy after half a century. They look at the benefits of an expansive strategy for services while taking a defensive approach on goods.
This is a summary of the recently published Resolution Foundation report on the UK’s post-Brexit trade approach.
For the first time in half a century Britain needs a trade strategy. The stakes are high: such a strategy shapes what families and firms buy from abroad, and what gets produced domestically. It influences our jobs, productivity levels and, ultimately, living standards. Trade is also a major plank of Britain’s foreign policy at a time of heightened geopolitical tensions.
Britain’s initial post-Brexit trade policy has prioritised the speed and volume of free trade agreements (FTAs) signed to retain the access UK firms had as part of the EU, and to tactically offset some of the significant reduction in trade openness post-Brexit. This has been largely successful with agreements signed with more than 90 countries, that jointly account for more than 60% of UK trade.
However, this approach has run out of road. Future FTAs with the US and China are not on the horizon. Furthermore, it has not been able to prevent a worrying decline in the volume of Britain’s goods exports – which are 17 per cent below pre-Brexit levels at the outset of 2023. This puts the UK significantly below France, the second weakest G7 performer, whose goods exports are just 6 per cent lower. And because FTAs are focused on goods, it has also failed to open up new markets for Britain’s services firms. This is a major oversight – we are failing to capitalise on our existing strengths in exporting services.
A new trade strategy is therefore needed, one with clear objectives grounded in the UK’s wider economic strategy.
Such a strategy should have two strands: a ‘defensive’ objective on goods to deliver market access for high-value manufacturing firms struggling to retain their place in European supply chains. The second strand should consist of an ‘expansive’ objective on services to ensure the UK benefits from the growth in global services trade which is particularly strong in areas of British specialism.
A ‘defensive’ objective on goods
The deep integration of the UK’s high-value manufacturing firms into EU supply chains makes them particularly vulnerable to new trade barriers with the EU. Disentangling UK firms from these supply chains will create a structural shift, which would see less-productive domestically-focused manufacturing grow as a share of output, while more productive exporters shrink.
This could be addressed by fundamentally revisiting our relationship with the EU. Delivering a ‘UK Protocol’, building on the agreement for Northern Ireland, would deliver the benefits of both the EU customs territory and single market for goods, and could boost GDP by as much as 1 to 2%.
Achieving a UK Protocol would be politically challenging. Even though UK politicians are united in their desire to reverse the decades-long decline of manufacturing exports, both parties have ruled out a customs union and even partial single market arrangements. Brussels too, as it stands, is not open to such an arrangement.
But importantly a trade strategy is not just about delivering what is on the table right now – it is also about laying the groundwork for future deals that align with the broader needs of the UK economy. The precedent of the Northern Ireland Protocol and the existence of mutual gains for the UK and the EU make a new goods trading arrangement feasible at some point, were a UK government to prioritise it as a core component of its trade strategy.
An ‘expansive’ objective on services
On the other hand, an expansive strategy for services trade would seek to position trade policy so that the UK can better benefit from growing global trade in services and our broad strengths across service sectors. Indeed, trade in the services in which the UK specialises, such as cultural and recreational services and other business services, have experienced particularly strong growth: global services exports in industries with a UK revealed comparative advantage (RCA) tripled between 2005 and 2021, outpacing goods exports which doubled over the same period. Moreover, progress here is also less reliant on the EU: 61% of services exports went outside the EU, compared to 50% of goods exports, in 2018.
The UK should adopt a more innovative and outward-looking approach to boosting our trade, with new Services Trade Agreements (STAs) that should differ from traditional FTAs in both the issues they cover and the way they are negotiated. The content should focus on the mobility of workers, mutual recognition and digital agreements.
While challenging to deliver, the UK can learn from previous experiences in promoting services trade – including in live negotiations with Switzerland – and focus initially on higher-income countries with which it already has an FTA, including Australia, Canada, Switzerland and Japan.
What is more, with the US trade policy priority being to onshore manufacturing activity, there may also be more scope to make progress on service trade liberalisation than a free trade agreement with our biggest trading partner.
The prize for negotiating innovative new STAs could be significant. Successfully removing the substantial barriers facing exporters, could boost the UK’s services exports by as much as 40 per cent, equivalent to additional exports worth £6 billion for business services alone if achieved with the countries above, and to up to £17 billion if an agreement with the US could also be reached.
A new strategy
After half a century of the EU setting trade policy for the UK, the UK finally has an opportunity to set its own trade strategy. However, the UK is yet to fully take advantage of this new opportunity.
The nature of the UK economy, developments in global trade patterns and rising geopolitical tensions regarding goods trade all point to a new twin-track trade strategy: defensive on goods and expansive on services, with both underpinned by supportive domestic policy decisions.
Successfully riding the wave of growing services exports could be transformative in the decade ahead. Figure 1 shows that maintaining the UK’s current market share as global services exports thrive, compared to the modelled post-Brexit path, could ultimately boost exports by up to £200 billion by 2035.
By Emily Fry, Economist, and Sophie Hale, Principal Economist, Resolution Foundation.
Read the full Resolution Foundation report on the UK’s post-Brexit trade approach here.
