Why the UK’s trading policy’s shift to Asia was never going to live up to the hype.

Prominent Leave advocates suggested exiting the EU would be beneficial for the UK economy as trade policy could shift away from slow growth Europe and towards the rapidly growing economies in the Asia Pacific (Rodrik, 2018). When Rory Stewart explains his ex-colleagues arguments on the podcast ‘The Rest is Politics’, he does so with a sense of sympathy stemming from an idea that the fate of these arguments and what has happened since in global politics was unlucky. 

But is it really down to ‘luck’? The initial logic for increasing trade with the Asia Pacific was that the UK could benefit from economies such as China which boast growth rates that the EU only dreams of. Now, the idea of linking the UK and Chinese economies in a comprehensive trade deal seems like a relic of the past. And that is because it is. 

The idea of a pivot in trading policy towards Asia was formed under the Cameron period in the ‘Golden era’ of UK-Chinese relations (Shirbon, 2015). Since then, the continued prevalent use of state-owned enterprises, currency manipulation and the disregard for intellectual property rights in the Chinese economy has ruled out further economic cooperation (Block, 2018). Not to mention the current power struggles with the US. 

Putting aside the flawed optimism of the Conservatives towards developing relations with China during this period, the pivot to the Asia Pacific was never going to live up to the hype.

But what about the rest of the region? In July, the UK signed an agreement to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an existing free trade agreement (FTA) including Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and Canada. The members of this FTA account for 13% of the world's GDP and boast an average annual growth rate in recent years of 8%, compared with average annual growth in the EU of 5.5% in 2021 and 3.5% in 2022 (Deloitte, 2023). 

This looks like a mission accomplished. However, the government’s estimate of the benefits of joining the CPTPP is a boost to GDP of 0.08% over the next 15 years, hardly a transformation to a new ‘Global Britain’. In fairness to the government, the UK had trade agreements with most of the CPTPP members already, so the gains were always likely to be small. Countries including South Korea and Indonesia have expressed interest in joining the CPTPP which could increase future benefits. Furthermore, comprehensive FTA’s on a regional level such as the CPTPP provide much greater long-term stability to trade than regular bi-lateral agreements. 

These are, of course, modest gains. This brings us to the fundamental conceptual flaw of the Asian pivot: the very high proportion of intra-regional trade and the UK’s inability to tap into it to any great effect.

The share of intra-regional trade in the Asia Pacific has increased from 42% of all trade in 1990 to 52% in 2011 and then 58% in 2020, levels which rival North America and the EU itself (Asian Development Bank, 2022; Eckardt et al., 2023). The growth has come from companies in the region establishing supply chains that span multiple countries in order to take advantage of lower production costs. For example, Japanese cars will have parts made across the region such as its tyres made in Malaysia and its seats made in the Philippines (Marklines, 2016). 

The UK was able to take advantage of the EU’s high proportion of intra-regional trade in much the same way. Supply chains established over a number of years with countries inside the EU offered benefits in location, resources and the cost of labour. The key and obvious difference here is distance. For example, Toyota could produce car parts and assemble cars in the UK with parts made elsewhere in the EU and then export the finished cars across the EU tariff free (O’Carroll, 2018). 

In the case of the Asian pivot, the UK is unlikely to see new production facilities being established to take advantage of trade liberalisation with the region due to the sheer distance. Instead, the economic benefits for the UK will have to come from goods which are almost entirely made in the UK already and exported as such, or on products which require expertise the UK alone has. No doubt, these are still economic gains and should not be dismissed. But when reviewed closer, the conceptual case made by Brexiteers to pivot the UK’s trading policy towards the Asia Pacific was never going to live up to the hype. And certainly never going to replace trade with the EU.

Bibliography:

Asian Development Bank (2022) Trade integration deepens in Asia and the Pacific Amid Pandemic, Asian Development Bank. Available at: https://www.adb.org/news/trade-integration-deepens-asia-and-pacific-amid-pandemic#:~:text=Trade%20within%20the%20region%20rebounded,the%20highest%20share%20since%201990. (Accessed: 15 November 2023). 

Block, C. (2018) Yes, China does cheat in trade - the rest of the world needs to wake up, Forbes. Available at: https://www.forbes.com/sites/cblock/2018/03/13/yes-china-does-cheat-in-trade-the-rest-of-the-world-needs-to-wake-up/ (Accessed: 14 November 2023). 

Deloitte (2023) The UK in CPTPP: Our analysis, Deloitte United Kingdom. Available at: https://www2.deloitte.com/uk/en/pages/tax/articles/the-uk-in-cptpp-our-analysis.html (Accessed: 11 November 2023). 

Eckardt, S., Ge, J. and Zaman, H. (2023) Asia’s trade at a turning point, Brookings. Available at: https://www.brookings.edu/articles/asias-trade-at-a-turning-point/ (Accessed: 15 November 2023). 

Marklines (2016) Japanese parts manufacturers in Southeast Asia: Indonesia, Vietnam, Malaysia, the Philippines, Laos, MarkLines Automotive Industry Portal. Available at: https://www.marklines.com/en/report/rep1513_201607 (Accessed: 20 November 2023). 

O’Carroll, L. (2018) Toyota: No-deal Brexit may cost up to £10m a day in lost production, The Guardian. Available at: https://www.theguardian.com/politics/2018/dec/04/toyota-no-deal-brexit-warning-uk-factories-10m-a-day (Accessed: 15 November 2023). 

Rodrik, D. (2018) “Populism and the economics of Globalization,” Journal of International Business Policy, 1, pp. 12–33. Available at: https://doi.org/10.3386/w23559. 

Shirbon, E. (2015) China, Britain to benefit from ‘Golden era’ in ties - cameron, Reuters. Available at: https://www.reuters.com/article/us-china-britain-idUSKCN0SB10M20151017/ (Accessed: 14 November 2023).