What does British imperial economic history tell us about the future of UK-EU trading relations?
David Clayton |
Post-Brexit UK-European Union (EU) trading relations will take one of three forms:
(1) The UK will remain part of the EU customs union
(2) UK-EU trade will be governed by World Trade Organisation (WTO) rules
(3) The UK and EU will enter a free trade pact.
Option (1) is economically optimal but has been declared politically unfeasible because it requires the UK to commit to the free movement of labour between the EU and the UK. Such conditionality is essential because economies grow unevenly and, in the absence of independent currencies across Europe and/or a central European state to pool the risk of unemployment, free movement of labour is the mechanism for redistributing the gains from EU growth.
Economics (not history) is the best guide here.
Most parties agree that option (2) is the solution of last resort. Much has been made of its impact on complex cross-border trade in manufactured goods, but trade in services may be more problematic. The General Agreement on Trade in Services governs international trade, but can these rules handle disputes regarding trade in services across highly integrated economies subject to disintegration post-Brexit?
The law (not history) is the best guide here.
Britain’s economic history however is key to analysis of option (3).
Firstly, it provides a reminder of the importance of services to the UK. Even during Britain’s economic heyday as the First Industrial Nation, from the mid-to-late 19th century, the country ran imbalances on its visible account as it imported cheap food and raw materials; this was balanced however by a surplus on the invisible account, trade in services, notably insurance and shipping.
Secondly, those advocating hard Brexit believe that Britain can return to one of two ‘golden’ ages of British economic history: Britain’s reign as a global free trader, or Britain’s reign as an imperial free trader. They misread these pasts:
(a) From the mid-to-late 19th century, Britain provided the leadership necessary for the establishment of a system of global free trade: it was a buyer of last resort, coerced territories into free trade (via gun boat diplomacy and colonial conquest) and nudged foreign states into mutually beneficial multilateral arrangements. Britain will never regain the power to underpin liberalism worldwide. This role passed to the US, 1945-to-date, and may now be passing to China.
(b) Britain’s reliance on colonial and commonwealth markets increased from the late 19th century but this shift was not due to cultural ties (that is, sentimental attachments) between Britain and an emerging British world. These were not soft markets. Instead, customers in say Australia or India or Ghana made hard-nosed decisions. They had a preference for British goods because Britain had a comparative advantage in simple and cheap manufactured goods, most notably cotton textiles. But this advantage was quickly eroded by the emergence of new low-cost centres of manufacture, most notably in Japan, India and China.
(c) In the mid-to-late twentieth century, a formal imperial free trade bloc emerged due to extreme conditions caused by global wars and depression, the dire conditions of the 1930s and 1940s, a world-wide retreat from globalisation. For Britain (and for its colonial and commonwealth offshoots) imperial protectionism was a strategic imperative, and the outcome of political decisions taken in London and other centres of imperial power. By the 1950s this expedient imperial trading bloc was however a constraint on British economic growth: policy makers knew that Britain had to secure entry into fast-growing markets in Europe. These were being grouped into customs unions and free trade zones. Access had to be negotiated multilaterally, an extraordinarily time-consuming process.
Thirdly, a lesson from the history of the UK’s attempt to secure access to European markets is that Option (3), a UK-EU free trade agreement, will pose diplomatic problems, some due to Britain’s legacy as an imperial power.
During the long 1960s, to gain entry into the European Economic Community (EEC), Britain had to create trade rules that compensated its imperial partners (from New Zealand dairy farmers to Hong Kong industrialists) for a retreat from imperial free trade. Entry into the European customs union subjected this imperial trade to a common external tariff and special arrangements had to be brokered. This took discontinuous negotiations, between 1961 and 1973, to solve. The problems facing UK-EU trade negotiators today are more complex, involving for example 27 EU members (not 6 EEC members as in the past) representing vested interests in economies that are much more integrated than those in Britain’s 1960s imperial bloc.
Three British imperial legacies might also complicate the long-term prospect of Britain securing free trade relations with the EU and with extra-European trade partners:
(a) Mindful of neo-colonialism, ex-colonies will not accommodate British demands for access without receiving promises of reciprocal arrangements: India has already made this point.
(b) Britain has far less to offer its ex-imperial partners than in the past. Britain is no longer a dominant trading nation: most members of the Commonwealth have preferential trading relations with the whole of the EU, a much larger market than the UK. In the past, strong imperial relations also provided entrepreneurs and governments overseas with access to cheap capital via the City of London money markets and highly skilled and mobile labourers, émigrés from the UK. In today’s global world, there are many more sources of capital and expertise.
(c) Any extra-European free-trade deals entered into by the UK might compromise free trade between Britain and the EU due to the problem of diversion. In the 1960s, European producers predicted that if Britain retained free trade relations with non-EU members, British merchants would divert tariff-free products imported in the UK into European markets. This was an understandable concern: British merchants had transhipped world goods via ports like London for centuries! This lack of trust slowed diplomatic progress in the 1960s.
There are therefore two conclusions to be drawn from British imperial economic history regarding the viability of option (3):
- Talk of Britain becoming a unilateral free-trading global/imperial power is fantasy dressed up as strategy.
- UK-EU free trade negotiations will likely be even more protracted than in the long 1960s: this will be a generational struggle with unpredictable consequences.
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