Trade Profile: The United Kingdom Strikes Out on Its Own

9 MINS READOct 24, 2017 | 09:35 GMT
As an island, the United Kingdom has always experienced a degree of separation from the rest of the European Union.

As an island, the United Kingdom has always experienced a degree of separation from the rest of the European Union.

(DAN KITWOOD/Getty Images)
Editor's Note

Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.

In the 12th installment, we focus on the United Kingdom.

A Snapshot of the United Kingdom

Economic Background

For most of the past two centuries, the United Kingdom has been a standard-bearer for free trade. Given its history, this is hardly surprising: The country was once home to the Industrial Revolution and commanded an empire that spanned a quarter of the globe. Armed with the military force to assert and protect its wide reach and competitive economy, the United Kingdom forcefully persuaded other countries to open up their markets to trade, laying the groundwork for today's global exchange of imports and exports. Now, seven decades after World War II brought the British Empire to an end, the United Kingdom's mighty manufacturing industry and international clout are shadows of what they once were. Yet much of the promise that the British economy boasted in its heyday persists to this day.

The United Kingdom built its economic power on a base of manufacturing. Starting in the mid-18th century, the Industrial Revolution created extraordinary efficiencies in the textiles trade that eventually gave rise to innovations in steam and rail transport, transforming how goods moved from place to place. Northern British towns such as Manchester, Liverpool, Glasgow and Dundee became affluent manufacturing and shipping hubs, while London grew into a global financial hub. Despite the United Kingdom's abundance of resources like coal, however, the island nation often struggled to feed its burgeoning population. In response, it adopted a clear trade pattern: The country imported food and commodities, only to turn them into manufactured products that it then shipped abroad.

Over time, the natural diffusion of technology rendered this economic model unsustainable. First other European nations, then the United States, began to adapt British technology, using it to compete with the United Kingdom both economically and militarily. As the years passed, it became harder and harder for the country to maintain its competitive advantages. World War II marked the end of its long, slow decline, and the onetime empire passed the baton of global leadership to the United States.

British Agrifood Exports and Imports

Back home, the war had another important impact: the creation of the National Health Service. The British welfare state had been developing since the turn of the century, but when a health care crisis broke out during the conflict, it helped propel the Labour Party to a surprising electoral victory on the promise of free health care for all in 1945. Despite its rampant inefficiencies, the National Health Service has remained one of the country's most beloved institutions — and a key battleground in numerous British elections — since its inception.

During the postwar era, the nation's heavy industry began to shrink as global competition intensified. Jobs in coal, steel and heavy manufacturing disappeared, while London maintained its position as a leading financial services center, in large part because of its existing infrastructure and advantageous time zones. With this prominence in financial services came many supporting industries, including legal and business services.

These sectors came into their own in the 1970s and 1980s. At the time, the fledgling eurobond market cemented London's influence abroad as the British government stared down labor unions and shuttered their industries at home. The United Kingdom's entry into the European Economic Community (the European Union's predecessor) in 1973 only spurred London's ascent. Though the move required the country to give up a considerable amount of autonomy in its trade policies, it also provided access to a captive market that enabled London to become the Continent's banker, broker and financial adviser, quickly outstripping regional rivals such as Frankfurt and Paris. The result: a dramatic shift of British wealth and influence from former industrial heartlands in the north and west to London, which is now the primary earner subsidizing the rest of the country.

This London-centric economic model has had far-reaching implications for the United Kingdom as a whole. For one, a lack of goods exports led to the steady expansion of the nation's trade deficit. Under normal circumstances, this might have depreciated the British pound, dealing a blow to imports by eroding the spending power of the average citizen. But instead, foreign funds continued to flow into the country in the form of investment — partly into assets such as London property, whose prices seemed destined to keep rising, and partly into industrial plants meant to serve domestic and European markets. This inflowing investment buoyed the value of the pound and sustained the United Kingdom's consumption-based economy as it continued to rely on the strength of London's financial sector.

As an island, the United Kingdom has always experienced a degree of separation from the rest of the European Union. But the ideological gulf between them widened in 2004 when the country began accepting workers from Central and Eastern European countries as soon as they joined the union, while governments like Germany and France opted to introduce temporary restrictions. Consequently, migrants flooded across the United Kingdom's borders. (After Poland's accession, for instance, 800,000 of its citizens traveled to the United Kingdom.) Amid the global economic downturn that struck in 2008, these waves of new arrivals fueled anti-immigration sentiment and Euroskepticism throughout the country. Last year those sentiments culminated in a vote by British citizens to leave the European Union. Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty in 2017, beginning the two-year countdown for the country's departure from the bloc. Any transition agreement that London and Brussels reach will doubtless preserve at least some of their current trade arrangement, perhaps even for a couple of years. But regardless of the Brexit deal's final details, the United Kingdom is poised to re-enter the global market and regain control over its trade policy for the first time in four decades.

As a result, the British economic model is once again in flux. The world's fifth-largest economy won't be able to avoid undergoing a number of changes as it leaves the European Union. In fact, the signs of these painful adjustments are already becoming apparent. London's prominence in global finance is in jeopardy as international banks make arrangements to relocate their jobs and functions to Frankfurt, Paris and Dublin, where they can remain a part of Europe's single market. Meanwhile, London housing prices have begun to fall, as has the value of the pound sterling. All of these trends point to the broader economic restructuring taking place as the pillars propping up London's thriving services industry are destabilized. 

The British Economy: The Pound and the Current Account

Trade Implications

Offensive Interests

Services — particularly financial and business services — have long underpinned the British economy, thanks in large part to London's position as a leader in the industry. Though its clout is waning as some jobs migrate to the European Union, the city will continue to be an important international center for finance, preserving the United Kingdom's competitiveness in the sector. Furthermore, other British services may become more competitive as British wages drop alongside the value of the pound. The country, after all, boasts an advanced economy, high education standards and cultural and linguistic advantages that give its exports an edge in international markets. The United Kingdom also has several powerful innovation centers, particularly near Cambridge and parts of London; though the Brexit will impose some constraints on the nation's technological advancementengineering and high-tech industries will probably thrive after it has parted ways with the European Union.

Geographic indicators will also be among the United Kingdom's trade priorities. Like most of Europe, the United Kingdom enjoys widespread demand for many of its domestically produced goods, such as Scotch whisky or English gin, because of their geographic provenance. The country will make sure that these products are clearly marked on the retail shelves of its foreign partners when it strikes new trade deals.

Defensive Interests

Heavy industry, once a historical strength, is a modern weakness for the United Kingdom. In recent years, Port Talbot's steel plant and Sunderland's Nissan factory have made headlines by closing their doors, a visible symbol of similar shutdowns occurring across the country. Because the Brexit vote proved that some of the United Kingdom's old industrial powerhouses still hold significant political sway, any British administration must protect their employment opportunities and interests if it hopes to be re-elected. This will not be an easy task, though, since the country is no longer competitive in many low-skilled heavy industries compared with its developing counterparts in Asia. The loss of access to the European market will remove yet another feature drawing investors to British heavy industry.

As a fairly small island with a sizable population, the United Kingdom historically has been a net importer of agricultural goods. Today, its agricultural imports total 57 billion euros (almost $67 billion) while its exports total only 26 billion euros. Because roughly 70 percent of these imports come from EU member states, they will likely be affected by the new tariffs and trade barriers that the Brexit will instate. Combined with the fact that the United Kingdom is unlikely to preserve the high agricultural subsidies that EU membership requires, this will present the world's largest agricultural exporters with exciting opportunities on the island. (That the country is more accepting of genetically modified crops than the Continental bloc only adds to its allure.) But this newfound appeal presents a mixed bag for the United Kingdom: Though consumers will encourage imports to maintain product quality and diversity, farmers — a small but influential constituency — may resist trade deals with major agricultural exporters such as the United States and Australia.

Public services, including health care and education, will likewise be points of contention during trade negotiations. The National Health Service, for instance, is an extremely sensitive issue in the United Kingdom. Though foreign health care providers could easily compete with the inefficient public provider if given the chance, they probably won't have an opportunity to tap into the massive British market as the United Kingdom works to keep the provision of public services in the government's hands.

Finally, immigration will likely remain a central issue in the United Kingdom. Calls to restrict the flow of people across the country's borders could throw a wrench in London's potential trade deals with less developed nations, like India, that are seeking to expand their diasporas. 

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