The UK Is Lining Up Trade Deals

Whilst much of the media focuses on the trade-related spat between the UK and EU over the Northern Ireland protocol, UK trade negotiators have apparently been busy. Last week, they finalised a fishing rights accord with the EU and a trade deal with Norway, Iceland and Liechtenstein.^[i] Next up on the UK’s trade agenda: a UK-Australia trade agreement scheduled for mid-June. Talks are also in progress with New Zealand, most of the Pacific Rim, India and America.^[ii] Note: We still don’t know if all or any of these deals will happen—the EU fishing and the Norway (et al) deals still need ratification, for example. But the symbolism is noteworthy, in our view: Post-Brexit Britain doesn’t seem to be retreating from the world, confounding some financial commentators’ portrayal of Brexit as a protectionist, isolationist move. That is a good lesson, we think, in not taking political rhetoric at face value when formulating an equity market outlook and making investment decisions.

Five years ago this summer, in the wake of Britain’s referendum to leave the EU, we observed many commentators theorising that the vote meant the UK was turning its back on the world and global trade. We saw others go further, suggesting it was a sign globalisation was in retreat. Meanwhile, the negative thinking implied, the UK was shooting itself in the foot, there was no upside to severing EU ties and calamity would result. Whilst we took no side in the debate and were neither for Remain or Leave, this argument did overlook a simple point: Leaving the EU freed Britain to pursue new deals of its own. Now that appears to be happening in full swing, and we think those still waiting for protectionist disaster may be disappointed.

To see this, consider all of the UK’s recent trade agreement activity. Even before Brexit took effect, there was the main EU trade agreement struck Christmas Eve and deals with 67 countries to preserve the trade agreements Britain was party to as an EU member-state.^[iii] Yes, some loose ends remain, like squabbles over the treatment of goods crossing the Irish Sea. But some of these have even been ironed out, including last Thursday’s agreement on fishing rights for the next year with the EU. Point being, this relationship will now look like most trade relationships globally. Occasional tiffs leading to talks and further deals. The heavy lift, the trade deal, seems behind us.

Beyond this, there was the UK-Japan trade deal reached last September and signed the next month. But now trade negotiation activity seems to be really ramping up. Last Friday, the UK announced a trade deal with Norway, Iceland and Liechtenstein—the non-EU members of the European Economic Area (EEA), which allows these three nations to participate in the EU’s single market. The UK’s trade deal with these non-EU EEA members mostly just preserves the arrangement it had with them when the UK was in the EU, but it does open up tariff-free exports of Norwegian white fish (like cod) to English processing plants and lower tariffs on some British cheeses crossing the North Sea.^[iv]

With those agreed in principle, the UK is now closing in on a trade deal with Australia and starting the accession process to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP. UK-Australia trade talks are pretty far along, and negotiators are shooting for an agreement June 15.^[v] The main remaining sticking points: British farmers are lobbying to retain tariffs on Australian beef imports, fearing they will undermine domestic production. Meanwhile, the UK seeks removal of Australia’s 5% tariff on Scotch whisky.^[vi] We don’t know whether negotiators think it is a good tradeoff, but experience tells us they probably aren’t so far apart as to scuttle a deal altogether—our research shows countries have a long history of adding small carve outs to protect niche industries or placate producers with a multiyear phase-in.

Clinching an Australia deal might just be an appetizer for the main course: joining the CPTPP, which would give the UK access to a trade bloc rivalling the EU’s size.^[vii] The CPTPP’s current 11 members—Japan, Canada, Australia, Singapore, Malaysia, Mexico, New Zealand, Vietnam, Chile, Peru and Brunei—comprise about 13% of global gross domestic product (GDP, a government-produced measure of economic output).^[viii] Members enjoy the removal of tariffs on 95% of goods traded among them.^[ix] Then too, the UK is also currently pursuing bilateral trade deals with America, India and New Zealand. In our view, if all or most of these come to fruition, it would make Britain’s trade with the whole world significantly freer than it was as an EU member-state.

Although we wouldn’t overrate trade deals’ impact—they can take years to negotiate and years more to take effect—we think the flurry of them undercuts the notion the UK is turning toward protectionism after Brexit. Far from it, from our standpoint. To us, the UK’s broadening trade scope underscores the importance of not taking the popular interpretation of current events at face value. For investors, we think it pays to look deeper, avoid overrating rhetoric and watch what actually happens instead.