Argument

An expert's point of view on a current event.

A Cure for the Brexit Trade Blues

After it leaves the European Union for good, the U.K. will need a new trade bloc. The Commonwealth can help.

Britain’s Queen Elizabeth II speaks at the formal opening of the Commonwealth Heads of Government Meeting at Buckingham Palace in London on April 19, 2018.
Britain’s Queen Elizabeth II speaks at the formal opening of the Commonwealth Heads of Government Meeting at Buckingham Palace in London on April 19, 2018. Yui Mok/AFP/Getty Images

On New Year’s Eve, Britain will finally leave the European Union, after more than four years of negotiations—talks that are still ongoing as the clock ticks down.

It is unclear what the conclusion of those negotiations will be, but one thing is for certain: The United Kingdom will need new alliances beyond its current relationships.

On New Year’s Eve, Britain will finally leave the European Union, after more than four years of negotiations—talks that are still ongoing as the clock ticks down.

It is unclear what the conclusion of those negotiations will be, but one thing is for certain: The United Kingdom will need new alliances beyond its current relationships.

The options aren’t attractive. The European Union is likely to feel irked by the U.K.’s animosity to the bloc and its aggressive negotiating stance for years to come. U.S. President-elect Joe Biden has been all but hostile to Brexit, publicly raising concerns about its implications for peace in Northern Ireland. And London is also on a collision course with Beijing after offering asylum to millions of Hong Kongers and banning Chinese-owned Huawei from providing the infrastructure to build up a 5G network.

But there’s one underappreciated alternative: the Commonwealth.

The Commonwealth is a voluntary association of 54 independent and equal countries, home to 2.4 billion people—almost a third of the world’s population—and over 10 percent of global GDP. The Commonwealth has its roots in the British Empire, but any nation can apply to become a part of it. Rwanda, which was never colonized by the British, joined as the association’s newest member in 2009. The group is based on shared values, like parliamentary democracy, as well as diplomatic, governmental, and commercial ties. In short, it’s everything a power bloc needs.

The Commonwealth is often dismissed as a colonial hangover with no 21st-century purpose. But it could be remade as a trade bloc.

Within the United Kingdom, the Commonwealth is often dismissed as a colonial hangover with no 21st-century purpose. But it could be remade as a trade bloc of countries with historical ties, long-established economic relations, similar administrative and legal systems, and facility with a shared language.

A focus on the Commonwealth as an entity would be far more effective than the piecemeal approach to bilateral trade deals that the United Kingdom has pursued so far. A trade deal with non-Commonwealth member Japan, for example, signed in September, means that nearly all U.K. exports to Japan will be tariff free. In return, British tariffs on Japanese cars will be lifted by 2026. Although the trade deal is forecast to boost trade between Japan and Britain by $20 billion, it is only expected to increase British GDP by 0.07 percent.

There will need to be dozens and dozens of such trade deals to make a dent in the loss of EU trade caused by Brexit. More significant one-off trade deals (for example with the United States) could achieve the growth needed, but they seem increasingly difficult, especially given the strain the coronavirus pandemic and recession have placed on the negotiating countries. Meanwhile, although a U.S.-U.K. free trade deal has been the centerpiece of British Prime Minister Boris Johnson’s post-Brexit vision, the Irish American congressional lobby and the incoming Biden administration itself are more cool to the idea. Biden has already warned Johnson that a trade deal with the United States is incompatible with his current Brexit strategy. There are similar blocks to a deal with Brussels. Europhiles see the United Kingdom as undermining the union. Why should it be rewarded now?

A big free trade deal with the Commonwealth, though could be easier. To be sure, there will be some skepticism toward the idea. Economists such as Walter Isard believe that Commonwealth members do not make natural trade and commerce partners, owing to what is known as the “gravity model—geographic distance has a negative impact on economic cooperation. That may have been true a year ago, but in a tech-enabled “work from anywhere” post-pandemic world, geography matters less.

Another argument is that the Commonwealth is simply too small to matter. In an op-ed for the Express, Johnson pointed out that “Today, the Commonwealth has a combined GDP of $10.5trillion, accounting for almost 14 per cent of the global economy.” That is about half of the EU’s GDP. But what the Commonwealth lacks in size, it more than makes up for in growth. Over the past four decades, Commonwealth economies have grown at an average rate of above four percent, compared with the EU’s 2 percent.

There’s also the type of growth to consider. The EU has a chronic inability to produce tech “unicorns”: start-up companies with a value of over $1 billion. Considering the easy access to venture capital and private equity in the major EU financial centers, not to mention the ubiquity of accelerator programs, the lack of big start-ups suggests a structural deficiency in the continent’s business and innovation culture, as well as the smaller home market.

But the next generation of unicorns could come from Commonwealth countries, especially with the U.K. backing them to preserve and increase their global standing. If cross-border barriers are sufficiently reduced so that the Commonwealth effectively becomes one large single market, the market will be far larger than the United States or China.

The quality of the market is great from a growth and innovation perspective, too. Such countries as Bangladesh, India, Malaysia, Nigeria, and Pakistan have young, skilled populations. All they need is the investment and support. Already, in many of these countries, the COVID-19 pandemic has been a catalyst for a subtle shift toward digital commerce, precisely the sector venture capitalists are attracted to.

For example, in Nigeria, a Commonwealth member and Africa’s largest economy, Klasha, a company that allows users to buy and sell items across Africa, has seen exponential growth since the pandemic and is tipped to become the African Stripe or PayPal. Across the Commonwealth, there are dozens of tech start-ups with a revenue of $100 million to $200 million a year, and growing year-on-year. The investment potential is far from realized. Their business models could easily be replicated at scale across the world.

London would be smart to improve access to the United Kingdom for this entrepreneurial talent by granting entrepreneur visas—a form of migration that has been inexplicably and self-defeatingly reduced or eliminated by the government in recent years. It should also invest venture capital in these countries. There is currently no viable visa that would allow the potential founders of these innovative start-ups access to the U.K., and there is no targeted British Sovereign Wealth Fund that can profit from their projects. There should be.

In 2018, Ipsos Mori found that the Brexit referendum resulted in a net positive effect on the U.K.’s perceived attractiveness in the Commonwealth countries of India, South Africa, and others. Even the most inward-looking and parochial of Brits should welcome entrepreneurs from those countries to their shores—as well as increasing economic partnership in general.

As Brexit’s final chapter closes, the Commonwealth, established in 1931, may finally be coming of age nearly a century later. As it does, it may also start to deliver on its name for its billions of citizens—with the right investment.

Ibrahim Khan is an angel investor and co-founder of IFG.vc and IslamicFinanceGuru.com. Twitter: @ibrahimkhan

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