After months of speculation and several high-profile legal battles over how Britain will leave the EU, Theresa May officially triggered Article 50 of the Lisbon Treaty on March 29th. The process got off to an unedifying start, with Britain grandstanding over trade and intelligence sharing.
The significance of the moment got lost in, amongst other things, squabbles over the sovereignty of Gibraltar, the future colour of British passports and chocolate Easter eggs. Then again, in Westminster, all this proved a convenient distraction for a government beginning negotiations on the back foot.
The Long-Term Effects
But while commentators and analysts are obsessing over the minutiae of the two-year negotiation process, the longer-term implications of Brexit have sadly been left by the wayside. It is true that the UK’s withdrawal from the EU will likely result in a period of domestic uncertainty that could last for years, but the unspoken deeper meaning of Brexit is that it also – assuming the British government plays its cards right – positions the UK as the trading partner of choice for the world’s fast-growing emerging markets.
Between a US in the throes of President Donald Trump’s “America First” programme of economic protectionism and nationalism, and an EU restricted by red tape and bureaucracy, the UK could theoretically quickly strike deals with the two blocs that are expected to dominate the world’s economy by 2050: the Commonwealth and the Gulf Cooperation Council (GCC).
Turning to the Former Colonies
Commonwealth trade ministers have already discussed plans to harmonise regulations between the UK and its former colonies after Brexit, while Gulf Arab states have pushed for an early deal on free trade with Britain once it has left the EU. India, New Zealand, Australia and numerous other countries are also lining up to sign free trade agreements with the post-Brexit UK.
It is true that Britain exported goods and services worth an estimated £240bn to EU member states last year, dwarfing the business the country does with both the GCC and Commonwealth nations.
However, over the past decade, British exports to the EU have grown by a paltry 4%, thanks to the on-going stagnation of the Eurozone. It is also true, however, that the latest balance of payments figures show that the UK runs a trade deficit with the EU, but a surplus with the rest of the world.
In marked contrast to the UK’s current trading relationship with the EU, future deals with Commonwealth nations and the GCC offer the potential of unparalleled growth. The Commonwealth last month said it aims to increase trade from $750bn (£600.89bn) now to $1trn by 2020, while a recent study from PwC said GCC/Commonwealth countries will be among the largest economies in the word by 2050. While the EU was responsible for 29% of world GDP in 2010, by 2050, that ratio will fall to 9%, with India overtaking the US and clocking in at 15%, at least according to the PwC forecast.
A free trade agreement with New Delhi could increase UK exports to India by almost 50%, Commonwealth Secretary-General Patricia Scotland’s staff have suggested, and position the UK to help the country as it moves up the global value chain. As the Indian economy grows, its consumers will increasingly buy high-end manufacturing products, in which the UK maintains a competitive edge.
India’s middle class is expected to grow from 50 million today to 475 million by 2030. Taking the Commonwealth as a whole, the 53 members cover nearly a quarter of the world’s land mass and serve as home a third of the global population. Collectively, the Commonwealth nations boast a GDP of $10.7trn.
Saudi Arabia vs Italy
Similarly, by 2050, Saudi Arabia will overtake Italy and become the 13th largest economy in the world. This explains why, with Brexit unfolding in the Europe, Theresa May decided to embark on a state visit to Jordan and Saudi Arabia this week. Indeed, Riyadh and London share common objectives: both want to attract foreign direct investment, and both see the other as a key partner in weathering economic changes to come.
Since announcing their Vision 2030 economic diversification programme, the Saudis have been aggressively courting investors eager to bring new capital into the Kingdom. A first volley of agreements has thus focused on the tech sector: a $3.5bn cash injection in Uber and the creation of one of the world’s largest tech funds, a $45bn mammoth managed jointly with Japan’s SoftBank.
The Crown Jewel
The real prize and one of the main reasons bringing May to Saudi is slated for 2018: the listing of Saudi Arabia’s oil giant Aramco. The fact that Xavier Rolet, the head of the London Stock Exchange, accompanied May on her Saudi trip is revelatory.
As part of its post-oil economic vision, Riyadh is gearing up to list 5% of its trillion-dollar oil champion. Rolet lobbied for LSE’s participation in the IPO, which is expected to fetch around $100bn, by making the case that London is an attractive global financial hub even outside of the UK.
A savvy investor thinking long-term would, therefore, be wise not to place too much currency in Britain’s current economic conundrum. Losing unfettered access to the EU’s internal market does not have to be the death sentence some pundits expect, but only if London manages to nimbly refocus its trade ties with emerging countries. On this count at least, Theresa May seems to be making the right moves.
The Brexiteer promise of a fully independent Britain has always been ludicrous – after all, any comprehensive trade deals outside of the EU will simply replace Brussels’ red tape – but the UK will nonetheless be in a more competitive position to cope with the fundamental shifts in who will run the global economy.