Wed Jun 4

In the trade wars, there are lessons for the US from Brexit. Australia and our trading partners should take note

Written by Peter Draper, Professor, and Executive Director: Institute for International Trade, and Director of the Jean Monnet Centre of Trade and Environment, University of Adelaide

While the Trump administration’s on-again, off-again trade wars ^[1] wreak havoc on the business plans of the world’s exporters, the risks to the global economy continue to grow.

The self-inflicted scale of disruption to global trade patterns ^[2] is enormous. Yet there are echoes with the United Kingdom’s experience of Brexit, both for the United States economy now and its trading partners worried about their trading futures.

Fortunately, while it is painful, Trump’s push toward economic isolationism brings opportunities for other trading nations to strengthen their ties.

This is especially the case in our Indo-Pacific region, where Australia is looking to new trade partners and deepening existing ties.

The economic consequences of Brexit

The UK economy is relatively diminished since 2016, when David Cameron, as Prime Minister, called the Brexit referendum on whether to leave the European Union.

A study of UK businesses ^[3] found three key impacts in the three years before formal Brexit took place in 2020:

the UK’s decision to leave the European Union generated major, sustained, uncertainty for the business community. Since business invests and trades, that was highly consequential
anticipation of Brexit gradually reduced investment by about 11% between 2016 and 2019
Brexit reduced UK productivity by between 2% and 5%.

A new report ^[4] establishes that since 2020, when formal Brexit took place, the UK is experiencing its worst trade slump in a generation. This decline contrasts with growing trade in other industrial nations, indicating the COVID pandemic was not to blame.

Harsh lessons in bargaining power

The EU did not change to suit the UK. Rather, because of the EU’s influential role in regulation known as the “Brussels effect ^[5]”, the UK must realign with EU standards to win back market access.

For decades, the UK had ceded its trade bargaining capacity to Brussels. It was always on the back foot as its inexperienced negotiators locked horns with seasoned EU trade diplomats.

The British also learned that outside the EU, their relative trade bargaining power, as well as foreign policy prestige, was much diminished. Many countries focused on dealing with the EU without the UK’s involvement.

Overall, it is difficult to escape the conclusion that Brexit hastened the UK’s inexorable transformation from “Great” to “Little” Britain.

MAGA echoes

The Brexiteers were motivated by free trade ^[6] and the belief EU trade policies prevented the UK from more liberalisation.

Trump’s decision to disentangle the US from world trade is motivated by protectionist desires, in the mistaken belief blocking imports will “Make America Great Again”.

Like the Brexiteers, Trump will find business confidence will diminish and the US economy will be worse off ^[7]. Data this week showed US manufacturing contracted ^[8] for the third straight month in May amid tariff-induced supply chain delays.

Just like the UK, US economic decline relative to its trading partners will accelerate.

Obviously, a huge difference between British folly and US hubris is that the US has market and geopolitical power in most of its bilateral negotiations, whereas the UK did not.

Yet, whereas the Trump administration assumes the US is the more powerful party in all reciprocal tariff negotiations, it is now learning that some major trading powers (China ^[9], the EU, India), and even some middle powers (Canada ^[10], Mexico, Australia ^[11]), will not simply roll over when faced with overt coercion.

Moreover, as Great Britain learned to its cost, the US will find its soft power ^[12] rapidly diminishing, and foreign policy objectives more difficult to attain. US allies, while in some cases in need of weaning themselves from over-dependence on the US military umbrella, are now actively hedging ^[13] their security bets.

What should trading partners do?

There is an opening for Australia to seize the moment with new trade partnerships, and by deepening existing relationships.

Members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) commission meeting in Vancouver last November. Darryl Dick/AP

We have a golden opportunity in our chairmanship of the 12-nation Comprehensive and Progressive Agreement for Trans Pacific Partnership ^[14] group this year.

This high-standards, deeply liberalising, trade agreement is a gold standard template to anchor our global trading partnerships. Members include Canada, Japan, Mexico, Singapore and the UK and representatives will be meeting in Brisbane next week.

Specifically, Australia, our trans-Pacific partners and the EU ^[15] need to agree to work collaboratively to converge on modern trade rules and support for free trade. Then take those accords into the World Trade Organization to strengthen and revitalise the institution, with or without the US.

In addition, we need to quickly conclude both the stalled bilateral free-trade agreement with the EU, and the second phase of our trade agreement ^[16] with India. This would cement two huge new markets of sufficient existing (EU) and potential (India) scale to rival both the US and Chinese markets.

Finally, we need to double down on our existing trade partnerships with Southeast Asian countries, anchoring on the 10-member Association of Southeast Asian Nations (ASEAN). This will bolster ASEAN-centrality ^[17] in regional trade arrangements and balance both US withdrawal and China’s advance into the region.

While this will not be easy, the effort has to be made and needs to start now.