war on the rocks

A Trade Strategy for United Kingdom Inc: Foreign Policy Pragmatism and Post-Brexit Britain

In Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay wrote:

[I]n reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.

He continued: “At an early age in the annals of Europe its population lost their wits about the sepulchre of Jesus, and crowded in frenzied multitudes to the Holy Land.”

We might update Mackay’s memoir by noting that at a later age in the annals of Europe, its population lost their wits, fiscal credibility, and economic sense over the delusion of an ever-closer European Union.

Recovering from transnationalism

The regulatory behemoth of the European Union (EU), with its five presidents, high representatives, 28 commissioners, serried ranks of bureaucrats and courts of counselors, legal representatives and other functionaries has inhibited growth and, consigned a generation of youth in Southern Europe to unemployment (56 percent in Spain, 62.5 percent in Greece). It has committed poorer member states to debt, austerity, and destitution in its futile pursuit of a currency union leading to a federated European imperium.

Curiously, this fiscally challenged ancien regime, whose banking sector post-Brexit appears on the brink of collapse, continues to attract plaudits from commentators who arguably should know better.

Mackay’s study of the madness of crowds discerned that a reckless mixture of greed, panic, fear, and delusion drives the pursuit of implausible financial schemes (and, indeed, financial markets generally). Such delusion has an interesting universal transcendence and is capable of gripping the popular mind across time and space, whether it be Dutch Tulipomania in the 17th century, the illusion of never-ending growth before the 2008 banking crash, numerous hailed – but now failed – economic “miracles” (Mexico, BRICS, Celtic Tigers, the Pacific Century, etc.), or the faltering euro project.

Were he alive today, Mackay might find in the response of those in the United Kingdom and elsewhere currently clamoring for a re-run of the European referendum or for the democratic vote to somehow be ignored, confirmation of his dictum that, “Many persons grow insensibly attached to that which gives them a great deal of trouble.”

The immediate fevered aftermath of the Brexit vote witnessed runs on banks and property stocks and the vertiginous drop in the value of the pound. Yet it becomes important that in predicting the apocalypse and the end of Western civilization as we know it, we don’t talk ourselves into a recession we don’t have to have. “Men [and women]… go mad in herds,” Mackay concluded, “while they only recover their senses slowly, and one by one.”

Economic pragmatism is the place to start

Politics is often about perception and momentum. Instead of debating when to trigger Article 50 of the European Union that sets a two-year timetable for withdrawal, the British government should be examining how it realistically responds to Brexit and the opportunity it creates for a newly independent, flexible and sovereign market state. In this context, the former Chancellor, George Osborne’s proposal to cut the corporate tax rate offers the United Kingdom the basis of a pragmatic new start.

Freed from the endless commitocracy of the European Union, however, the United Kingdom should be looking more closely at the practices of successful market states. Often founded in the era of Empire that once put the Great in Great Britain, these entities comprise Special Administrative Regions like Hong Kong and sovereign Commonwealth states like Canada, Singapore, Malaysia, India, Australia and New Zealand. All of these states have followed constitutional and economic practices bequeathed by the former colonial power often with unparalleled economic and political success.

Learning from others

Unlike Britain, these states did not abandon sovereignty and a version of the Westminster parliamentary system for a utopian delusion. Instead, they focused on adapting institutions and practices to the challenges and opportunities offered by later twentieth century globalization.

By last year, Asian city-states like Singapore had a per capita GDP  ($51,855) well above that of Britain and most West European states with the exception of Norway, Luxembourg, and Switzerland.

Singapore, like Hong Kong, is a regional trading hub, which facilitates foreign direct investment through a business friendly climate and excellent infrastructure. While Britain has endlessly deliberated over a third runway at Heathrow, Singapore has built a third runway and fifth terminal at Changi Airport and two Mass Rapid Transport train lines connecting the island’s five million people.

Notably, despite the recent downturn in China since 2015, East Asia has maintained growth rates across the region in excess of 5 percent over the last decade. Openness to global production networks and free trade agreements have been central to this growth. The pattern of development and the opportunities it offers are worth exploring and, where possible, adopting.

The benefits of FTAs

The most significant factor in 21st century Asian growth has been the evolution of free trade agreements (FTA) among states across East Asia and with the United States. The pattern of agreements, which evolved in the aftermath of the 1997 Asian financial crisis, increasingly links the economies of Pacific-Asia with the United States and India.

Significantly, FTAs entail no loss of sovereignty or require the adoption of a single currency or regulatory regime. They do, though, facilitate mutually beneficial investment and enhance agricultural, service, and manufacturing interests and practices.

Since 2003, the more dynamic and export-oriented economies of the Asia-Pacific have negotiated a range of bilateral and trilateral agreements covering goods, services, manufacturing, agriculture and economic collaboration. South Korea, for example, has 24 FTAs with, among others, Chile, Singapore, Peru, the United States, and India. Singapore has 32 FTAs, Japan has 24, China has 23, while Thailand and Malaysia both have 22 each.

Australia, which has 19 FTAs, concluded three in the course of 2014 alone with China, South Korea, and Malaysia. It had earlier reached deals with Singapore and the United States.

The Canberra based Centre for International Economics notes:

Free trade agreements that include Australia lead to an increase in Australian exports, production and GDP relative to what would have been the case without the FTA.

Meanwhile, a 2014 study by the Australian government’s Rural Industries Research and Development Corporation concluded:

Agreements excluding Australia result in small declines in Australian exports (relative to the baseline) as products from the FTA partners become more competitive relative to Australian products.

The Australia–U.S. FTA alone has accounted for a substantial increase in the volume of trade and investment since the agreement entered into force in 2005.

Interestingly, it is in this context of rapid growth in trade and regional development that the U.S. pivot to Asia after 2011 must be situated. Defense Secretary Ashton Carter as recently as May 2016, described the Asia-Pacific – not Europe – “as the single region of the world of most consequence for America.”

As evidence of this, the United States sees the promotion of a free trading Trans-Pacific Partnership as far more important than the glacially slow progress it has made on the Trans-Atlantic Trade and Investment Partnership with the European Union.

Canzukus?

During the E.U. referendum campaign, in April 2016, President Barak Obama warned the United Kingdom that if it voted to leave it would have to go to the “back of the queue” on any free trade negotiations with the United States. However, despite Obama’s ill-judged remarks (which saw the leave vote rise in opinion polls after his intervention), the likelihood that a newly elected administration would recognize the complementary nature of these two market-oriented states and move to effect an FTA is high.

Such a move would have both political and geopolitical implications. It could ultimately facilitate a more elaborate version of what James C. Bennett termed Canzuk, Canzukus perhaps, which adds military co-operation, liberalized migration rules, and other co-operative measures to free trade with Canada, Australia, New Zealand, the United States and, in time, Singapore and India. This would afford the basis, in conjunction with Commonwealth countries, not only for evolving economic linkages but geopolitical ones as well, in terms of a shared language and a shared political culture based on sovereign institutions and the rule of law.

Look East?

Somewhat differently, China considers the Association of Southeast Asian Nations (ASEAN) led Regional Comprehensive Economic Partnership (RCEP) a core part of its bold “Belt and Road” development initiative. This seeks to improve connectivity by building land transportation corridors that link China to Europe, and South Asia as well as with Southeast Asia, whilst its Maritime Silk Road promotes port development to enhance trade with Southeast Asia.

Reflecting and informing this partnership is China’s Asian Infrastructure Investment Bank (AIIB). The partnership involves 50, primarily Asian, members but includes the United Kingdom. With assets of more than $1 billion to invest in regional infrastructure, the AIIB could prove a significant boon to the integration of Southeast Asia as a single market facilitating a free flow of goods. The initiative could, thereby, see the United Kingdom participating in China’s regional growth strategy.

The developing Asian model offers Britain an environment to embrace the global market and develop an industrial strategy rather than subject itself to the regulatory intense environment of Europe with its protected manufacturing and agriculture. The fact that English is the language of international trade and business and that Britain can draw upon its historic Anglospheric connections with India, Hong Kong, Singapore, and Australia means that it already enjoys a comparative advantage in dealing with Asia.

Like the United States, Asian states find doing trade deals with the European Union an enervating experience, and are looking for alternatives. Pointedly, within days of Brexit, South Korea’s top diplomat Yun Byung-se announced he wanted a bilateral trade deal with London. Similarly, on July 1, the China Daily reported that China was frustrated by its attempts to make trade deals with the European Union. A spokesman for the Chinese Ministry of Commerce noted that post-Brexit China had a strategy to develop its business links with the United Kingdom and, like South Korea, would seek trade talks.

Clearly, an entrepreneurially orientated United Kingdom, liberated from the constraints of negotiating through the European Union’s single regulatory mechanism, has an opportunity to seize the growth prospects that trade agreements with the Asia-Pacific offer.

A return to liberal reform?

In the aftermath of the European referendum, politics in the United Kingdom has undergone an administrative revolution. In July 2016, Prime Minister Theresa May, fresh to the job, appointed not only a new Chancellor but a special minister for Brexit, David Davis. In addition, for the first time in two generations, May is explicitly seeking to develop an industrial strategy for the United Kingdom, Inc.

The immediate shift in tone and doctrine of the new administration reflects not only May’s thinking but that of her advisory team who wish to resurrect a particular understanding of trade and industry policy. It is associated with the influential Birmingham based industrialist-turned politician and social reformer, Joseph Chamberlain, and the late 19th century liberal-unionist movement for tariff reform for which he campaigned.

Channelling an understanding of Chamberlain, the new government envisages not only negotiating a new relationship with the European Union. It has also signalled its intention to move from a free market philosophy that restrains government to one of government activism, economically as well as socially. This perspective assumes there is insufficient dynamism in the British economy, marked as it has been by consistently low productivity and weakening growth. The new government wants to see lower prices, and a more reliable supply of energy. It wants to keep a watch on foreign takeovers if they threaten job losses ,and to create new treasury mechanisms to raise more funds for infrastructure investment.

A further ambition of the late 19th century Birmingham school of social and municipal reform was the transformation of the agglomeration of disparate British colonies into a coherent military and trading imperial federation – what Chamberlain came to call “Greater Britain.”

A “Greater Britain” is not necessarily what May had in mind when she stated: “Brexit means Brexit.” However, there have emerged over the last weeks various “alternatives to Europe.” Few considered such alternatives while Britain was trapped in the European Union, which set the economic and fiscal rules both for its single regulatory mechanism governing trade and labor movement within the Union, and free trade negotiations with external partners outside it.

Conclusion

The post-referendum British government, therefore, must carefully evaluate these options if it is to fashion Brexit as a positive movement towards global change rather than an extended damage limitation exercise. With this aim, the government led by May has an opportunity to improve on Chamberlain’s vision. Although the municipal reforms he pioneered in his home city of Birmingham remain widely regarded as a model of intelligently thought through social design, his broader ideas of imperial preference and liberal trade were killed by the stroke that disabled him in 1903. Revitalizing his vision might also provide the new government with just the “Big Idea” it needs.

 

David Martin Jones is Visiting Professor, Department of War Studies, King’s College London: M.L.R. Smith is Professor of Strategic Theory and Head of the Department of War Studies, King’s College London. They are authors, with Nicholas Khoo, of Asian Security and the Rise of China: International Relations in an Age of Volatility (2012).

Image: Pexls, CC