U.K.’s Geography Muddles Post-Brexit Trade Ambitions

(Bloomberg) --

Now that the U.K. has formally left the European Union, it’s sizing up all the potential trade deals it can now secure — though judging from the opening salvo, a pact with the EU may not be the top priority.

With just 11 months to reach an agreement with the 27-nation bloc, Britain’s chief Brexit negotiator, David Frost, launched a stinging attack on Brussels’s conditions for a post-Brexit agreement on Monday night. Frost warned that if the EU expects the U.K. to stay aligned with European rules forever, the bloc has failed to see the reason it left in the first place.

After leaving on Jan. 31, Britain has until the end of the year to reach an agreement with the EU or it will default to trading on World Trade Organization terms — meaning tariffs, quotas and customs checks would return for the first time in a generation.

While the share of the U.K.’s exports that go to the EU has fallen over time, it still is Britain’s biggest partner, accounting for 50% of the country’s cross-border exchange in goods. The theory of trade gravity helps to explain why: It’s logistically easier to buy and sell with your neighbors — a point that ultimately didn’t convince British voters about the merits of staying in the bloc.

For the U.K. government, getting agreements with the U.S., Japan, Australia and New Zealand is a key aim. The idea there is that Britain’s historic ties with those countries will make deals easier to accomplish.

“Forging trade deals around the globe is seen as a significant benefit of Brexit, but it’s far from certain that they will confer the same economic benefit as membership of the world’s biggest single market,” said Bloomberg Economics’s Dan Hanson. “The government has ambitions to improve ties with all four corners of the globe, but the reality is the biggest prize lies on the U.K.’s doorstep in the form a deal with the EU.”

Charting the Trade War

Global trade in goods will likely stay weak in coming months as disruptions from coronavirus in China staunch the movement of international commerce already slowed by tariffs and uncertainty, according to the WTO. The Geneva-based body’s latest forward-looking Goods Trade Barometer stood at 95.5, compared with a level of 96.6 in November. Readings of 100 indicate growth over the next quarter in line with medium-term trends, while those higher or lower than 100 point to growth above or below the recent trend.

Today’s Must Reads

• China restrictions | The Trump administration is considering new restrictions on exports of cutting-edge technology to China,  according to people familiar with the discussions. It’s a push aimed at limiting Chinese progress in developing its own passenger jets and clamping down further on tech giant Huawei’s access to semiconductors.
• Fee exemptions | China will start accepting applications for tariff waivers on a wide range of American commodities as it seeks to show commitment to keeping its side of the trade deal with the Trump administration.
• Meat mountain | Thousands of containers of frozen pork, chicken and beef are piling up at some major Chinese ports as transport disruptions and labor shortages slow operations, people familiar with the matter said.
• Carbon plan | The EU has a plan to tax some of the carbon produced by global competitors, which other countries might call a tariff — and a potentially illegal one at that. For the EU, the mechanism could be a way to protect its industry while prodding other regions to move ahead with similar climate action.
• IP post | The U.S. is working to block China from taking the top post of the United Nations intellectual property agency, in the Trump administration’s latest bid to convince countries of the threat posed by Beijing’s technological prowess.

Economic Analysis

• Back at work | China’s economy has been running at just 40% to 50% capacity in the last week, with large variations across sectors, according to Bloomberg Economics. 
• Higher-value exports | Chinese exporters of shoes and clothing will probably upgrade their manufacturing toward higher-value, pricier items as they seek to win back U.S. orders in 2020.

Coming Up

• Feb. 19: Japan trade balance
• Feb. 21: South Korea 20-day exports and imports
• Feb. 25: CPB World Trade Monitor 
• Britain’s departure from the EU on Jan. 31 marked the start of a new and, if anything, more complex phase of the negotiations. Click here for a timeline to the year ahead.

--With assistance from Jeremy Diamond.

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Richard BravoBrian Swint

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