Ruth Lea: Britain needs to shift its focus on trade from Europe to the Commonwealth

Ruth Lea is Economic Adviser and Director of Arbuthnot Banking Group.

The Commonwealth as an economic bloc is rarely discussed in Britain. But, as the global economic and political focus shifts to partnerships with non-western economies in the wake of the global financial crisis, this is an opportune moment to re-evaluate the economic potential of the Commonwealth both in the global economy generally and to us as trading partners more specifically.

The Commonwealth nations, taken together and including the UK, are an economic colossus comprising some 15% of world GDP, 54 member states (53 excluding Fiji, which is currently suspended) and two billion citizens. They will inevitably become more influential and powerful. The Commonwealth spans five continents and contains developed, emerging and developing economies.

Crucially, the Commonwealth in its richness and diversity mirrors today’s global economy in a way that the EU simply cannot start to aspire to. In its global reach it speaks of the future, and should not be regarded as a curious relic of Empire, whereas the EU will continue its inexorable, relative decline. As David Cameron said of Tony Blair, so is the EU. “You were the future once.”

One of the drivers behind the global changes is demographic. The populations of the Commonwealth countries are projected by the UN to expand between 2010 and 2050. So is the US. But the “big 3” EU countries (excluding the UK) are projected to have falling populations: Germany (-28%), Italy (-23%) and even France (-5%), though Japan (-37%) and Russia (-31%) are much bigger fallers. By the way, China’s population is projected to fall by 11%, reflecting the “one child” policy. 

Despite the fact that successive British governments have shown relatively lukewarm interest in the Commonwealth, preferring the watering holes of Brussels, British trade with the Commonwealth is already significant. In 2009, total exports of goods and services to the major Commonwealth countries were over £32bn, over 8% of the total, and there was a modest surplus (£1bn). But these exports were dwarfed by exports to the US (£67bn, £24bn surplus) and in particular to the EU (£188bn, £28bn deficit).

And it can be argued that Britain’s export performance to Commonwealth countries (and indeed the US) is disappointing compared with that of the EU. This is all the more the case when there is arguably a cost advantage, estimated at 10-15%, when trading with Commonwealth as opposed to non-Commonwealth countries. British exports to Germany and France are about 1.5% of those countries’ respective GDPs. The equivalent figures for exports to the US and the Commonwealth’s “big 3” (Australia, Canada and India) are about half that. Britain really ought to be doing better in Commonwealth markets.

Britain’s lukewarm attitude to the Commonwealth contrasts unfavourably with other Commonwealth countries which have been more positive about the Commonwealth. Kamal Nath, for example, India’s Cabinet Minister of Urban Development and former Industry Minister, has said: 

“The Commonwealth is the ideal platform for business and trade... I hope that India’s ties with the Commonwealth will move from strength to strength, and that the new paradigm will only mean greater warmth, greater cooperation.”

Britain needs to shift its focus from a relatively stagnant Europe to the world’s future growth markets, not least of all those in the Commonwealth. Commendably, the Coalition Government has already stepped up its efforts in this regard. More, however, needs to be done. In an ideal world Britain would be able to negotiate, within the overall rules of the WTO, mutually beneficial trade deals with fast-growing Commonwealth countries. (I would add the USA as well, as it is such a huge market.) But, of course, we cannot do this whilst we are in the EU and trade deals for the whole of the EU are negotiated by the EU’s trade Commissioner.

I make no apology for touching on the thorny question of the EU again because the brutal truth is that EU membership constrains our economic prospects in many, many ways.

This country faces many challenges. But, as has been elegantly and eloquently expressed on ConservativeHome many times, the economic growth challenge is one of the most significant politically – if not the most significant. The economic recovery is far from robust. The OBR, the European Commission and the Bank of England in their latest crystal-ball gazing exercises have all downgraded the growth forecasts for 2011. And, given the 2011 Q1 GDP figure, the economy is already slipping behind the OBR’s March Budget forecast.

Moreover, the OBR forecast is relying very heavily on “export-led growth” to drive GDP growth forward. I am deeply sceptical that their projections will be met, given our over-dependence on slow-growing, mature European markets.

It is time for some radical pro-growth thinking. We need to focus more energetically on buoyant export markets, in general, and we need to be able to negotiate our own trade deals with the countries of the future, not least of all Commonwealth countries, in particular. We may have a stab at the former as a member of the EU but we cannot even start to dream about the latter whilst we are in the EU.