Trade ties that bind

Boris Johnson meets Canadian Prime Minister Justin Trudeau

Brexit has cast a spotlight on Commonwealth trade. It could be time to ramp-up an extraordinary economic opportunity, writes Paul Bryant

In 2015, economists at the Commonwealth Secretariat – the intergovernmental organisation which co-ordinates and carries out much of the Commonwealth’s work – discovered a

‘secret sauce’ that somehow boosts trade between

Commonwealth countries.

They found that trade between members was 20% higher than that with non-member countries, and foreign direct investment flows were 10% higher1, on average. And they couldn’t explain these elevated levels of economic activity with ‘conventional’ trade drivers – for example, the Commonwealth isn’t a formal trading block with tariff preferences between members.

According to Brendan Vickers – Adviser and Head,

International Trade Policy at the Commonwealth

Secretariat – an equivalent force is at work, dubbed the

‘Commonwealth Advantage’, and it results in trading costs between Commonwealth countries being 21% lower than between member and non-member countries, on average.

Further studies concluded that the advantage arises from the deep historical and cultural ties between members, the widespread use of English, similar legal and administrative systems, and economically active diaspora communities2 . Vickers says: “We are absolutely convinced this is an untapped opportunity and that countries can exploit this advantage to their benefit. They can use it as a tool to grow trade, create trade resilience, and promote recovery from the Covid-19 economic shock.”

It’s fair to say the UK has been slow to exploit the Advantage. While across the entire Commonwealth, intra-Commonwealth trade has grown from 12% of Commonwealth countries’ total trade in 1998 to 18% in 20182, the UK’s intra-Commonwealth trade has remained roughly static as a share of its total trade over the same period – at around 9%3 .

But it’s probably also fair to say that this situation is

The Commonwealth heads of state meeting in 2018

likely to change. Couple the Commonwealth Advantage with the UK’s new post-Brexit trade-policy flexibility, the greater importance placed on non-EU trade, and the attractive trading profile of the Commonwealth – 54 countries, many of them growing rapidly, digitising rapidly, with a combined population of 2.4 billion people (60% under the age of 30)4 – and the extraordinary economic opportunity becomes obvious.

A multi-lateral force

The earliest guise of the Commonwealth emerged in 1926 when Britain; plus Australia, Canada, India, the Irish Free State, Newfoundland, New Zealand and South Africa – all Dominions, or semi-independent countries at the time – established the British Commonwealth of Nations and agreed that they were all equal members of a community within the British Empire (but still owed allegiance to the British king or queen).

As Dominions gained independence and rejected allegiance to the British monarch, this community adapted and in 1949, the London Declaration provided for new republics to be part of a re-named Commonwealth of Nations.

Membership has grown steadily to today’s 54 (with a few exits over the years as well) and even includes states which were not part of the British Empire – Rwanda and Mozambique.

Today’s Commonwealth describes itself as: “A voluntary association of independent and equal sovereign states … Our members work together to promote prosperity, democracy and peace, amplify the voice of small states, and protect the environment.”5

Priority areas of work are agreed at Commonwealth Heads of Government Meetings, held every two years. Operational activities are then co-ordinated by the Commonwealth Secretariat, including the production and execution of strategic plans.

Vickers says that since highlighting the Commonwealth Advantage, trade-led economic development has moved up the agenda: “It proved to be a catalyst. Senior trade officials started to meet, and intergovernmental processes focused on trade and investment cooperation kicked off with renewed vigour, culminating with Commonwealth trade ministers meeting again after many years.”

Practical opportunities

From a UK perspective, free trade agreements (FTAs) with Commonwealth countries are obviously high on the agenda now that it has left the EU.

Lord Marland, Chairman of the Commonwealth Enterprise and Investment Council (CWEIC), a business network, says some FTAs should be relatively easy to conclude – particularly with the developed markets which already have fairly ‘open’ economies, such as Australia, New Zealand, Canada and Singapore.

In contrast, an FTA with a huge developing market such as India has enormous potential upside but will be very difficult to conclude – chiefly because of the imbalance in market ‘openness’ – and is unrealistic in the short term.

But he cautions against over-emphasis on new FTAs: “Ultimately, businesses need to create trade; government can’t do it – it can only provide a framework. Businesses need to visit potential and existing trading partners regularly. And there has understandably been a reticence by some British businesses in the past, particularly small and medium-sized enterprises (SMEs) to go into pastures new. But in a post-Brexit world, with the Commonwealth being home to a third of the world’s population with strong demand for British products, I think we’ll see a lot more activity.”

A key area of opportunity is technology and digitisation. The Commonwealth Trade Review 2018, points out

“The signs are encouraging for EVs but there needs to be more factories making EVs and batteries before we have a significant volume”

Commonwealth trade in numbers

l US$705 billion: Total intra-Commonwealth trade in goods and services (all countries) l US$27 billion: Total intra-Commonwealth greenfield investment (announced projects) in 2019 l US$419 billion: Cumulative value of intra-

Commonwealth greenfield investment (announced projects), 2010–19 l £65 billion: UK exports to Commonwealth countries (fifth largest intra-Commonwealth exporter), roughly the same as to Germany l £64 billion: UK imports from Commonwealth countries (largest intra-Commonwealth importer), roughly the same as from Germany l 72%: Share of UK’s total Commonwealth trade from five countries (India, Canada, Australia,

Singapore, South Africa)

All values for 2019 unless otherwise shown. Source: Commonwealth Secretariat, House of Commons Briefing Paper, June 2020

Photos: Getty, Alamy

“We are absolutely convinced this is an untapped opportunity”

that access to broadband is low in many Commonwealth countries, and that achieving a ‘pragmatic target’ of countries below the world average doubling their present broadband coverage, and countries above the world average achieving near-universal provision, would contribute around US$ 600 billion to the GDP of the Commonwealth – including through reduced trading costs, increased access to e-commerce and other multiplier effects.

Lord Marland suggests that, as the leading technology hub in Europe, the UK should be taking advantage of these opportunities; for example, in the fields of medical and financial technology. He says: “With over 60% of the Commonwealth population under 30 years of age, technology is going to be vital to how these people transact in the future.”

Mohammad Razzaque, Research Director at The Policy Research Institute of Bangladesh (previously Adviser & Head, International Trade Policy at the Commonwealth Secretariat) thinks the primary opportunity for the UK is to use targeted direct investment as a ‘gateway’ to boost exports.

He says: “Consider a Commonwealth country like Bangladesh. It has recently been granted tariff-free access to China for 97% of its products. But it has limited capacity to exploit this market access. UK companies could be considering investing in new facilities in Bangladesh and then exporting to China, tariff-free. Remember, it is not uncommon for China to impose tariffs of 25–30% on imports, so this is a huge advantage. There is also a large Bangladeshi diaspora in the UK which can help facilitate this. How wonderful an opportunity is that?”

Lord Marland thinks 2020 is a clear inflection point for UK trade with the Commonwealth: “Covid has set people back and many Commonwealth economies have taken a big hit. But businesses know there is going to be a re-drawing of the trade landscape post-Brexit. They have hopefully taken time to reflect – and realised the compelling reasons why many Commonwealth countries present such great opportunities.” n

Sources 1 Commonwealth Trade Review 2015 - The

Commonwealth in the Unfolding Global Trade

Landscape 2 Commonwealth Trade Review 2018 - Strengthening the Commonwealth Advantage 3 Statistics on UK trade with the Commonwealth –

House of Commons Briefing Paper, June 2020 4 Commonwealth Enterprise and Investment Council 5 TheCommonwealth.org