After Brexit

Implications of the UK’s upcoming FTAs for Pakistan’s trade

Following its exit from the European Union (EU) on December 31, the United Kingdom (UK) has used its available policy space and freedom to negotiate several trade agreements with various developed and developing countries. It has concluded a futuristic, Trade and Cooperation Agreement with the EU-27. It is prospecting to strike “zero tariff, zero quota” trade agreements with the US, and potential deals with New Zealand, Australia and Canada. The UK has also concluded a trade deal with Japan in September 2020, the first of its most anticipated deals after the transition. It has launched trade negotiations with Kenya and a review of Economic Partnership Agreements with several ACP countries. Apparently, the South Asian region is not yet on the FTA radar of the UK, hence an opportunity for Pakistan to make its presence felt.

These trade deals have gained significance as these would not only principally determine the future of the UK’s trade dynamics but the orientation of trade for several other countries outside these trading blocs. They ought to be a subject of interest for Pakistan, as the country’s exports depend heavily on markets of the UK and those of its potential trading partners. The ongoing trade negotiations and agreements are anticipated to cover 80 percent of the UK’s global trade. Considering the current quota-free trade deals with the EU and conclusion of such deals with other developed countries, several countries, such as Pakistan, are expected to endure a disadvantage in terms of accessing these markets and losing out to competition from other efficient players in absence of similar preferential trade agreements.

These trade deals are progressing swiftly and are quite deep in terms of scope and trade potential. It is anticipated that the forthcoming post-transition trade deals between the UK and the US, Japan, European Union, Australia, New Zealand, and Canada would eliminate tariffs in goods and services, promote digital trade and greenfield investment and cover a range of new trade policy issues. The negotiations with Japan have been concluded while those with Australia are expected to be over by the end of the current year. A similar deal with the US is expected in 2022, and with New Zealand by 2023. The UK and Canada have signed an ‘agreement in principle’ to roll over the current trading arrangements as a transitional agreement, while also committing to negotiate a more comprehensive, permanent deal in 2021.

This wave of trade agreements could have a negative impact in terms of GDP growth, trade, investment and employment, for many developing countries that rely on the export market of the UK and these partnering economies. The effects could be less pronounced for some economies such as Nigeria, Brunei, Zambia and Pakistan as the drop in trade may be offset by reductions in input costs and spill over effects of trade deals between UK and the partners mentioned above.

On the positive side, the aforementioned agreements between the UK and other developed countries may increase competition and reduce prices in UK’s markets which could be beneficial for imports from the UK.

Countries tend to invest in FTA partners to increase trade integration and ensure security of capital as well returns on the capital, and to improve quality of intermediary inputs. The UK has invested in the services sector, particularly in the banking and insurance industries and offers a global platform for investors from around the globe. With its exit from the EU and signing of FTAs with major developed markets, UK may become an even more attractive destination for foreign investment in the services sector and an even better global platform for financial and related services. This situation may offer opportunities for early movers in that market but may lead to a restrictive entry option, in a few years, for bystanders.

UK provides preferential market access to Pakistan under the Enhanced GSP Framework. The exports to UK have seen positive trend, at least in recent months, but the sustainability of such growth is not assured. In order to ensure resilience in Pakistan’s exports to the UK and achieve realistic growth, it is essential to focus on diversification and value-addition of goods and increasing share of services and food exports. Food exports have large potential and remain resilient to global shocks as has been observed in this pandemic as well as during the global financial crisis in 2008-09.

In order to retain UK as one of its main export markets, Pakistan should start working towards having a full-fledged, deep and comprehensive FTA with the UK, rather than a mere reliance on preferential schemes such as the GSP. Pakistan’s main exports to the UK comprise textiles and food products, while the UK’s main exports to Pakistan comprise machinery and electronics. This pattern of intra-industry trade provides a good baseline to increase trade complementarity in these economies. Beside negotiating an FTA with the UK, it is imperative that Pakistan increases its outreach and advocacy to start trade and investment negotiations with other developed countries, particularly the markets with which the UK has initiated trade dialogues: USA, Canada, Australia and Japan.

Needless to say, enhancing trade competitiveness, diversification of products and target export markets and value-addition are prerequisites for Pakistan in order to maintain, and increase, its trade share in the UK and other developed markets.

The writers are international economists

After Brexit