Leaving the EU was never going to be easy for the UK, not least because the short-term costs would be offset mainly by advantages in the longer term, but the economic challenges of Brexit have been compounded recently by three important developments:
- the economic damages that have been done to the global economy, due to measures taken to fight Covid,
- growing isolationism, especially in the US, and
- growing anti-China rhetoric.
The vision of Global Britain is at a crossroad, and how these historic challenges are met will determine our economic prosperity for years to come.
As we emerge into the post-Covid world we will face a massive economic clean-up. According to estimates by the Asia Development Bank, nearly $9 trillion – around 10% of the world economy – and millions of jobs and livelihoods will be lost. By another estimate, half a billion people in poorer countries could be pushed back into poverty, and the World Bank estimates some 60 million could be reduced to extreme poverty. The IMF have recorded the largest outflows of capital from developing countries, and an unprecedented number of more than 80 countries have requested emergency financial assistance. UNCTAD estimates a 30-40% fall in foreign direct investment over 2020-21, and estimates by the WTO suggest world trade could fall by an unprecedented 32% in 2020.
In the US, unemployment has reached levels not seen since the depths of the Great Depression, and the Bank of England has forecast the UK will suffer the deepest recession since 1706!
In response to this unprecedented economic collapse, governments around the world, almost all in the richer, developed countries, have pledged some $8 trillion in fiscal support, adding over 10% to an already record burden of public debt.
It could take a generation to rebuild.
The structural adjustment challenges of globalisation and rising wealth inequalities in the West are well known, but are now being greatly exacerbated by the supply chain disruption and economic depression caused by Covid measures. Increasingly, US President Trump and others in the US have been threatening to withdraw from the world economic order, including the World Trade Organisation (WTO), and are calling for greater national self-sufficiency. Similarly, protectionist voices have been heard in Europe, especially in France.
Covid has led more and more politicians to call for greater national self-sufficiency in more and more goods and services. Shortages of medical supplies and movement restrictions imposed to fight Covid have disclosed weaknesses in the complex web of global supply chains, and protectionist voices are now calling for more on-shoring of production capacity. France has called for EU governments to rethink their approach to supply chains in order to assure “sovereign” and “independent” supplies, and such views are gaining traction in the UK.
The UK Prime Minister recently told civil servants to draw up plans – code named Project Defend – to reduce dependence on China for a range of “essential” goods, services and technologies, and to identify the UK’s economic vulnerabilities to “potentially hostile foreign governments”. As in the US, all this is said to be done “in defence of national security”.
These calls to on-shore supply chains will almost certainly deal a significant blow to the development efforts of poorer countries and impede the socio-economic progress they have seen over the recent years.
This isolationism and protectionism increasingly goes hand in hand with criticisms of China, the putative source of Covid.
Over the past 25 years, China has transformed from a poor third-world country to holding a dominant position as a global economic superpower; the largest, most rapid economic transformation in history! China is now the second largest economy in the world, with an estimated GDP of $14 trillion, nearly 20% of global output, and an increasingly wealthy population of some 400 million middle-class consumers. These consumers are not yet as rich as those in the West, but they are getting richer quickly, and there are a lot more of them. While China is now the largest exporter of goods in the world, it will increasingly become a major market for competitive exporters, as Chinese consumers increase their demand for new goods and services, and as China seeks to address its large trade imbalance.
Complaints that China “cheated” its way to global power are not without some truth. Huawei’s theft of Western intellectual property, for example, seems well established. But such complaints may be seen as inconsistent. They ignore the imperial history of Britain and other European countries, and the missionary zeal with which the US has sought to extend its values and political preferences to the rest of the world.
To seek now to marginalise China in the economic plans of the West would be an act of the greatest folly. China is far too big to be put on the naughty step, and those that seek to punish China will probably end up punishing themselves even more.
As the UK dominated the world economy in the 19th century, and the US in the 20th, so China, appears to be the heir apparent of the 21st century. Much of the anti-China rhetoric must be seen in light of this “changing of the guard”. Some comfort may be found in that, throughout most of its long history, China has seldom demonstrated imperialist ambitions. With a few notable exceptions, empire building has been largely a characteristic of Western countries.
I don’t suggest we should be naive or kow-tow to China, but that we should keep in mind Henry Kissinger’s famous aphorism: “America has no permanent friends or enemies, only interests.” While many in the Western democracies may not like the Chinese government, geopolitical discord is not conducive to economic growth, and engaging in an economic cold war, or worse, is something the West simply can’t afford.
If we learn only one lesson from the 20th century, it’s that protectionism and isolationism impair economic growth and wealth creation; that open, free trading economies raise people out of poverty. Yet the siren calls of economic nationalism and protectionism are being heeded again by more and more politicians, frightened by the fractures and tremors in the global economy caused by the great Covid lockdown, and by the growing economic influence of China.
The success of free trade is not that it benefits a few large corporations and plutocrats, but that it benefits “the many, not the few”. It increases people’s choices, lowers costs, and fosters innovation.
The greatest achievement of the last round of GATT negotiations, which formed the now threatened WTO, was to establish a predictable, rules-based international trading system within which business could thrive. An important benefit of this system, not often enough appreciated, is that, while it benefits bigger, stronger, and more developed countries, it also serves smaller, more economically vulnerable countries by opening markets and protecting them from unfair and capricious behaviour by the more powerful – one of the principal reasons so many, including China, chose to join.
Over the past 25 years, it has largely worked well, and helped to raise the living standards and improve the lives of many millions of people. Though it now needs updating to better incorporate new challenges of the 21st century, the principles on which it was founded are no less important today, and they remain vital to global prosperity.
Covid has made the challenges of Brexit more difficult, and made the ambition of Global Britain all the more important. The UK could play an important role as a champion of free trade, by defending the open, rules-based international order, and helping to foster increased prosperity at home and abroad. Alternately, it could withdraw with old friends behind a new Iron Curtain drawn across a large and growing part of the global economy, and seize defeat from the jaws of victory. The UK should be steadfast in its vision for a truly Global Britain, and reject the deceiving siren calls of isolationism and protectionism.