The push for a Commonwealth trading bloc further politicises free trade

By Giovanni Di Lieto, Monash University

A UK-based lobby group has come up with an idea that has been endorsed by Australian and British politicians alike—a Commonwealth trading bloc.

The Free Enterprise Group (FEG) made its case in its Reconnecting with the Commonwealth report, arguing for closer trading ties and liberalised labour markets among the former British dominions, as the post-Brexit trading plan for UK.

The FEG conveys the views of free trade conservatives who seek to decouple Brexit from protectionism. In particular, the FEG involves Brexit hardliners, such as Andrea Leadsom, secretary of state for environment, food and rural affairs, and Conservative members of Parliament, including the co-author of the report, James Cleverly, whose mother was from Sierra Leone, a Commonwealth nation.

In the FEG’s report foreword, former Australian Prime Minister Tony Abbott says “Brexit means that Britain is back”. Abbott adds that “Brexit is not a vote against free trade because the EU has acted as a protectionist bloc against trade with outsiders”.

Essentially, the FEG report recommends replacing the EU single market with a Commonwealth trading bloc to be built in staggered sequence.

This initial analysis argues Commonwealth nations might be stuck in the waiting room for quite a while, as a speedy US-UK trade deal is easier said than done. It also points out Theresa May’s intention of a “hard Brexit” might lead to a high-stakes trade gamble with the EU, and that a China-UK free trade agreement will be neither as easy nor as clearly advantageous as portrayed by Brexit supporters.

The group then sets out that the UK should look to the Commonwealth’s open economies of Australia, Canada, Singapore, and New Zealand to secure preferential trade arrangements. The following steps of this strategy would target trade agreements with India, and eventually with the less developed African, Caribbean and Pacific nations.

As a last step, the UK would join the multilateral Trade in Service Agreement (TiSA), which is being controversially and secretively negotiated by the most advanced service economies, including Australia, the EU and US.

In connection to the liberalisation of trade in goods and services, the FEG report also proposes easier people movement between Commonwealth nations through the relaxation of Tier 2 visas for skilled workers, in particular for workers from India. The report goes as far as to promote free labour mobility between the UK and the most developed Commonwealth nations such as Australia, Canada, and New Zealand. The new Foreign Secretary Boris Johnson famously launched this idea well before the Brexit referendum.

Considering the supporters in the camp of free trade conservatives, it appears that the post-Brexit Commonwealth option has a real chance to seep through Theresa May’s trade and investment policy, as her hard Brexit speech shows.

It remains to be seen whether the UK government will have the necessary appeal and strength to pull the Commonwealth nations in this direction.

In the UK, Commonwealth community leaders backed the British exit from the EU, as they claimed that the UK government’s immigration policy discriminates against non-EU citizens. As Commonwealth citizens resident in the UK retain the right to vote in elections, many of the nearly one million “British subects” vowed to vote to leave precisely on grounds of insufficient labour mobility. This is clearly a significant constituency that no sensible government would ignore in the formulation of the post-Brexit trade and migration policies.

The “Commonwealth effect”

Outside the UK, the Commonwealth Trade Review 2015 points out the tremendous potential for Commonwealth countries to expand their trade performance and economic development.

Although the Commonwealth is not a trading bloc now, intra-Commonwealth trade is projected to surpass $US1 trillion by 2020, and reach $2.75US trillion by 2030, as estimated by the Commonwealth Secretariat.

Econometric results from the Commonwealth Trade Review 2015 suggest that, when both bilateral partners are Commonwealth members, they tend to trade 20% more, pay 19% less in transaction costs, and generate 10% more foreign direct investment inflows than otherwise.

This so called “Commonwealth effect” shows that historical ties and a strong diasporic community all contribute positively to increased trade, investment and labour flows among members.

The Commonwealth Trade Review concludes that leveraging the “Commonwealth effect” for greater economic gains requires strengthened cooperation and deeper integration within existing regional trade agreements. This approach contradicts the Tory’s FEG report, which advocates the formation of multi-tier preferential arrangements. These would be ordered according to the different levels of domestic economic development.

This fundamental difference means the Tory post-Brexit Commonwealth option will be a harder sell to those Commonwealth nations that are small, less developed, further away from the motherland, or well established in regional free trade and open labour areas.

In this category we can ascribe at least half of the 53 Commonwealth members, including: Australia, New Zealand, Singapore, India, Malaysia and Brunei; Pakistan, Sri Lanka, Bangladesh and Maldives; Canada; and Cyprus and Malta, as well as the numerous Pacific and Caribbean micro-countries.

For the UK this dynamic may open the Pandora’s box of being accused of some kind of post-imperial plot, as pointed out in a 2012 House of Commons report on the role and future of the Commonwealth.

In Australia, Tony Abbott’s endorsement of the Tory post-Brexit Commonwealth option, despite some economic merit under the UK perspective, risks excessively politicising and thus alienating a bipartisan, evidence-based approach to the forming trade and investment relationship with the UK.

At this uncertain time of looming trade wars with serious security implications globally, it’s crucial for Australia and the other Commonwealth nations to avoid being dragged into the domestic issues of foreign countries, even if they happen to share a head of state.

Giovanni Di Lieto is a lecturer in the Bachelor of International Business course at the Monash Business School, at Monash University. 

This article was originally published on The Conversation. Read the original article.

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